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Closed-End Bond Fund IPOs Are on the Rise


It's not a coincidence that there was a jump in the number of closed-end bond fund IPOs last year. Bonds had a very good year and, in general, closed-end funds compete well against open-end bond funds. However, the rise also emphasizes the lack of closed-end equity fund launches, even when the market was soaring a couple of years ago. The drop off in new closed-end equity funds is due to the increased popularity of exchange-traded funds and increased regulatory scrutiny, which may have deterred managers from creating them, according to analysts.

There were 36 new IPOs for closed-end funds in 2001, the most since 1994 when there were 40, according to Lipper. [There were 40 in 1999 as well, but that number is skewed because many of them were loan participation IPOs, which include multiple share classes.] Of the 36 that were issued in 2001, 33 were bond funds. Closed-end bond funds compete well against their open-end counterparts because they have the ability to leverage investments and generally that creates higher yields, said Brian Smith, executive director of the Closed-End Fund Association.

"I think it was a combo between bond funds doing well, especially closed-end bond funds, and the fact that they are a good income investment, which made it a very positive year for them," said Smith.

While 36 closed-end funds may not seem like very many, the dollar amounts of the IPOs do. There was $7.3 billion dollars raised in last year's closed-end fund IPOs, according to Lipper. For comparison, net inflow into the more than 2,000 open-end municipal bond funds in 2001 was $8.7 billion. Of the 33 new bond funds, 30 were closed-end municipal bond funds, that performed well and garnered positive flows in 2001.

The $7.3 billion is also the highest closed-end IPO total since 1993, said Bill Bradford, an analyst with Lipper who specializes in closed-end funds. In 2000, there was $629 million raised in three equity and three bond IPOs, according to Lipper. In 1999, the total dollar amount was $4 billion, with most going to bond funds.

Of the three closed-end equity fund IPOs in 2001, the Scudder Weisel Capital Entrepreneurs fund, which launched in January, was liquidated in April, Bradford said. In fact, the last time there were more than three closed-end equity IPOs in one year was 1994 when there were 25. Since then there have been a total of 16 through 2001.

One of the main reasons for that drop-off is that there is little room left in the market for new products, Bradford said. "They're all tapped out," he said. Not only is there little on which a closed-end equity fund could be based that doesn't already exist, but the emergence of ETFs have eliminated many investors who would normally have been more interested in closed-end products, Bradford said.

Also, in recent years there has been more pressure on closed-end equity funds' boards of directors, according to Smith.

"There's been a general chill in the air because of past year's board type actions, which have required certain agreements written in to guarantee the prices of the funds," Smith said. "That's not an attractive thing to management."