Measuring closed‑end fund performance: Net Asset Value (NAV) versus Market Price

Learn how the more complex structure of closed-end funds can provide access to potentially higher-yielding segments of the market than more conventional open-end funds.

How should investors in closed-end mutual funds judge performance? These vehicles are more complex than conventional open-end mutual funds. And because of that, measuring performance is a bit more complicated.

Closed-end versus open-end funds: a brief review
Closed-end funds (CEFs) differ in significant ways from open-end funds (OEFs). Both have important, but distinctive, roles to play in a diversified portfolio. And evaluations of CEF performance need to take into account notable differences in structure and pricing, as compared to OEFs.

Like OEFs, CEFs offer investors a convenient and cost-effective way to invest in a professionally managed portfolio, reflecting a specific investment objective. Both types of funds may provide the potential for generating income and capital growth through investment performance and distributions.

CEFs, however, are structured very differently from OEFs. And because of that, they may provide certain unique benefits, including more flexibility in the use of leverage and potentially greater access to less liquid, but potentially higher-yielding segments of the global markets.

Structural differences
Unlike OEFs, CEFs generally have a static number of shares outstanding and do not issue or redeem shares to meet investor demand on a daily basis.1 Furthermore, CEF shares typically trade on an exchange. Like other publicly traded securities, the market price of CEF shares fluctuates and is generally determined by supply and demand in the marketplace, among other factors.

In significant part due to the closed-end fund structure, CEFs have greater flexibility to use leverage in seeking to enhance return potential and often offer higher levels of current income compared with OEFs with similar investment strategies. And because CEFs do not need to manage unpredictable inflows and outflows of fund assets like OEFs, they enjoy a relatively stable pool of assets. This not only helps facilitate the use of leverage, but also allows the funds to attempt to take advantage of attractive, less liquid and potentially higher-yielding securities.

Distinctive pricing
Because CEF shares typically trade on an exchange, CEF shares fluctuate in price throughout the day. OEF shares, on the other hand, are generally priced once every business day based on the fund’s net asset value (NAV) per share at the close of business on that day.

CEFs also have an NAV that is calculated daily. NAV is important because it reflects the value of net assets held in a portfolio. But because a CEF’s share price is determined based on market forces, as discussed above, rather than NAV, the market price of CEF shares is often not the same as its NAV.

As mentioned earlier, the market price of CEF shares fluctuates subject to the forces of supply and demand. While changes in market price will bear some relation to changes in NAV, market price may also be influenced by everything from a fund’s yield relative to similarly-focused CEFs to investor sentiment about the broader market and economic outlook or conditions in a particularly relevant sector. Demand for or aversion to levered investments may factor in, as may manager popularity. The release of new fund information may affect CEF share price performance.

As a result of these influences, CEF shares can (and typically do) trade at a discount or premium to a fund’s NAV.

Significance of a discount or premium price
The relationship between a CEF’s market price and its NAV is often referenced as one measure of fund performance. A fund is said to be trading at a discount when its market price falls below its NAV; if the market price rises above the NAV, the fund is said to be trading at a premium. But neither premium nor discount pricing in and of itself tells a complete story.

For example, a CEF trading at a discount, depending on the supply/ demand forces mentioned above, could be an indication of a value opportunity. Or it may reflect the market’s estimation that the fund’s future earning or distribution potential could be at risk. It could also reflect changes in market sentiment and the view that certain asset classes or sectors of the market may be out of favor.

Likewise, a CEF trading at a premium could be a sign the market has high regard for the fund’s portfolio management team and sees a strong probability its share price will continue to appreciate. But it could also mean the fund is currently overvalued.

Alternative measures of performance

There are divergences of opinion on how best to evaluate CEF performance. Performance may be measured as a percentage change in the market price or the NAV, including or excluding distributions. PIMCO believes a CEF’s total return on net asset value, including fund distributions, is one of the most important indicators of a portfolio manager’s ability to add value.

A competitive yield or distribution rate can have a positive impact on CEF demand and, thus, may favorably influence a fund’s market price. Steady monthly or quarterly dividends often are the key selling point for CEFs. However, it is critical to look at distributions in the context of a fund’s earning profile, as the board of a fund may change distributions from time to time depending on how the fund’s earnings profile changes. CEFs typically report information about their earnings in shareholder reports and other updates. Shareholders should consult these reports to better understand the earnings profile of a specific fund in relation to its distributions.

Before investing in a closed-end fund, it is important to review its trading history, performance, current earnings in relation to distributions, and the underlying asset class and sector exposures as well as how it may complement other elements of a portfolio. Without question, CEFs are a bit complex; and they tend to be more volatile and have portfolios that are less liquid than conventional open-end funds. At the same time, they can be an important source of income and enhanced return potential for sophisticated investors.

1Closed-end funds can potentially issue new shares as part of their dividend reinvestment program (DRIP).


Closed-end funds, unlike open-end funds, do not continuously offer new shares. After the initial public offering, shares are sold on the open market through a stock exchange. Closed-end funds may be leveraged and carry various risks depending upon the underlying assets owned by a fund. Investment policies, management fees and other matters of interest to prospective investors may be found in each closed-end fund annual and semi-annual report and also through press releases. For additional information, please contact your investment professional.

A word about risk: Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. The use of leverage may cause a portfolio to liquidate positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage, including borrowing, may cause a portfolio to be more volatile than if the portfolio had not been leveraged.

Distribution rates are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price as of quarter end. Distributions may include ordinary income, net capital gains and/or return of capital (ROC) of your investment in the fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. A negative value for Undistributed Net Investment Income represents the potential for a ROC. A fund’s Section 19 Notice, if applicable, contains distribution composition information. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent each January.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.