Closed-end Funds About 700 funds Fixed number of shares Shares sell like stock Generally hold less liquid assets A lot are country funds or bond
funds
NAV versus price Generally sell at a discount (10%)
(Price – NAV) / NAV Can sell at a premium Why?
Taxes Management fees Investor sentiment
Distinctions from Open end
Less liquid for investors – no redemption
Fewer shareholders services Leverage can increase returns Don’t have to hold cash
No inflows or outflows Can invest in less liquid securities
Dividend returns NAV = $10, Price = $9 Dividend yield = $1/$9 = 11.11%,
not 10%
Closed end fund dividend yield generally higher than open end, all else the same
REITs 75% of assets in real estate Pass through at least 90% of income 125 traded - $300 billion in assets
10-15% of US institutional quality real estate
As of July 31, 2008 Dividends – currently about 5.8%
average
What are REITs? REITs established by legislation passed
in 1960 providing small investors access to real estate investment
Operating companies which own and manage commercial real estate
Assets consist of, and revenues primarily come from, real estate investments
Can selectively operate ancillary businesses
REIT Types Equity (91%)
Own real estate assets Revenues come principally from rents
Mortgage (7%) lend to real estate owners acquire loans or mortgage-backed
securities Hybrid (2%)
Combination of equity and mortgage REITs
What Makes a REIT Different?Asset and Revenue Test
75 percent of assets must be invested in: Equity ownership of real property Mortgages Other REIT shares
75 percent of revenue must come from Rents from real property Mortgage interest Gains from sale of real property
Taxable REIT Subsidiaries (TRSs)
Allows REITs to more effectively compete with other real estate owners
May provide services to tenants to third parties such as landscaping, cleaning and concierge
Investments in TRSs limited to 20 percent of REIT’s assets
TRSs must pay taxes at the corporate level
Private 1) Institutional investors – large
positions 2) Packaged with other services
offered by a financial professional 3) Incubator – start up hoping
eventually to go public
Why REITs instead of direct investment?
Property sector and geographic diversification
Professional and experienced management
Real-time pricing Low transaction costs Liquidity
REIT advantages Stable earnings from long-term
leases Attractive dividend yield Competitive risk-adjusted returns Diversification