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Closed-End Funds: A Passport to Global Assets

It’s easy to get so caught up in something, such as a conversation, a show or a book, that you forget your surroundings. This may also be the case with the active versus passive investment management debate.

Investors have long debated active versus passive management of assets. Some argue that it’s better to put money into active funds, citing the potential for outperformance thanks to the highly skilled and watchful eyes of active managers. Others argue that even a track record of success and experience has its faults and can’t guarantee income, and believe passive funds are a more practical form of investment.

Which one is the better of the two? This question has provided fodder for a battle of the brains among financial experts and commentators for a long time. Today, it remains unanswered.

Maybe this is because it shouldn’t be a debate. In overanalyzing whether active reigns or passive rules, investors may miss the point of why both types of vehicles exist.

Investors may benefit by subscribing to the notion that it’s not a question of which one is better. Investors could use both approaches in an effort to complement each other. Think yin and yang, day and night, Sherlock Holmes and Dr. Watson. Each can help to achieve different outcomes. For example, active management can be a suitable way for investors looking to diversify into international assets.

Many investors, especially those based in the U.S., tend to have a “home bias” when it comes to investing. In other words, most prefer to invest in their domestic markets rather than branching out. These investors might believe that a passive fund can do an equally good job of achieving their goals. What about riskier assets—specifically, international assets? 

Many investors may have never given thought to this question because most of their investments are domestic. But as investors search for new sources of income and ways to diversify their risk away from being overly concentrated in one area, some may consider new geographic regions.

So why haven’t more investors allocated their assets abroad? Investing internationally requires caution because doing business in one country is never like doing business in another. The amount of research involved in investing abroad can be daunting, and in today’s environment, investors are more careful than ever. That’s why we believe it’s important to have people on the ground doing firsthand field research on international companies and assets.

Global active managers already have the research teams in place in those international markets, some who have been conducting due diligence on international businesses for years. Active managers can serve as the eyes and ears on the ground for an investor’s assets, without an investor having to leave their home desk.

One potential roadblock for investors may be access. Active managers can be harder to access, especially those that manage international assets. A possible solution to this barrier to entry is a closed-end fund.

Some investors may not be familiar with closed-end funds, a type of fund structure that can help them access overseas markets. Closed-end funds tend to be actively managed, which means that the investment management teams typically have the extensive knowledge and resources to vet particular regions. Closed-end funds can make it easier for investors to access less liquid markets and individual countries such as Israel—which we believe is a country filled with many attractive opportunities, underpinned by a number of healthy and growing sectors including consumer and technology.

Investors looking to venture beyond one country, such as India or China, can choose a regional-focused closed-end fund and take advantage of opportunities in a wider range, such as the Asia-Pacific region.

Simply put, investors looking to diversify internationally have many options when it comes to access thanks to the opportunities provided by closed-end funds. In addition, investors can piggyback off the expertise of closed-end fund managers, who tend to be experts in examining the regions in which they invest. Maybe it’s time for U.S. investors to dust off their passports.

Bev Hendry is Co-Head of the Americas at Aberdeen Asset Management.

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