Management’s income is usually based on a percentage of the market value of the securities in the fund. The larger the asset base is, the greater the income. Both open- and closed-end fund managers are (at least theoretically) compensated to provide superior investment performance. If the value of the assets being managed grows, the management fees expand proportionately. In addition to pressures associated with performance, the open-end fund manager is faced with problems that can arise form variable capitalization.

Statistically, there is virtually no question that the popularity of both closed-end and open-end funds varies with market conditions. When the market is high, especially during periods of excessive speculation, open- end mutual fund sales increase (sometimes very dramatically), and there is an increase in the number of new closed-end funds. When the market is depressed, open-end sales decline (sometimes redemptions dominate), and there are few new closed-end funds formed.

FundsGenerally, someone who purchases a mutual fund does so with the presumption that the fund’s management will invest the money in whatever investment the fund was designed for: stocks, bonds, or the like. Even the open-end fund manager who knows that the market is overpriced and destined to falter can be pressured to buy stocks because of the demands of stockholders. Conversely, if prices are depressed and shareholders want to sell (redeem), the open-end fund manager can be forced to sell at depressed prices to raise the cash necessary to pay for redemptions. In effect, the open-end fund management can be forced into the precise formula for loss (buying high and selling low) by following the demands of clientèle.

The closed-end fund manager has the benefit of fixed capitalization. If shareholders do not like the management and/or market conditions, they can sell their shares in the open market. The closed-end fund’s capitalization is therefore not affected.

Some critics contend that the fixed capitalization of closed-end funds can create lethargic management because the asset base is not exposed to the risk of being sold by discontent shareholders, as they are in open-end funds. The previously mentioned close average performance by various fund types negates this criticism.

Most managers would obviously prefer fixed capitalization, avoiding both the risk of losing assets resulting from shareholder sales and being forced into investment decisions by shareholder demands. Investors obviously prefer variable capitalization, avoiding the discount discomfitures, as evidenced by the far larger number of open-end funds than closed-end.

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