Taylor Swift Invests in Discounted Closed End Funds. Should You?
Taylor Swift is often called one of the savviest businesspeople in the music industry. And, in another demonstration of her money smarts, it was recently revealed that the 33-year-old pop superstar invests in a niche, elite investor-approved type of mutual fund.
Last weekend, Boaz Weinstein, founder of New York-based investment advisor firm Saba Capital Management, attended one of the Philadelphia dates of Swift’s record-breaking Eras Tour with his daughters. It prompted him to tweet: “Did you know that @taylorswift13 invests in discounted closed end funds? You think I’m kidding, but her father Scott told me so!” These sorts of funds are niche and cost a lot to manage, but can also result in high yields. “For many reasons,” Weinstein adds, “it’s hard not to be a Swifty.” (We’ll forgive him for spelling Swiftie wrong….)
Clearly, Weinstein approves. So, what exactly are these funds, and should we all be investing in them? (Can we even??)
Closed-end funds, or CEFs, are like mutual funds—a portfolio of securities that’s typically managed by a firm. But unlike the more popular open-ended mutual funds, which accept a constant flow of new capital and investors, CEFs sell a fixed number of shares during a single initial public offering and then no new shares are created. Then, CEFs are traded at a discount compared to their net asset value, making them attractive because of the potential for a bigger payday. “Because you’re getting them at a discount, the dividend you’re getting from the underlying shares is bigger,” says Laurence Booth, a professor of finance at the University of Toronto’s Rotman School of Management. Plus, CEFs typically pay dividends to their investors quarterly, and they’re designed to pay out a regular income.
You can also potentially sell CEFs at a lesser discount than when you bought, leading to a bigger return on investment.. Additionally, there’s the possibility that the fund’s assets are liquidated and split among the investors, translating to a massive pay-out. But Booth says that in Canada, that’s really unlikely to happen because the Canadian market is smaller and CEFs are newer and tend to be less niche (even though American CEFs have been liquidated in the past). An example of a Canadian CEF is Canadian General Investments, an equity fund managed by Morgan Meighen and Associates. Municipal bond funds are also typically CEFs.
CEFs are inherently riskier than mutual funds because they’re less regulated. “They can borrow debt, for example. Or borrow funds to lever up their return. They can take aggressive strategies in terms of investing in derivatives, options and futures,” Booth explains. All of these tactics are used to create leverage to boost returns. They’re also risky because you can’t pull your money out—you can only sell your shares to other investors at the price of the CEF, and there’s no guarantee your shares will cost your initial investment, regardless of the fund’s assets. Plus, just as there’s the potential for the discount to get smaller, the discount can also grow by the time you’re ready to trade, so the price you can get might be less than what you bought for. “It’s not easy to sell without taking a beating,” says Booth.
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CEFs are also sometimes more concentrated—so if one part of their holdings takes a massive hit, the overall worth plummets. For example, Booth explains that Canadian General Investments had major holdings in Shopify, and when the value of Shopify’s stocks went down the value of the fund also took a major dive. Standard mutual funds, meanwhile, are more diversified. “Mutual funds are sold to the general public because they’re heavily regulated. Investment funds like CEFs are regulated, but not to the same degree, because they’re not aimed at ordinary investors.” But, for high-earners like Swift who can tolerate the risk and afford the higher-than-average management fees, it’s a smart investment.
That being said, investing in CEFs isn’t exclusive to the rich and famous—they’re traded on the stock exchange and anyone can invest as long as they have a broker. “Anyone can just go in and check the stock price,” Booth says.
CEFs can be high-risk, high-reward, and Swift’s investment in them shows she has an expert understanding of the market. Recently, the singer also made headlines after it was revealed that she avoided the multimillion-dollar FTX lawsuit (which other celebrities like Tom Brady and Kevin O’Leary are named in) by asking the now-bankrupt crypto exchange’s representatives if their cryptocurrencies were “not unregistered securities” before ultimately deciding not to sign a $100-million sponsorship deal.
New money, suit and tie. Swift can read you like a magazine.