Not sure about the difference between open-ended and closed-ended funds? We look at how they each work – and the pros and cons to weigh up.
Managed property funds offer a number of potential benefits to investors.
For many, they’re seen as a low-fuss way to access markets or individual assets, such as high-value commercial properties, that may be beyond the reach of individual investors.
Part of the appeal lies in the way a managed fund can typically deliver strong returns for investors – not just because the fund has the capital to invest in quality assets, but also because the fund management team is comprised of professionals with their finger on the market pulse.
However, with managed funds offered in different forms, investors can be uncertain about the key nuances between the different types of fund structures – particularly when it comes to closed-ended and open-ended funds.
In this explainer, we describe how closed-ended and open-ended funds work, and the pros and cons investors need to weigh up when evaluating their investment options.
What are closed-ended funds?
A closed-ended fund raises capital by making a fixed number of units available to investors at the outset.
Once the closing date for investor subscriptions has passed, or the fund has raised sufficient capital to achieve its goals, the fund shuts its doors to new investors or further injections of money from existing investors.
During the life of the fund, investors typically receive regular distributions, and at the end of the fund’s given term, a vote is usually held to either extend the fund or sell down the assets, with capital gains realised and returned to investors.
The pluses of closed-ended funds
- The investment timeframe is known upfront. This allows investors to plan ahead and can provide more certainty about the investment horizon and suggested timeframe required to maximise returns.
- Investors can enjoy a set-and-forget approach throughout the set term of the fund.
- A known asset pool: For a single-asset fund – investors know upfront what the fund will invest in, which is helpful for portfolio planning.
Potential downsides of closed-ended funds
- Lower liquidity – investors should consider closed-ended funds as fixed-term investments, meaning they need to commit to the full term of the fund. The fund manager will set the target term of the fund based on the time they believe is required to realise maximum value from the underlying assets.
- Inability to buy additional units – once the fund is fully subscribed, investors can’t add to their holdings. This can be frustrating for investors if a fund is performing particularly well!
The Westbridge approach
Most of our funds to date have been closed-ended funds (initial term with a vote to renew) – such as the Westbridge Tamworth Property Fund, which was launched in 2024.
This Fund has a target timeframe of five years, during which the Fund aims to deliver a blend of income and capital appreciation generated by value-add opportunities located in a neighbourhood retail centre in NSW.
What are open-ended funds?
Unlike closed-ended funds, open-ended funds accept new capital at regular intervals – in some cases monthly.
This allows new investors to buy into the fund, and offers a chance for existing investors to increase their holdings.
In this way, new money flowing into the fund can be invested in additional assets to grow and diversify the fund’s underlying portfolio.
The pluses of open-ended funds
- Greater liquidity – open-ended funds can offer fixed withdrawal windows, enabling investors to redeem their capital at set intervals should their financial objectives or goals change.
- Flexibility in underlying assets – the fund manager can buy or sell properties over time, allowing the fund to select the best-performing properties (within the defined criteria covered in the IM) at any given time based on market opportunities.
- The option to grow your investment – an open-ended fund offers the opportunity to buy extra units when investors have the capital available.
- Regular pricing updates – the value of the fund is calculated regularly, allowing investors to decide whether to increase their investment, which can be appealing for investors looking for a more hands-on approach.
Potential downsides of open-ended funds
- The fund relies on a continuous inflow of capital to grow its holdings.
- Liquidity risks – investors may choose to redeem units during times of market volatility, which can lower their returns.
The Westbridge approach
Recently, Westbridge launched an open-ended fund – the Westbridge Industrial Opportunity Fund.
This Fund aims to deliver a balance of capital growth and income, which will be distributed monthly.
We chose an open-ended structure for the Westbridge Industrial Opportunity Fund to provide a more flexible investment option offering a blend of income and value-add opportunities.
Closed-ended versus open-ended funds – which is right for you?
Choosing the type of fund that is right for your needs does call for some research, as well as some reflection on your unique objectives.
It involves weighing up how you feel about risk, your liquidity needs, and whether you are prepared to commit to a fund for the long term.
What’s exciting is that open-ended and closed-ended funds are not mutually exclusive. Investors have the option to add both to their portfolio.
It can mean enjoying the best of both worlds – a set-and-forget investment plus the opportunity to withdraw capital as, and when, it may be needed over time.
Contact the Westbridge team to learn more about the fund options we have available that can help you achieve your goals.
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