Closed-end funds have long been a niche investment vehicle, but what makes them particularly compelling in today’s emerging markets environment? We discussed this with Oliver Marschner, Senior Portfolio Manager and Head of the Emerging Markets Group at City of London Investment Management (CLIM).
In the interview, he explains how CLIM leverages pricing inefficiencies in closed-end funds to capture alpha, the structural advantages of the closed-end format, and why the firm sees a strong case for emerging markets today. He highlights the role of macroeconomic shifts such as a weakening US dollar, falling interest rates, and the sector’s large exposure to AI through leading technology and semiconductor firms.
Key Highlights
City of London Investment Management (CLIM) has built its reputation as a specialist in closed-end fund investing. The London-based asset manager, founded in the early 1990s and listed on the London Stock Exchange, has about USD 6.8 billion assets under management (AUM). Its strategies span emerging, frontier and developed markets as well as listed private equity – all united by one core principle: exploiting pricing inefficiencies in closed-end funds.
Oliver Marschner, Senior Portfolio Manager and Head of the Emerging Markets Group, explains how CLIM applies this niche approach to its Emerging World Fund (EWF) and why the firm sees attractive opportunities in emerging markets today.
Exploiting pricing anomalies
Closed-end funds differ fundamentally from open-end vehicles: they issue a fixed number of shares that trade on exchanges like ordinary equities. Because supply is fixed, share prices fluctuate according to demand and can deviate from the net asset value (NAV) of the underlying portfolio. CLIM’s strategy centres on exploiting these deviations.
“We buy into funds when their discounts to NAV are wide relative to history and sell as the discount narrows,” Marschner explains. “That’s how we capture alpha.”
This discount trading, he adds, provides a differentiated and complementary source of return compared to traditional emerging market funds. Over its three decades long track record, CLIM has generated consistent outperformance – around 200 basis points annually over the MSCI Emerging Markets benchmark, with comparatively low tracking error.
Combining macro views and fund selection
CLIM’s investment process blends top-down country allocation and bottom-up fund selection. A three-person macro team in London ranks 27 emerging markets quarterly on a 9-to-12-month horizon, considering macroeconomic, market and political factors. The portfolio management team then determines how best to express these allocations through the most attractively valued closed-end funds.
Equally important is the quality of underlying fund managers and governance structures. CLIM seeks boards that are “shareholder-friendly” and willing to act on persistent underperformance or widening discounts.
“If the discount continues to widen, we can put pressure on the boards to address that so they can have a tender offer or buybacks or ultimately liquidate the fund. And in each case, assets are returned to shareholders at net asset value, which again is an attractive proposition because we’re buying into these positions at large discounts,” Marschner notes.
Why emerging markets now?
After a decade of underperformance, Marschner sees a confluence of factors turning in favour of emerging markets. “The US dollar is weakening and the Fed is cutting rates, both historically supportive for EM assets,” he says. In addition, the asset class has significant exposure to artificial intelligence – a major structural growth driver.
Between 40 and 45 per cent of the MSCI Emerging Markets Index is linked to AI through technology and semiconductor firms such as TSMC, Samsung, SK Hynix, Tencent and Alibaba. “Sentiment is finally shifting while valuations remain cheap, creating an attractive entry point,” he argues.
Advantages of the closed-end structure
Beyond the valuation opportunity, Marschner emphasises the inherent benefits of the closed-end structure itself. Unlike open-end funds, closed-end vehicles are not subject to investor inflows or redemptions, allowing managers to focus on long-term positioning without holding excess liquidity. Historically, equivalent closed-end versions of funds have tended to outperform their open-end peers due to this structural advantage.
The approach also delivers strong diversification. CLIM’s portfolios typically hold 40–60 closed-end funds, each invested in 50–80 underlying equities. “On a look-through basis, that gives exposure to over 3,000 emerging market stocks,” Marschner says. “It’s a diversified, efficient way to access the space with lower tracking error.”
A niche with structural edge
Emerging markets equities remain largely retail-dominated, leaving room for specialists like CLIM. “Retail investors tend to be less focused on discount dynamics,” Marschner explains. “That gives institutional investors who do the research – like us – a clear edge.”
