Aberdeen Closed-End Funds: Navigating Distribution Policies and Tax Risks for Sustainable Returns

Investors in closed-end funds (CEFs) often prioritize steady distributions, but Aberdeen Standard Investments' U.S. CEFs are now facing scrutiny over the sustainability of their payouts and the tax implications of their return-of-capital (ROC) components. As of May 2025, these funds are at a critical juncture: some are cutting distributions to align with reality, while others continue to rely heavily on ROC—a practice that erodes investor capital and complicates tax planning.

The Distribution Dilemma: Cutting Payouts or Sustaining Illusions?

Aberdeen's abrdn Income Credit Strategies Fund (ACP) recently reduced its monthly distribution by 22% to $0.0775 per share, acknowledging the need to prioritize sustainability over aggressive payouts. This adjustment, from an 18% to a 14% annualized rate, reflects a rare moment of prudence in an industry where distributions often outpace earnings.

But not all funds are so cautious. The abrdn Healthcare Opportunities Fund (THQ) and The India Fund (IFN) are distributing 90% and 100% return of capital, respectively. Such high ROC levels mean shareholders are receiving more capital than income or gains, a red flag for long-term viability.

Why ROC Matters: Tax Consequences and Capital Erosion

Return of capital reduces your tax basis, meaning you'll owe capital gains taxes if your shares appreciate or if you eventually sell. Worse, if ROC exceeds your basis, the excess becomes taxable income. For example, IFN's 100% ROC means investors are effectively paying taxes on their own principal—a hidden cost that compounds over time.

The abrdn Life Sciences Investors (HQL) fund further complicates matters, reporting a $21.3 million net deficit as of May 2025. This deficit arises when unrealized losses exceed undistributed gains, signaling that even paper losses could force future distributions to rely even more heavily on ROC.

Sustainability: A Broken Promise?

While Aberdeen's funds operate under SEC rules allowing flexible distribution policies, the disconnect between distributions and NAV growth is alarming. Take the abrdn Global Infrastructure Income Fund (ASGI): its 11.59% annualized distribution rate far exceeds its 9.44% NAV return. Over time, this gap will force funds to dip into capital or cut payouts—a reality already seen in ACP's adjustment.

Act Now: What Investors Should Do

1. Audit ROC Components: Focus on funds like ASGI (35% ROC) with lower dependency on capital returns. Avoid IFN and THQ entirely.
2. Demand Transparency: Insist on funds with clear policies to avoid ROC or disclose deficits. The HQL's $21 million deficit should trigger investor activism.
3. Tax Strategy First: For held funds with ROC, calculate basis adjustments and consult a tax professional. The clock is ticking—final 1099-DIV reports will clarify tax liabilities by early 2026.
4. Watch for Policy Changes: The ACP cut hints at a trend. Funds with unsustainable ROC levels may follow suit, risking market price drops.

Final Warning: The Write-Off Looms

Aberdeen's CEFs trade at premiums or discounts to NAV, but fundamentals matter more. Funds like IFN, with negative cumulative returns (-3.10% over five years) and 100% ROC, are ticking time bombs. Investors holding these should consider exiting before distributions are cut further or NAV declines accelerate.

The writing is on the wall: Aberdeen's CEFs demand vigilance. Those willing to sift through ROC ratios, NAV trends, and tax impacts can find opportunities—but complacency will cost you. Act decisively, or risk being left holding the bag when reality catches up.

The clock is ticking. Make your move before the next distribution cut hits.