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CEF Monthly Review: December Interview - Tom Roseen

Tom Roseen
Tom Roseen, Head of Research Services with Refinitiv Lipper & author of the Fund Market Insight Report alongside the Closed-End Fund Association discuss Tom›s insights on the closed-end fund market.


Welcome to CEF Insights, your source for closed-end fund information and education brought to you by the Closed-End Fund Association. My name is Diane Merritt. Today, we are joined again by Tom Roseen, Head of Research Services, with Refinitiv Lipper and author of The Fund Market Insight Report, which provides in-depth monthly commentary on the closed-end fund market. We're happy to have you with us today, Tom.


Thanks for having me, Diane. Good to be here.


Tom, you recently published your report for November 2020, which covers over 500 closed-end and interval funds. How did investment markets generally perform in November? And what was the impact on closed-end funds?


Well, it was a spectacular month, actually. It's the best monthly returns for equities that we've seen since 1987. So really, really good run. I mean we saw record closes on the Dow, the NASDAQ, the S&P 500 and even the Russell 2000, so it was a big month for returns.
We had less uncertainty, Presidential election while occurring and the recounts and a little bit of confusion going on. Still, I think people were finally said, well, we're glad that's finished. We also saw that the Democrats didn't necessarily take all three chambers. Didn't take the Presidency, the Senate and the House. Now that still is up for debate.

Obviously, we still have two run offs occurring in Georgia, so it could happen. But I think people breathed a sigh of relief because inaction for the markets and they know what's going on and not necessarily big changes in taxes and stuff like that, I think that was a boon for markets overall in the US.

Also I think the main driving factor to this spectacular month that we had was a COVID-19 vaccine being created. We have a trifecta of three different firms coming out with the possibility of a COVID vaccine. And we all know that. In fact, they're rolling it out this week.
Of course, in November, we just heard that they were going to be applying to the FDA for emergency application and use. Also, we saw a wonderful non-farm payrolls. Now, I say wonderful, because it was 638,000 regained jobs. A lot of people refer to as new jobs, though we all know that the unemployment rate is still at 6.9%. So it was just regaining of those jobs lost in March. But the nice thing about it is it did beat analysts' expectations of 503,000. And although it was slowing, it was a positive number.

And maybe one of the big stories for this month when we start talking about November returns was that we saw a COVID vaccine related rally in oil as well, basically pushing crude oil up about 26.68% for the month, which was a boon for a couple of classifications we'll talk about later.

And the last piece that I think was really important for the news portion of it was that we felt rotation. In the past we'd talked about FANG stocks doing all the beating on NASDAQ was doing wonderful, but no other rotation. S&P was kind of languishing. Dow was languishing, but we saw that it was a big move.

So how this broke out, closed-end funds returned and the closed-end equity funds returned 9.86% first month in three that they saw positive returns and it was their best return since April. April was a big month as everybody will probably recall. On a market basis, they're up are 16.26%. Great return.

Fixed income closed-end funds were up 3.51%. And that was their eighth consecutive month that they've seen positive returns, but the return was about 6.24% on the market basis. So really, really strong. An exceptional month.

And by the way, if we start looking from November to November, the type of returns, this was the strongest for the Dow, the strongest November return since 1928. So really it was a stellar return.

Let me end though, with this rally of conversation and numbers I'm throwing at you. Year to date, we actually moved to positive territory for fixed income bonds, they're up 2.37%. Year to date for the equity funds, they're still down 1.56%, but let's keep in mind that energy master limited partnerships and natural resources funds got clobbered in March and April. They're still down.

Energy master limited partnerships are down 53.86% year to date. And natural resources are down 31.16%. So while I'm saying we're still in negative territory, it's because those two groups just dragged down the average completely. So when I'm saying minus 1.56% year to date for equities, the majority of equities are actually back into positive territory.


Your data breaks out closed-end funds into over 20 classifications. What classifications were the best performing for the month and which sectors struggled?


Well, basically when we're taking a look at this world equity funds... So let's take a look at the macro groups first. So world equity funds actually did very well. Remember I said there was a new rotation going on and people have been kind of pushing off any sort of world equity, international funds, global funds, they've been ignoring that just because of what's been going on with the COVID 19.

Up 11.64% first month in three that they've actually been the leaders of the group. We had developed domestic equity funds that basically returned 9.88%. Great return. And even mixed asset funds were up 7.92%. But breaking it down for the second consecutive month, and here's why I told you a little bit about the rally in oil, energy master limited partnerships were up 19.34%.

Keep in mind, I still said they're down 53.86% year to date, but they had a spectacular month and natural resources funds on that big rise in oil, also saw that they were up about 16.97%.

And then the next big category was developed market funds. So people were looking at the European funds and UK funds and the like. Basically up 14.25%, so quite a story there. In fact, the worst category, we'll call it the relative laggard because they still turned 3.70% return - real estate funds. So they were the laggard to the group. So that was amazing.

Now, if we take a look at the fixed income side of the arena, investors were willing to put quite a bit more risk on. Basically we saw that they were yield seeking and risk seeking. We saw world bond funds actually for the first month in four rise to the top of the macro groups, up 5.14% for the month. Domestic taxable fixed income funds were up 3.97%.

And even muni bond funds actually did a really good, even though people were getting away from the riskier, to less, I should say the safe assets, muni bond funds were up still 2.68%.

And the leaders of this group, as one would probably imagine with world bond being at the top, emerging market hard currency debt funds were up 6.07%. Now we're all used to hearing 6%, 5%. This is a bond fund and it's a one month return of 6.07%. Global income funds where the next big winner, high yield leverage were, did very well.

And the laggard of the group, if we take a look at it, was intermediate municipal debt funds. They were still up 1.33%, and this is the first month in four that municipals have actually been in plus side territory, and all nine qualifications were basically in the black for November.


Is this a change from what you saw in October?


So we still had, if people recall from last month when we chatted, the energy and MLP funds actually did pretty well. But again, remember I told you that there was a rotation going on in that particular group, but really people were still playing in the FANG stocks, the stay-at-home stocks, FANG stocks as people refer to the technology-oriented stocks were basically the darlings of that time.

And again, last month was a little bit low, but back to the question, basically what we're now seeing is a rotation into the out of favor stocks. So we're seeing national resources funds doing better. The international markets are improved. Basically it's a broad based rally.

So it really was quite a change that we had from that period. Again, we're always talking about techs and FANG and that kind of stuff. Now it was a complete rotation until the end of the month. And then people started going back to the stay at home stocks because of the rise in COVID cases and hospitalizations right at the end of the month.


Do you expect these trends to continue into December?


I do in some senses. I think we're going to see a little bit more volatility. All eyes are going to be on the economy, but right now is when the first couple of weeks of Great Britain, particularly in the UK, I believe that they're going to be doing the first rounds of vaccines.

And I think that will be a boom, but again, I think people have already pushed the stocks up quite a bit, and keep in mind that we are in the last portion of the year, had a spectacular run-up in many stocks and many even fixed income funds I think there's going to be some tax-loss harvesting.

So while we see the markets kind of going up and down, one thing we're going to have a little bit more volatility, and we do have to keep our eyes on what happens in the closed-end fund industry quite a bit. And that's that tax-loss harvesting.

So we might see some artificial declines when other markets are going up, maybe slight declines in equities as people are trying to match those losses with those gains to make their after tax performance look that much better.

CEFA: Investors often monitor the way that a closed-end funds trade in relation to their net asset value. What were the trends in premium discount behavior for November?


Basically what we saw was the large improvement in premium and discounts. That's a big change from November. If we take a look at all closed-end funds, and keep in mind, I use the median discount rather than the average, because we have some big swings both premium and discounts, but we saw the median discount narrowed 260 basis points, which is a huge number.

It went down to 7.41%, but it was a big change. And it's better. This is the first time I can say in matter of months that it's better than the 12 month moving average of median discounts of 8.38%. So the current monthly median discount at 7.41% is looking better than the 12 month moving average. We haven't had that for a while.

If we take a look though at more of a breakout, we saw that equities improved 271 basis points, declining to 11.16%. In fixed income, actually saw a narrowing of their discount of 1.82 basis points, making it a 6.45% median discount for the month.

And actually I should be saying at month end, right? It actually was measured on November 30th.


Closed-end funds often see investors engage in tax oriented trading strategies near the end of the year. Have you seen any tax-loss selling in this space?


Not yet. There has been no movement. And the reason we haven't seen it is because we had such a huge market gain that, again, we saw the narrowing of discounts. It was just huge. But again, this is something that I expect we'll see movement as we move on in the month.

Again, year-end selling, there has been some really big profits, but again, if you were the holder of a master limited partnership on the energy side, or of the natural resources funds, you may want to try to match some of those losses with some of the gains that we recently experienced against some of the convertible securities funds are up 20% for the year so far.

I mean, this is some big numbers that are out there. So I think you're going to see some matching of losses and gains to again improve that after tax performance. So again, we will see some changes, I think, as we go through the end of the month. Nothing yet though.


How do current premiums and discounts compare to their historical averages?


So we basically have seen some big movements, as I said before. The historical perspective, if we take a look at what the history has been doing, we see that when we look at the overall group, we saw that the median discount had declined on November 30 to 7.41% as I said before.

But if I take a look at the overall for closed-end funds on January 30, 2020. Again, about 11 months ago, we're at 4.95%. So we're still basically looking at some pretty high median discounts. But again, the improvement has been a lot. Now, if I take a look at the individual, like the equity and fixed income, if we take a look at that and do the comparison on January 31, 2020, the median discount over the last 12 or 13 months was that lowest point 5.40%. And on November 30th, it was at 11.16%.

But let's keep in mind the largest spread that we saw in discounts was, just occurred last month on October 30, 2020, it was at 13.86%. So we are seeing a better improvement.

Fixed income, on the other side, when we're taking a look at it on January 31, 2020, the median discount was at 4.69% whereas on November 30, as I told you already, it was at 6.45%.

But again, the steepest, widest discount we saw was on March 28. The median fixed income fund was actually trading at 9.11% discount. So again, we've seen a big improvement, not the best numbers, but again, we're getting close to them.


Which sector saw the greatest change?


So if we take a look at it, the best movement we saw was in high yield funds. And so high yield closed-end funds had an improvement of 416 basis points. That's over 4% change. So it dropped down to 6.98%.

The smallest improvement, nobody saw a negative by the way, the smallest improvement was basically in the single states municipal bond group, the macro group, they only saw an improvement of about 82 basis points to 8.08%.

And really, if we take a look at the number of funds trading, so if we look at last month's and the prior month, I should say October's, we had 52 funds trading in premium territory. At the end of November, we saw 76 funds trading at premium territory. So that's pretty big change.

CEFA:  Closed-end funds often see a pickup in demand in late December and through January. Is this something you would expect to see in the next several weeks given where discounts are and following any year-end tax related trading?


That's a tough question. And this is going to be the million dollar question for everybody who's out there right now and in the closed-end fund space. Markets are at record highs. And so we're pushing stretched valuations.

A lot of people feel that we've reached the mark. Again, we hear the NASDAQ and the Russell and the Dow all hitting record territory, record new numbers. And so when we're taking a look at those numbers, we have to keep in mind that we want to keep an eye out for wash-sales and tax-loss harvesting.

So it's going to be awhile for people to actually sell the security, to avoid a wash-sale, to have to wait 30 days in which to take care of those numbers. So again, I think we are going to see some changes that we need to keep an eye on.

CEFA:  Areas of the economy continue to improve, but we still have areas of uncertainty as we look forward to 2021. Are there sectors among closed-end funds where investors may find particular opportunities given where those funds are trading relative to their historical averages?


There are, and I brought up two of those and again, this is not for the faint of heart and I would keep an eye on this as well as what's going to happen over December and into January. Again, we usually have a sell off, maybe it's artificial lows in the pricing, and then we see a jump back up in January, as people are, again, avoiding those wash-sales and get the stock back up as they get back in the market.

But if we take a look at it, energy master limited partnerships, energy MLP funds, are still down 53.86% and natural resources funds are down 31.16%. Keep in mind, I told you that they were at the top of their group for the second consecutive month for outperformance.
So I'd be cautious here, but the reason I'm still saying it could be an area that we could find some areas of interest is if we have a COVID vaccine related change in the markets, meaning that people start traveling more, when we get airlines back out there, we get people traveling more often in their cars and the like, demand will increase.

We may still see some numbers that again, look better than they had in the past. Now, keep in mind when we're taking a look at this and we're trying to figure this out, I mean, keeping an eye on gas prices is certainly a, I shouldn't say gas, but oil prices themselves.

We went from $35.79 at the end of the prior month and to the end of November, again, November 30th, we saw oil prices near month crude oil prices, by the way, jump to $45.34. So that was a big jump. Now we're still at $45.34. And we've been in this trading range for a while so it would be something I'd keep an eye on.

Two other areas that are of interest. And these may have to be with people that are interested in the yield possibilities. Again, they struggled this last month. Utility funds are down year to date 4.78%, and real estate funds considered a yield play by many as well are still down 4.37%.
So these are something that we keep an eye on, but again, the caveat emptor my buyer beware piece here is year-end selling could really change things quite a bit.

CEFA:  Tom, you also follow interval funds, which typically offer limited quarterly liquidity to investors. How have interval funds generally performed through November of this year?


So if I looked at the individual for November itself, and actually the non-interval funds, the conventional closed-end funds, have basically done better this last month.

But, if we take a look overall and we take a look at some of the areas we were talking about, real estate funds is one of those areas that there are a lot of interval funds. 29 interval funds versus nine conventional funds.

They had a tendency to actually beat their conventional closed-end fund group. 2.36% was the average return for real estate funds that were actually interval closed-end funds. And then the conventional closed-end funds had a negative 10.86%. So 2.3% versus minus 10.86%.

So that's one of the areas we can take a look at. Now that said, I can go to the sector equity group and tell you that the numbers are a bit different. There was seven interval funds versus 16 conventional closed-end funds.

The interval funds on the sector equity side had a 7.08% positive return year to date. Whereas their conventional closed-end fund brethren had a 12.06% return year to date. So we've had this dichotomy between the two.

One last group is loan participation funds. If you think there's going to be a heightened interest rates problem if we get another bailout, sounds like it'd be much less than the $3 trillion they were talking about before, or even the $2 trillion, looks like we're looking at about just a little less than a trillion. $900 some billion in lending.

If you think that's going to cause a little bit of inflation, loan participation might be an area you can go into. The interval funds, basically up 0.29%. So barely up.

And then if we take a look at the conventional loan participation funds, they were down 1.37% for the year to date time period. So again, that might be another area. And by the way, for the split it's 27 interval funds versus 28 conventional closed-end funds.

So that's a great example of taking look at the comparabilities. They're very close to each other return wise.


As we start looking toward 2021, how would you see investors best utilizing interval funds in their income oriented portfolios?


We've talked about this before and I think the bottom line is, is that people have to remember this a long buy and hold when you get into these, because they're not going to let you out. As you've said, they have quarterly refunding, usually. Some have semi-annual. Some are even less, or more restrictive than that, where they say, we'll try to do semi-annual or quarterly, but if we decided not to do any at all, we can do that as well.

And that's in their documents because they're going in buying less liquid securities so they can't just turn around and sell. But again, this is one of those buy and hold things. And of course you could possibly, if we do have a moderate sell-off because of tax-loss harvesting and that type of thing, there could be an opportunity to get in to an interval fund at a little cheaper price.

Keep in mind they never create a premium or discount. They're always selling at NAV. And so it would just be something I'd be cautious about. Remember long buy and hold when you're in an interval fund.


Tom, thank you so much for taking the time to join us today.

 Tom:   Diane, thanks for having me on and I do want to wish everybody a happy holidays as we go forward.


 Same to you. And we want to thank you for tuning into another CEF insights podcast. For more educational content, please visit our website at

Audio recorded 12/07/20.


Closed-end funds trade on exchanges at prices that may be more or less than their NAVs. There is no guarantee that an investor can sell shares at a price greater than or equal to the purchase price, or that a CEF's discount will narrow or be eliminated. CEFs often use leverage, which increases a fund's risk or volatility. The actual amount of distributions may vary with fund performance and market conditions. Past performance is no guarantee for future results.



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