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Lipper's February Closed-End Fund Market Review

Tom Roseen

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 and the Closed-End Fund Association discuss Tom’s insights on February's closed-end fund market action. The podcast audio can be heard here.


CEFA: 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 Lipper from Refinitiv and author of the Fund Market Insight Report which provides in-depth, monthly commentary on the closed-end fund market. We are happy to have you with us today, Tom.

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

CEFA: Tom, you recently published your report covering February, 2020. You study over 500 closed-end and interval funds regarding performance, premiums and discounts, and corporate activity. Since we spoke last month, there has obviously been a significant increase in market volatility. What has been the general impact on closed-end funds, and has this been similar to what we see in the broader market?

Tom: It is, and in some cases a little bit more severe. Not only did we have a market downturn towards month's end, but that usually exacerbates closed-end fund returns as well. I mean, we had some good news at the beginning of the month. We hit new records with the Dow and the S&P. We heard nonfarm payrolls came in better than expected, 225,000 versus 165,000. We heard the Central Bank of China was injecting money to help with the breakout of the coronavirus and the like, and I think people initially thought that that was a good thing.

But then we heard about the spread of COVID-19 amongst their neighbors, and then later on in the month, in Italy and other places and even hitting here in the U.S.  So, we saw the markets go into correction territory, and I think everybody listening to this podcast knows that correction is usually a 10% decline from its top. Certainly in the last week of the month, we saw a 12% and 13% decline from the top as investors not only were concerned about the coronavirus, but also heard some very discouraging news about oil prices and that the relationship between Saudi and Russia, that they're going to do an oil production cut was falling to pieces. So I think it sent the market into a tizzy of sorts.

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

Tom: We saw that the equity closed-end funds actually suffered their largest one month decline. If we look at an NAV basis, it was since September 30, 2011, declined about 6.90%. So equity funds got crushed in that manner, and I think it's going to be worse here this month unless we can get some reversal going on. But anyway, for February, on a market basis it was their worst month of returns since February 28, 2009. We saw an 11.12% decline for equity funds.

And then if we take a look at fixed income funds, things we're not quite as dour. Obviously we put up just a 0.15% return for closed-end fixed income funds, their fourth consecutive month they've seen plus side returns. Again, only to the tune of 0.15%, but we also saw that on a market basis, they actually suffered their worst return in 13 months and actually posting a negative return of 3.25%. So, the prior 13 months they were on a winning streak, no negative returns on a market basis. At this time we saw minus 3.25% as investors really put the risk off, a flight to safety.

So we saw treasuries and higher quality bonds do better. But interesting enough, we didn't see gold rally. Actually there was for the month, near month gold prices dropped about 1.19% for the month. And the reason I think people were concerned there, and we didn't see a lot of movement, is the treasury yield actually declined at 1.13%, its lowest on record. And it remained inverted with the 3 Month Treasury Bill basically going to 1.27 and the 10 Month Treasury Bill being at 1.13. So, I think people were a little confused on what's going on. I would have thought we›d have a big move in bond funds, but we didn't.

But let's take a breakout of all the classifications or the breakouts that did best. So, you had asked what did best? What did worse? Well, domestic equity funds took it on the chin. They were down 7.68% for the month. For the entire equity universe, only 21 closed-end funds had plus side performance. So, it was not a good month for anybody. Mixed asset funds were down 4.66%. World equity funds were down 6.50%.

So, if we take a look at kind of the best performers, those that had an income tilt to it, real estate funds mitigated losses better. They were only down 2.46%. Convertible securities were down 4.58%, and income and preferred stock did -4.69%. But as you might imagine, remember I told you there was a meltdown, if you will. I think it was a somewhat 17% decline in oil prices. We saw that the energy master limited partnership funds actually suffered for the second month in a row with negative returns, but to the tune of 17.40%. This was a precursor, by the way. I think everybody knows that oil just got crushed after that. It went from $46 a barrel down to 30s this month in the last week or so.

But natural resources funds were down 12.26%. The utility funds were down 9.8%, but, again, if we take a look at fixed income side and those investors, a lot of people are looking for a yield here. So, fixed income is a common asset bought in closed-end funds, domestic fixed income funds were down 1.23%. Muni bond funds marvelously were up 2.12%, and world bond funds were down 1.55%.

So, really, again, this risk off thing we saw emerging market debt down to the bottom, losing about 2.64%. High yield leveraged funds down 1.7%. And California municipals and, in fact, all of the municipals, for the fifth month in a row had plus side performance or best performance. California was 2.35%, and general insured municipal bond funds leveraged were up 2.34%. So, that was quite a story there.

CEFA: Is this a change in what you have seen in the previous months?

Tom: It is. There is some change in, obviously it's with the same thing I told you, for the second month in a row the energy master limited partnerships were just crushed, and natural resource have been towing a very tough line here. But we are seeing again investors going towards... And this is where the change has been. Everybody's been really kind of in a go-go attitude, and I think people are really stomping on the brakes, and when we talk a little bit later about premium and discounts, you'll see why I'm saying that. It has changed considerably in how investors are responding to some of these big declines, but then in particular also why they might be even moving towards the muni bond funds and other secured debt type of securities.

CEFA: Are you seeing these trends carry over into March?

Tom: We are, and this is what I made reference to a little bit earlier. One of the biggest, I think, maybe an indicator for us, was when we saw the markets really take a dip and energy MLPs, natural resources funds really take it on the chin. That might've been a little bit of a precursor, a teller for us. We said, “Okay, this was due to the agreements between Russia and, basically, let's call it OPEC.” It was really Saudi Arabia, but they were going to agree to cut their production out there.

But what happened is we really have the coronavirus actually causing a decline in demand for oil on a global basis, and so this has really caused that landslide. So, this is something that we are seeing definitely reach over into the month of March. We've seen wild swings, and certainly the other day we saw an 8% decline in the market in one day, its biggest since 2008. This is something that we're keeping an eye on.
CEFA: Closed-end funds can trade at a premium or discount to net asset value. What were the trends in premium discount behavior?

Tom: So, the median discount for all closed-end funds is, I think, we all would expect with the big market volatility in a decline, it widened 313 basis points, or got worse by 313 basis points and declined to 8.08%. That was the median of all closed-end funds that we're taking a look at. Basically if we take a look at the 12-month moving average of 6.75%, that's one of the issues that we probably take a look at, is that median discount has worsened than over the last 12 months.

And let me give you a particular, equity closed-end funds were wider by 232 basis points down to 7.72%, and fixed income were wider by 368 basis points to 8.37%. Again, this is in anticipation, I think, of people worrying about the Fed cutting rates... Or actually they wanted the Fed to cut rates, and then obviously we now know they did a surprise 50 basis point cut. But I think that was in anticipation of, not only worrying about the coronavirus, but also in anticipation of the Fed cutting rates and central banks getting involved.

CEFA: How do premiums and discounts compare to their historical averages?

Tom: Well, we had this month 90% of all funds see either their premium decline or their discount steepen or worsen. So, that is a big change, and in fact, in January, when we last talked it was 113 closed-end funds that were in premium territory. For the month of February, there was only 61. So, we've seen almost a halving of premium discounts... Funds in premium territory actually halve during the month of February. So, this has been a pretty big change.

CEFA: Which sector saw the greatest change?
Tom:  So, world income actually witnessed the largest widening of discounts. It was 437 basis points to 6.68%, and every single group actually suffered very widening of discounts. So, I really don›t have one that I can say “this did better,” but I can tell you which had the largest change. It was certainly world income funds.

CEFA:  Tom, are there sectors where investors may find particular opportunities given where those funds are trading relative to their historical averages?

Tom:  You know, I think that we are going to see some buying opportunities. I think some of this is baby out with the bath water. The market just hates uncertainty. And in the closed-end fund space, one of the things that we worry about is, not only do we have to worry about the underlying portfolio, right? Being priced as and that's what we get our NAV returns on, but then how the... So, we get a decline with that, but then also how the decline will impact closed-end fund trading behavior.

So, I think that we're going to see... Energy MLPs literally have taken it on the chin over the last two months. And this is one of those situations where, again, I think we need to wait for the dust to settle. But how long do you wait? I think we see things in the natural resources, energy, MLPs, and even maybe some of the commodity linked funds that may have some opportunity going forward.
CEFA:  Tom, you also follow interval funds which differ somewhat from traditional closed-end funds. How has the market volatility impacted interval funds?
Tom:  So, that's an interesting question. This is one I kind of answered a little bit in the question before, but it's very opportune to pay attention to the structural differences between interval funds and a conventional closed-end fund. They don't have to worry, they being the portfolio manager, and also even the people owning the interval fund, don't have to worry about premium discount behavior. I mean, again we have a big market decline. The underlying portfolio declines, but then as closed-end fund investors, the price is actually based on supply and demand. If people keep dumping, they might even have bigger discounts. In fact, we know they do.

So, I think this was actually a boon for interval funds, and it keeps the market participants maybe in check. Let's say it's a quarterly refunding. A lot of the interval funds will say, “We›ll do redemptions on a quarterly basis.” This may give people enough time to actually go through a breather, if this doesn't turn out to be a true 2008 where we lose 45% and it stays off for a year. If this is a balance, they may be able to avoid some of the temptation to sell during some of the biggest market downturns we've seen in ages.
CEFA:  A characteristic of interval funds is a more limited degree of liquidity. Can this actually benefit investors in the type of market environment we are in currently?
Tom:  So, there's a double-edge sword there. So, as I made reference, it may stop people from pulling the trigger at an inopportune time, but on the flip side, this is one of the downfalls that we have as well. If you can only do redemptions on a quarterly basis, and the market is on its downward spiral, and you wanted to get out... I mean, it's one of the reasons people use the closed-end funds rather than let's say mutual funds, you can trade constantly on a given day. They lose that opportunity to pull out quickly.

Again, that's a double-edged sword. So, this could help them avoid some unneeded losses, selling it at a low, but additionally, if you wanted to get out and you felt this was going to be long-term in nature, I mean, as something akin to what we saw in the, 2000, 2003 market decline or even in the 2008 market decline, this may be one of those things you say, “Darn, I couldn›t sell and that›s really stopped me.” So again, double-edged sword, but I see it as actually a silver lining for investors.
CEFA:  Tom, thank you so much for taking the time to join us today.
Tom:  Diane, thanks for having me.
CEFA:  And we want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website

Audio recorded 03/11/20.


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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