Fund Companies Rights Offerings Managed Distributions Leveraged Funds IPOs Asset Classes CEF Advisors

My Fund Comparison
Initilizing list...

CEF Quarterly Review: July 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.

CEFA:

Welcome to CEF Insights, your source for closed-end fund information and education brought to you by the Closed-End Fund Association, and available on our website at www.cefa.com. 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.

Tom:

Good to be with you, Diane. Thanks for having me.

CEFA:

Tom, you recently published your report for June 2021, which covers over 600 closed-end and interval funds. How did investment markets generally perform in June, and what was the impact on closed-end funds?

Tom:

An interesting month, it started out pretty good. Everybody was elated with the global reopening of the economies. The Fed came out and committed to keeping monetary policy pretty easy. All the borrowing going on, it was going to continue on, and they said anything inflationary was probably transitory. And it went pretty well throughout the month, especially after we got a Goldilocks, I will call it, May non-farm payroll report, which basically kept investors engaged. I mean, this is where we saw a report of about 559,000 new jobs. I shouldn't say new, but just jobs in May created in the US economy.

But analysts expected 671,000. Well, that was good because it wasn't too low. It wasn't too high. It was just perfect, and a lot of people thought the Fed will probably keep to that easy monetary policy because of that. I mean, we saw inflation tip its head quite high. I mean, if we look at CPI, the Consumer Price Index, it was up 5% in a year-over-year basis in June, which is the highest and fastest in 13 years. But investors, basically, took the Fed at its word saying they're going to keep rates low.

And so, they started the party. The interesting thing that we can take a look at is, certainly, the Fed governors on the FOMC board, that's the policy setting committee, basically changed their dot plots, indicating that we'll have two hikes in 2023. Originally, if we call back, they said that it was not going to be changed until 2024. And, in fact, one of the St. Louis president, basically, came out and said, "Hey, I could see a rate hike as early as 2022." So there was some hiccups during the month, but another thing that investors had to be concerned about was oil hitting a two-year high.

The reason I bring this up, it's going to play through to performance of closed-end funds as we go here. Basically, what we saw near month crude oil prices rise at $73.47, again, that's over a two-year high, a 10.78% change for the month. But, ironically, after all this happened, we saw the 10-year treasury decline by 13 basis points. That certainly doesn't sound like the bond market is thinking inflationary issues. And this turned out, again, it closed down about 1.45%. We haven't seen that for a little while. And this turned out to be a tailwind for tech stocks, but a headwind for financials and anybody else who's really playing the re-inflation trade, so that lost a little momentum.

But how it broke out, if we take a look at the NASDAQ, did pretty well. Again, techs were in favor. Again, and interest rates went lower. So we saw the NASDAQ rise about 5.49. The Dow was slightly negative, about minus 0.08. How that played through though, if we take a look at this is, in June, the average equity closed-end fund had a 1.34% return. It's certainly not bad. I know we're used to seeing these three, and four, and three, and 2% returns. 1.34% annualized, that's a great number.

But if I take a look at Q2, it's even better. The second quarter of 2021, 6.89%, for the average equity closed-end fund. And year-to-date they're up a whopping 13.89%. Now, if we take a look at fixed income funds, they're not up as strong, but, again, we won't expect them to be. For June, up 0.85%. For Q2, we're up 3.18%. And we saw that for the first half of the year up 4.36%. So, overall, really a good start for closed-end funds and, actually, the market in June was certainly pretty good.

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:

Well, let's take a look. And, by the way, I didn't give you any market price returns. You usually will talk about that, but I want to stay in the NAV-based returns here. I think that's probably the most pertinent that people could take a look at. If we take a look, first, at the macro groups, we saw in the equity side, mixed asset funds, actually, did the best. It's the first month in eight that mixed assets funds did better than the other cohorts. Domestic equity funds just slightly behind, 1.65%. And world equity funds struggled a bit, just rising 0.03%. Again, this is the idea of the reinflation, or reflation, trade was actually off. People went back to techs. I won't say the stay-at-home stocks, but certainly the tech run was certainly in play here.

And so, when we take a look at this, we see that, once again, for the third consecutive month, energy, master limited partnership, closed-end funds did the best, 4.82%. Again, it's the third consecutive month they've been at the top of the list. Entering, and May's laggard, convertible security closed-end funds actually did the second best return, 3.33%. That makes sense. We had interest rates go down. We had markets hit new highs. And it certainly played into the convertibility of convertible securities.

The other piece, and this is back to that idea energy and oil did well, is up over 10%, natural resources funds was the third best performer up 2.34%. At the bottom of the barrel though, we did see developed market funds lost about 1.83%. Again, this is the idea that, first of all, the dollar strengthened, so there was a little bit of exchange trade issue going on, causing a little bit of a decline in return. But, also, the idea that there's still some concerns about the delta variant of the COVID virus and the like, and so there was some concerns out there.

Now, let's take a look at the fixed income side. For the first month in four we saw domestic taxable bonds rise to the top. People were in favor of world last month and the month before. But domestic taxable bond funds were up 0.89%. Muni bond funds just right behind 0.83%. And world bond funds fared a little bit better than their equity counterparts, if you're taking a look at fixed versus equity, but world bond funds were up 0.66%, so just about under a whole percentage point. But, basically, people remained yield focused. So corporate debt triple-B rated funds, these are the funds that are a little bit higher quality, people, they're still going for yield, but for the first month in 15, they were the top performers up 1.43%. Their leveraged equivalents, so corporate debt triple-B rated leverage funds were up 1.35%. And high yield munis was the third best performing category on the fixed income side up 1.11%. And emerging market hard currency debt funds actually lost a little down 0.37%.

But the story that we've talked about in the past, munis were on a roll. Fourth month in a row that they've seen plus side performance with all nine classifications in positive territory. That was the story with the macro groups and the individual classifications.

CEFA:

Is this a change from what you saw earlier in the second quarter?

Tom:

It is. We saw that the second quarter really had more of what I was calling the reflation trade going on. We saw techs take it on the chin. We saw people moving towards commodities, infrastructure related pieces. Financials were doing better, because you were getting interest rate hikes out of it. So we did see a little bit of a change of pace. And, certainly, that is something that we're going to keep an eye on. This month, I won't call it unique, but a lot of people were going back to the tech issues, going back to the stay-at-home stocks, for the cliché term to be used, and paid less attention to the value oriented plays and the other issues that were out there.

CEFA:

Do you expect these trends to continue into July and August?

Tom:

I do. Again, I think the reflation play will come back into play here though. I think that people are going to pay attention to what the House just passed and, certainly, they're hoping the Senate will pass it. Keep in mind, the infrastructure bill was something that even Trump was in support of, and the Republicans, and now the Democrats in charge. I think they can find a common place there to do that. But I think we're going to see more of that reinflation, inflation trade going out. And, basically, paying attention to those type of plays that are going to get the most out. We're going to see, maybe, commodities, natural resources, maybe even some of the basic materials do a little bit better, but I do expect it to go.

But, of course, one of the things we got to keep a look on is that while techs have done really well, they could continue on, but the real return funds are something I would pay attention to. And then, certainly, if we take a look at if inflation is transitory, or not, we're going to have to pay attention to what's happening in the bonds. If we see a big increase in inflation, or the treasury yield really climbs, we could have some problems in the bond market.

CEFA: The way closed-end funds trade in relation to their net asset value is an important consideration for many investors. Did you see any specific trends in premium discount behavior for June?

Tom:

Well, we continued onto another good month for decline in the discount to NAV. So, basically, we saw that, on a market basis, they were trading average closed-end funds, so a discount narrow or improved 38 basis points to 2.42%. That is much better than the 12-month moving average that we saw at 6.48%. And just so people know, I use the word median in this case. Median is what we basically take a look at to get rid of the outliers. There are some big funds that have some huge premiums, huge discounts, so we use the median. But we are using a moving average on that number of 6.48%, so 2.42% is absolutely outstanding.

Let's take a look at the average closed-end fund equity. The equity fund widened a bit about 18 basis points to 4.33%, still a very respectable number. And then we saw the average fixed income closed-end fund narrow about 66 basis points to 1.52%. We haven't seen it that low in quite a while.

CEFA:

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

Tom:

I'm not going to go way back, because I said for quite some time. That 1.42%, that is just really low for years. But let's go back to just the time period that we've seen, 12-month period. If I take a look at all closed-end funds, I don't care, equity, fixed income, combine them all. In June of '21, this month that just past, we saw a 2.42% discount. Now, if we go all the way back to July 2020, it was 8.72%. And to put this more into perspective, we have 149, as of June 30th, we have 149 funds trading in premium territory, while 308 were at discounts. If we take a look at that in July of 2020, it was 74 trading on a premium, and 405 at a discount. So we've seen a big change.

Taking that one step further, and taking a look at the equity and fixed income. Equity funds this last month, 4.33%, a year ago, 11.96%. Fixed income funds 1.51% versus a year ago, 7.2%. So it has been a really complete turnaround. And some people might say maybe that's just over exuberance going out there, but certainly we're seeing a very steep narrowing going on, and certainly I'm sure all closed-end fund investors want to keep that going, obviously, but it's been a big change.

CEFA:

Which sectors saw the greatest change?

Tom: 

Like I said, equity funds saw a slight increase during the month and, basically, domestic equity funds were the culprit. They saw the largest widening of their discount, a worsening, if you will, 112 basis points, but only to 2.90%, so still very good. Single state municipals saw the largest narrowing, about 139 basis points to 2.93%. All of them very respectable numbers.

CEFA: 

Tom, equity markets had a good second quarter, economic growth has rebounded, and interest rates remain low, but there are some concerns about the potential for inflation with the degree of economic stimulus we are seeing. Are there sectors among closed-end funds where investors may find particular opportunities, given where those funds are trading relative to their historical averages, and how do you see the direction of the markets?

Tom: 

This is one of the areas that I think everybody is... It's the million dollar question for everyone. Does the Fed come out here shortly? Certainly we know that they're going to be having their normal Fed meeting at Jackson Hole. It's their economic policy meeting in August. We'll be keeping a clear eye on that. But when we're taking a look at this, and looking at historical trends, if we believe that inflation is going to continue on, if we believe that there's going to be infrastructure spending, some of the sector equity funds have some unique positions. There's some real asset funds out there. And when we talk about real asset funds, obviously, there are the funds that might have some commodities, or gold, or might have oil, but they also have machinery there that can be used in infrastructure development. That's something I think people are going to be taking a look at.

Funds that have a focus, or holdings within the basic material areas, I think they might have a chance here. And, certainly, if we see a little bit of rise at the long end of the curve, which, again, was just the opposite of what happened, and we saw the long end of the curve actually go down and flatten the whole curve. But financials could become more important, as well. And I think people saw that the stress test that the Fed did, showed that certainly the financials, the banks out there, are in good financial positions, so that's an area.

Two other areas on the equity side I think that are interesting to look at. And, again, this is a lot more risk, but a lot of people have been talking about the developing markets. Developed markets and emerging markets really didn't participate. If we see the emerging markets, we see oil and gas and natural resources, and those materials doing better, certainly could be a play. Have to do some deep research in that. And the same with the developed markets. We've seen a recent rise in, let's say, the FTSE, London Stock Exchange in some of the more developed countries. But they didn't participate the way US did, so we might see some plays there.

For those undecided though, there's two areas that they could take a look at. Option strategy funds are something that have a historically, at least during this rally, not done as well as some of the other equity groups. In fact, for the quarter, the group is down, I'm sorry, up, but only about 6.12%. For instance, energy master limited partnerships up 19.02% for the quarter. They didn't participate in this most recent rally, and they use covered calls, and they're also buffer funds building in some declines while you can still participate on the upside. So those would be interesting to take a look at.

And on the fixed income side, if you anticipate that we are going to have some inflationary fears come ahead of us and see it, loan participation funds still could have some opportunity to shine, along with global income funds, as well.

CEFA:  Tom, you also follow interval funds, which typically offer a limited quarterly liquidity to investors. How have interval funds generally performed in the second quarter of 2021?

Tom:

Well, they actually didn't do as well as they have in the past. We've always said there's a 50/50. This time if I take a look at the numbers, the numbers are pretty starkly different when I take a look. If I look at, and this is a little bit of a apples to oranges comparison, but if we do take a look at the actual returns, we saw that interval funds return about 3.65% on average. Where if we take a look at the conventional closed-end funds, they were up about 5.51%. But that's because we have areas, for instance, energy, master limited partnership, or let's even go to one, natural resources funds up 10%, 10.99% for the quarter. But there are no interval funds in the natural resources space, so what I was giving you is a mismatch and not a great way to be able to take a look at them.

But if we do take a look at the categories that we talked about, in real estate funds, for instance, there's 33 interval funds, nine conventional closed-end funds. Basically, they underperform considerably, about 4.29% for the average interval fund that's in a real estate space versus 1.39%, 11.39%, I'm sorry. There were some big differences, but most of these are pretty small, to be honest with you. If I look at loan participation funds, interval funds were up 2.12% while their conventional counterparts were up 2.74%, so we're really close there. Income and preferred stock funds 4.52% versus 4.98%. One area that we saw that was actually a pretty big out-performance was in the global income category. It was 7.51% for interval funds versus 3.28%. That was quite a difference that we saw, but I will have to say that is because of one fund with four different share classes. Remember, these are interval funds, so they're structured a little bit like the conventional fund with share classes. And while I'm not recommending this, at all, I'm just pointing out that this is why they outperformed.

Basically, we saw BlueBay Destra International, an event driven credit fund, their different share classes, take the top four positions in that category for the quarter. So, again, no recommendation here, but just pointing out the fact that they out did. Interval funds didn't do as well as they've done over the last several months and quarters, as we've talked about, but certainly, again, this is just one period of time where they underperformed slightly in most cases.

CEFA:  What asset classes or investment strategies do you believe offer the most interesting opportunities for interval fund investors in the current market?

Tom: 

The global income funds, I think, is an interesting one. Again, I would be cautious on this. Remember... And, again, this has to be because that classification is made up of those four, or actually should say, that classification for interval funds is only made up of one fund, the BlueBay Destra International and event driven. If you like that alternative type of fund, that might be something to get into. The other side is, if we take a look at it, we're worried about the inflation rearing its ugly head again, loan participation funds, certainly, is the big space in this group. Interval funds is about 26 loan participation interval funds versus 27 conventional funds. Certainly, that is something that I think people can keep an eye on, as well.

CEFA: 

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

Tom: 

You're welcome, Diane. Thank you so much 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 at www.cefa.com.

   
 


Audio recorded 4/18/21.



Disclosure

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.

Resources

Aberdeen Closed-End TV

Asset TV — CEF Channel

CEF Connect

Cohen & Steers CEFs Knowledge Center

Harvest — CEFA Channel

Legg Mason CEFs

Seeking Alpha — CEFA Channel


SySys Logo

Lipper Logo
Powered by a SySys data & content management system.

©Thomson Reuters 2017. All rights reserved. Any copying, republication or redistribution of Lipper, a Thomson Reuters company, content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper, a Thomson Reuters company. Lipper, a Thomson Reuters company shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.