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CEF Market Review: July Review

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 July's 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. It's great to be here.


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


Markets took us out on a roller coaster ride this month, and it really was due to some great news that we heard and some disappointing news. We basically started out the month on an up note, seeing that the unemployment rate dropped to 13.3% from 14.7% in May, and the main numbers basically came in 2.5 million jobs being added to the US economy while analysts thought there was going to be, at some point, a 3 million person decline.

So those job increases actually set the tone. However, later in the month, we had to worry about new closures coming around because we had a spike in coronavirus cases, and basically it was a pall put over the general economy as a whole, so we saw wild moves; 500 point swings up, 500 point swings down on the Dow, and so this really set the standard, but investors also had to weigh against these new coronavirus cases that we had. Again, strong employment numbers coming in, basically the improvement there, but also it was the commitment by the Federal Reserve and Department of Treasury to do whatever it takes to shore up the economy, and that really put us on some very good numbers.

The average closed-end fund rose 1.18% for the month, and on a market basis, it basically rose by 0.83%. Fixed income funds rose about 2.61% for the month on a NAV basis and about 2% on a market basis. So while we're still in negative territory, and again, remember equity funds really took it on the chin on a year-to-date basis. They're still down 13.67%. Fixed income funds are down 4.55%. For the second quarter, equity closed-end funds are up 18.27%, that's the best quarter since Q2 2009, and fixed income funds are up a whopping 8.48%, and that's the best quarter for them since Q3 2009. So really the month and the quarter were still very strong. We had most of our great returns in the prior two months, but basically when we're taking a look at the June numbers, they were good as well.


Now, your data breaks out closed-end funds into over 20 classifications. What classifications were the best performing for the month and which sector struggled?


Let's start with kind of the big view, see where we went. Basically, I'm going to give you some macro views. If we look at equity funds, the second month in a row we saw world equity funds stay at the top of the charts. They produced about a 4% return on a NAV basis. Then we look at mixed asset funds; they were able to return 1.71% in June. And domestic equity funds, they got clobbered a little bit; I'll elaborate here. We're up 0.2% for the month.

Basically what we saw for the equity universe is that people turned their attention towards foreign issues, so emerging market funds were up 5.64%, but we also had convertible security funds that were benefiting from the lower interest rates and that opportunity to participate in a conversion, if that's what they said it'd do to get some equity returns out at 4.11%. And then we saw the developed market funds up 1.83%.

And on the flip side, and this is where I was saying domestic equity funds took a little one-two punch on this, the energy master limited partnership classification lost 5.87%. So energy and multi funds down 5.8% and natural resources funds were down about 1.9%, so they dragged that domestic equity fund group down.

Now, if we look on the fixed income side, the flight to safety was actually, during the month ... Remember it started out good and we heard more closes in the economy, we heard bars closing and the like, and then we had more cases of coronavirus increase. This flight to safety actually pushed bond funds up quite handsomely, and if we take a look on a play-by-play basis, we saw that emerging market debt bonds were up about 5.17% and U.S. mortgage funds were up 4.29% and high yield municipals were up 3.15%.

Now, if we take a look like I did on the other one, a macro group and this flight to safety, for the second consecutive month, world income funds were up 3.63%, municipal bond funds were up 2.40%, and on the domestic fixed income side, they were up 2.63%. So handsome returns on macro groups.

Now on the bottom side, we'll call them laggards. Nobody was in negative territory. Intermediate municipal debt funds were up 1.43%. In California, municipal debt funds were up 1.54%. So those were the laggards of the fixed income group, but really the good news to share with our investors and the like is all muni debt funds were in plus side column for the second consecutive month in a row. So again, strong return. I know it doesn't compare to the 18% and 14% we talked about on the equity side, but very strong returns for bond funds and bond closed-end funds for the month of June.


Is this a change in what you saw from May?


It is. If you recall in May, we had this rally, if you will, in really underperforming classifications and issues out there. Basically we saw the energy MLP funds at the top and natural resources funds were at the top as well. I think many people recall that we had a rally in oil prices. It was like a 98% increase at one point. I mean, just huge numbers when you're going from 15 to 30, that's what happens, or 19 to 28, whatever the numbers were.

But so we had that happen. Well this month, the reality set in a little bit more, and so again, we saw energy master limited partnerships or energy MLP funds be the big losers along with natural resources funds. So investors also kept the pedal to the metal for the international or foreign issues, and we saw global and international funds actually do very well. So there were some similarities and some contrasts that we could take a look at.

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


The trend that we saw was kind of elation still from the prior months, and then we saw people enter this reality mode. The numbers started to decline. We saw wild swings. I think we're going to see a lot of swings in the market still, and really this is going to be, I think, a risk off mode for investors. We've seen some big numbers come across. I think people are going to take a breather here and keep a close eye on the COVID-19 cases and hospitalizations as we go.

So, the continuation will, I think, be kind of the choppiness that we saw. I mean, yesterday we saw some big losses in the market, and I think what we're going to see is this back and forth as investors evaluate, first of all, the Treasury and the Fed, their mantra of doing anything they can to keep the economy going versus this rise in the coronavirus cases that are out there.

CEFA: Closed-end funds can trade at a premium or a discount to net asset value. What were the trends in premium and discount behavior?


In general, we saw that all closed-end funds ... We put them together, we don't care about fixed income or equity styles. We saw that all the median discounts actually widened about 30 basis points. What I mean by widened, it got deeper or worsened, ending up at about 9.41% at the end of June, so on June 30th. Equity funds also saw a widening of their discounts. 15 basis points, about 11.92%, and fixed income funds actually witnessed the largest widening of 34 basis points to 8.5% discount. Now those numbers, again, we saw some wild swings, we looked at them on a daily basis, but those were the closing median discounts that were applied for the NAV and the market price.

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


The median discount of 9.41%, I quoted that for the overall group again, so I'm going to give you overall numbers. They were higher than our 12 month rolling median discount average, and this is hard. We like to look at the mid points. We look at the median discount, and what I did is I took a 12 month rolling average and that came out to be 7.33%. So it's still much higher on an average, so we're seeing an increase in discounts as we roll on the months from a year ago.

And basically a year ago, when we were taking a look at that number on 7/31/2019, we had a median discount of 5.65%, and that was with 111 closed-end funds that were traded on a premium. And then as of June 30th, 2020, we saw that this median discount for June 30th, again, was 9.41% and only 71 of the closed-end funds out there were trading at a premium to their NAV, and so that was about a 400 basis points swing between a year ago and today. So the numbers are still showing a little more pessimism and a widening in the general closed-end fund arena.

CEFA: Which sector saw the greatest change?


Municipal bond funds saw the largest widening of discounts, only 74 basis points to 8.88%, but world income funds, remember I told you that investors really were turning their focus back towards emerging markets, emerging market debt, developed market, closed-end funds and the like, so basically world income funds on this case saw the largest narrowing or improvement in their discounts, 248 basis points to 5.92%.


Tom, areas of the market and economy have improved, but there are still some economic uncertainties raising concerns for investors. Are there sectors where investors may find particular opportunities given where those funds are trading relative to their historical averages?


There are, and I'd like to put this with a caveat. We have seen, again, a spectacular run up for the quarter, even though the numbers for June were a little bit lower, and I'm going to call them normal. I love it when I'm at 1.8% return for the month. So I'm afraid a lot of people are looking at the fear of missing out, I think has been the quote that everybody has been saying, and might have been driving this rally.

But that said, if we take a look at the numbers, basically on a year-to-date basis, taking a look at the average equity fund is down 13.67%, fixed income funds are down 4.55%. and if we do believe that the Fed will do whatever it takes to keep the economy rolling, that reopening will start to happen, and in fact, we're seeing an increase in production and utilization and the like, I think there are some opportunities.

The two biggest funds that are down, the closed-end fund classifications that are down right now, are energy master limited partnerships, so energy MLP funds are down 58.54%. I'm a little hesitant on that group just because there's some rule changes going on and how they're structured as a limited partnership; there's some questions there. But natural resources funds are down 35.99%. There might be some opportunity there; keep an eye on oil and gas. And utility funds are down 16.33%, and emerging market funds are down at 12.87% for the year-to-date period.

So I'm giving you these negative numbers to say we do have some reason to think that it's going to come back. How fast it will be? Are we in a V-shape or are we in a U-shape or W shaped recovery in the economy? We don't know. But one area we have been looking at with interest is sector equity funds are only down 3.36%, and one of the reasons is people have turned their attention to both technology and health and biotechnology type of issues. So there may be an opportunity there, but keep in mind, they have recovered a lot of their losses that they witnessed on the year-to-date basis.

CEFA:  Tom, you also follow interval funds, which typically offer a limited quarterly liquidity to investors. Often the portfolios of these funds include investments that are not plain vanilla. How have interval funds generally performed over the first half of the year?


It's been fairly similar when we a look at interval funds overall, but I think it's best to focus on three different classifications, and the reason I say that is that's where the lion's share of actual funds are. For example, if I were to do the developed equity fund group, developed market fund group, basically we only have three interval funds, two or three, but if we look at the three groups that I'm telling you about, real estate, general bond and loan participation, I think we get a better idea on how they function on a year-to-date basis.

Basically real estate funds, and there's 34 interval funds in this group, 10 conventional closed-end funds, basically saw or were able to mitigate losses better than their counterparts. So the interval funds actually suffered a 5.94% return year-to-date while the standard or normal closed-end funds basically saw about a 20.73% decline.

Now, we have to be careful on how we're evaluating these because funds suffer these rollercoaster rides, and then they basically have daily NAV shifts and stuff are traded on the market, but we take a look at the interval funds and they also have the ability to, let's say, invest in private assets, and so we might have to deal with a mark-to-market type of a valuation transition.

But when we take a look at general bond funds, there was actually a little bit of a degradation in returns if we compare to their counterparts. Basically global bond funds were able to mitigate losses to about the tune of 6.83% while their conventional counterparts lost about 6.18%, so about 80 basis point difference there. But really one of the areas that I think people have taken a look at recently is loan participation bonds. I mentioned them earlier in the segment. Basically, we saw an equal grouping there. Loan participation funds that are interval funds are about 28 in number, and then we see that about 30 in account for conventional closed-end funds.

So the interval funds on the loan participation side, and loan participation, it's the same thing as, if you will, bank loan funds, leveraged loans; we just happen to call them loan participation. They actually mitigated losses, losing about 7.27%, better than their counterparts who lost about 11.81%. So certainly interval funds have done a good job in some of the groups, but if we take a look at month to month, and I won't give you those numbers, but they're a little bit of different story. So they suffer illiquidity, so when they mark-to-market you might see some bigger swings. So in June, we saw a little bit different numbers as far as interval funds go, so I'd keep an eye on that, but certainly there are some great opportunities in the interval fund space.

CEFA:  So do you see advantages among interval funds for a particular type of investor at this stage of the market cycle?


I think that when we're taking a look at people looking for yield, and I think that most closed-end fund investors actually are looking for yield, we do have the opportunity. There's kind of a tale of two cities here, other sides of the coin. If we take a look at this, obviously there's two things that they can get out of this. You usually get a higher yield, but then you're putting on a little more risk, and in this market, we have to be concerned about that because of the choppiness that we've seen in the market.

One of the things we have as benefits though, if we're looking at the fixed income side of the universe, is there isn't really a lot of places for the Fed to go to cut rates. Certainly spreads for other instruments against the treasuries can widen a bit, but I do think there's opportunity if we have the ability to have a higher yield. And like I said, at the other side of the coin here when we're taking a look at it though, is that there is that illiquid issue to it, and a lot of times they're going into non rated or very low rated securities as well, and we have to be concerned with that risk that's being put on those portfolios. But again, I think there are some great opportunities in interval funds here.

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


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 at

Audio recorded 07/09/20.


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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