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CEF Market Review: May Wrap-Up

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 June'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.


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


Tom, you recently published your report from May 2020 covering over 500 closed-end funds and interval funds. Since we spoke last month, markets have continued to show improvement. What has been the general impact on closed-end funds? Does the activity in closed-end funds reflect what is occurring in the broader market?


They are. It was a very strong month for equities and for fixed income. We showed that 85% of equity closed-end funds had plus side performance this month, I should say for the month of May. 98% of fixed income funds were in the black as well. It was really, really a good month. The numbers weren't quite as spectacular as we saw in the preceding month, in April. It was more realistic, but still some great numbers.

Despite learning that the unemployment rate jumped to 14.7% with over 20.5 million Americans out of work in April, investors cheered the easing of the coronavirus lockdown. Congress came out and provided some strong economic relief. We also have the Fed in there providing economic relief as well. I think investors were looking for that liquidity and that support. Also all of us, most of us got that $1,200 in our pocket and so we had some extra spending money. I think that was a boon to the market.

One of the things that we did notice, and this is despite seeing ugly retail sales. Retail sales were down 16.4%, industrial production was down 11.2%, investors were looking at the light at the end of the tunnel. We saw one of the big areas that really clobbered the markets in March, that was oil. Declines of like $19.78 per barrel at the month end. Basically saw that they clawed back and got most of those losses, some of those losses back as investors were eyeing decrease in production and also an increase in demand because of the loosening of the coronavirus lockdowns. We saw a 79% jump in oil prices alone and a closing at about $35.49 cents per barrel. That was a really good thing.

We saw also that the NASDAQ basically was up 6.7%. How this broke out is basically we saw that the average equity closed-end fund was up about 4.4% on NAV basis. On the fixed income side, the fixed income closed-end funds were up 4.69%. Now, we're all used to hearing 4%, 5%, this up and down, that is a monster number for fixed income funds. I really want to put emphasis on this. This was their strongest one-month return since April 2009. Now, I want to bring us a little bit back to reality now. Year-to-date equity funds are still down 15.05% and fixed income funds are still down 6.88%. We have a long way to go.


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


Let's take a quick look at kind of the macro groups. This is when we can kind of combine all the groups or all the individual classifications into bigger groups so we can understand what was going on. For the first week in five we see that world equity funds were at the top of the charts. They returned about 5.22%. World equity funds would be like China region funds and Japanese funds. Those focused offshore compared to the United States. Mixed assets funds were up about 4.49%. Domestic equity funds were up 4.2%, very respectable for all of them.

If we look at the fixed income side of the universe, we see world income funds basically gaining 5.55%. That's the first week in five also that they were at the top of the charts. Muni bond funds did great at 4.77% and domestic taxable fixed income funds were up about 4.51%. Now, let's take a kind of a closer look. Equity funds, if we take a look at that, for the second consecutive week energy MLP, remember I told you oil had a big jump. Energy MLP funds did great again, 8.75% top of the charts within the equity universe. We take a look at convertible security closed-end funds, we see that they were up about 8.39%. But at the bottom of the barrel, we saw real estate closed-end funds still up, but only 0.88% and emerging market funds up about 3.00%.

Now on the fixed income side, we saw kind of a change in leadership. People were basically risk-on here. We saw that people were looking for those higher yield-paying funds, but fixed income, emerging market, hard currency debt funds were up 10.33% after getting clobbered in prior months. That's the strongest one-month return since April 1995. That's an amazing figure. High-yield closed-end funds on the leveraged side were up about 5.66%. At the bottom, US mortgage funds up 1.13%, very respectable and corporate debt, BBB-rated closed-end funds were up 1.97%.


Is this a change in what you saw from April?

Tom: It is. It's very similar to what we saw in April, at least on the equity side. Risk was on, but we saw a big change for fixed income funds. Fixed income closed-end funds we actually saw some, as I was saying, some big moves in emerging market hard currency debt funds. But in particular we focused on for the first month in three, we saw muni funds jump to the top of their group. Now, they were beaten by world debt funds as I was saying. But muni funds saw all classifications were in the black and overall the group was on the plus side of performance.

We attributed this to the Fed's commitment to provide liquidity. It's do whatever it takes attitude really propped up the fixed income universe. This was a big change. Again, equities was pretty similar to what we saw last month, but fixed income really saw a 180 degree turnaround.

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


We are. The market continues to rally. I mean, we saw some encouraging news. A couple of days ago, we saw the ISM manufacturing index improve to 43.1. That's still showing a contraction. It was actually a little bit lower than expected, but just today, it's Friday today that we're doing this recording, we saw that the US economy added 2.5 million jobs in May. We saw the unemployment rate drop to 13.3 from, as I told you, 14% and change. Those investors that were actually saying that the 20.5 million people underemployed or unemployed, about 18 million of those were temporary. We are starting to see an about-face in that area as well. It was a good reading today. I think we'll see the markets react to that as well.

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


We saw a slight improvement in discounts overall with the median discount narrowing about 26 basis points to 9.11%. That was for all funds. Really if we take a look at the numbers, about 404 closed-end funds traded at a discount to their NAV. About 74 closed-end funds traded at a premium. That was kind of a change from what we've been seeing. A little bit of improvement with more funds, either trading at a premium or actually their discounts improving.

What we saw here in particular on May 29th and we're going to look at the month end, the actual trading date, which was a Friday, equity funds actually saw a widening of their discounts about 80 basis points to 11.75%, while fixed income saw a narrowing of 36 basis points to about 8.16%.

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


The median discount for all closed-end funds is still wider than our 12-month moving average for median discounts of 7.12%. Remember I just told you, 9.11% versus 7.12%. We are seeing a little more degradation in the discount, right? We're still seeing a kind of a deeper discount than we had over the long haul. But again, we have been seeing some general improvement.

CEFA: Which sector saw the greatest change?


The National Municipal Bond Fund Group, that's kind of the macro group where we put all the general municipals, high yields and that kind of stuff, they saw the largest improvement to its discount, 105 basis points. It went to 6.76%. There was a general narrowing for national municipals. While we take a look on the equity side though, we saw that domestic equity closed-end funds, that macro group experienced the largest widening of its discount, about 97 basis points to 9.89%.


Tom, with areas of the market improving, are there sectors where investors may find particular opportunities given where those funds are trading relative to their historical averages?


We believe there are. I say this with a lot of caution. The people in the market felt that there was a lot of throwing the baby out with the bath water-type of situation. Up until now, we've seen a very narrow-focused rally. I would say that and everybody's seen the Dow hitting not new highs, but the Dow hitting some very strong numbers. NASDAQ actually in positive territory year-to-date. We've seen a narrow-focus rally and most of it is done around the FANGS and the tech-oriented stocks, but recently we saw some rotation. We saw that the Russell 2000, I think it was about a week and a half ago, had a 7% plus return in just one week. We are seeing some rotation.

Now, improvement in oil prices is something that people may want to keep an eye on. If we're taking a look at this, energy master limited partnerships, which have their own issues that people needed to delve into, still are down 55.2%. But I told you, as storage goes up, if we start producing oil again globally, I think we're going to see some transportation increases. There might be some plays there, again, very cautious. Natural resources are still down 35%, mainly on the oil. Emerging markets funds are down 17.85%. These all give us opportunities.

But when I say emerging markets, we need to be concerned. We have Trump's response to China on the COVID-19 response. We've also heard that China's national security law might be applied to Hong Kong, which threatens their autonomy. When we're looking at emerging markets now and taking a look at those, I think we need to keep an eye on trade, on China and on, if you will, the politics behind that. Emerging market debt hard currency funds are also looking somewhat attractive. They're down 14.51%. If you expect some reversals, these are some areas you can look into. But again, I have a lot of caution out there. We don't know if we're going to have a second round of the coronavirus peak up. We don't know if Trump and others are going to have conflicts between the Sino-American trade deals that are going on. Again, tough time to be in the market. But again, it looks like there's some room for improvement.

CEFA:  Tom, you also follow interval funds which differ from traditional closed-end funds and typically offer a limited quarterly liquidity to investors. As the market has shifted from the middle of February to now, what has been the impact on interval funds?


Investors continue to be in search of yield. No matter if we've had the high in the market on February 12th and then the bottom somewhere what was it, March 24th or whatever the day was, people are still in search of yield. Amazing in May we saw that interval funds dominated new fund offerings. There were six new share classes offered in this area, four from just one fund. When you open a fund and do multiple share classes of closed-end fund space, they're counted as individuals.

But really kind of the story that we've been talking about that focus on illiquid assets, higher-paying dividends and the like it's certainly been at, we saw the CIM Real Asset & Credit Fund come out. I'm not promoting any of these. Just want to kind of air what they're doing and kind of the importance. They're focused on current income with preservation of capital with a secondary objective, capital appreciation. Basically what they're looking is to capitalize on less liquid markets, getting a higher return, higher income and basically trying to look on those.

We saw two other existing closed-end funds that are interval funds that offered new share classes. One was a Carlyle Tactical Private Credit Fund. Private credit, again, this concept that people are willing to go out, lock down their assets a bit more for the long-term role of getting a higher yield. The last one was the PIMCO Flexible Municipal Income Fund. Again, this is another share of an existing fund that's been out there. You'll be able to see how they've done, but basically they exploit structural illiquidity in the municipal bond fund market.

What a great time to be investing in those particular areas if you're doing new buys, if you take a look at what happened in March and even part of April. That was where their focus was. What we've been talking about is that the interval funds are looking for those opportunities to make investments during troubled times, lock down those assets and basically give investors the opportunity for a long-term buy and hold strategy.

That said, I still think we have to be cautious because if you needed to pull your money out, they're only doing a 5% redemption and that was every quarter. That's kind of the issues that you have to play. Higher yield maybe, better return over the long haul, but less liquidity.

CEFA:  You've commented in the past that the limited liquidity offered by interval funds may actually work to the benefit of some investors in volatile markets. Do you see that being the case over the past three to four months?


Yeah. It's kind of akin to the last question that you asked. Interval funds weren't forced to sell into the declining market. Now, eventually they can have redemptions, right? They do have to worry about having some cash on hand eventually on a quarterly basis, but basically they didn't have to suffer from, if you will, pressured selling that we saw other funds, especially open-end funds have to do now. People say, "Well, what difference is that from closed-end funds?" Closed-end funds pretty much didn't have to worry about liquidity or selling in the market, but they also weren't able to raise money during kind of the troubled times.

Some of the closed-end funds with interval structure were able to raise money, take in money. We didn't really see any net inflows, but on the flip side, they didn't have to suffer net redemptions that we see in the open-end universe. But again, I think that we need to be very cautious when taking a look at these. If you have a need for liquidity, these are probably not the right type of funds to be in because you can't go in the market every day and just sell them. But on the flip side, if you are long-term buy and hold, looking for yield, yes. I think that this benefited investors over the long haul and even over the short term, because they might have saved themselves from making sell decisions hastily during this last market retreat.  

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


Thanks for having me, Diane.

CEFA:  We want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website at  

Audio recorded 06/05/20.


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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