July 2016 Closed-End Fund (CEF) Market Update

Senior Portfolio Specialist Allen Webb talks with Portfolio Manager Steve O'Neill about the closed-end fund market for the month of July 2016.


ALLEN: Steve, let's talk about the month of July in the closed-end fund market. It seems like another month of risk-on for broad asset classes. S&P was up about 3.5 percent, intermediate bond strategies were up, credit was up. Did that translate into the closed-end fund market at all?

STEVE: Certainly. Closed-end funds, on average, were up about 2.5 percent for the month and that brings the year-to-date number to a little over 13 percent. Again, closed-end funds are certainly benefiting from a combination of discount narrowing and very strong NAV performance.

ALLEN: Steve, you’ve talked about performance, so how about discounts? Obviously, with the price performance, did NAV performance follow in lockstep or discounts narrow again?

STEVE: Discounts certainly narrowed again. The average discount narrowed almost 100 basis points, which brings us to about a 3.9 percent discount, which sounds certainly very narrow. Again, we’ve mentioned this a number of times, there are a lot of funds trading at significant premiums that skew the average. It’s still our view that you can find asset class exposure quite easily, and discounts anywhere from maybe 7 to 11 percent on the bond side. On the equity side, active management remains out-of-favor and closed-end equity funds are still trading at 10 to 15 percent discounts.

ALLEN: You have mentioned activism a couple times in the last few videos as something that has been on the rise in the earlier parts of 2016. As closed-end fund performance has been very good this year, and as discounts have narrowed, is activism something that is still prevalent or on the rise, or have we seen that dissipate to some degree as tighter discounts have turned the focus to other parts of the market?

STEVE: There are still a hundred funds – I’m just going to throw out a number – there are still probably a hundred funds that are wider than 8 percent. You look at that and then you think about, “How many funds are wider than 12 percent?” The number is still not insignificant, so there’s plenty of activist opportunities. Then the funds that people bought a lot wider, you think about an activist accumulating a position. Really, maybe they started in 2014 or ’15, their average discount was 12 or 14 percent buying into it. Well, yeah, maybe the fund’s performance has been really good since then, the discount has narrowed to nine, but that investor now owns 15 percent of the stock and it’s going to be hard to get out of that without a liquidity event. A lot of the seeds have already been planted, and realization events need to occur in order to allow the fund to move on. I think you’re going to see a lot of tender offers to settle proxy battles, or maybe even avoid the proxy battles that are inevitable. Do I think that that capital gets redeployed in this space? It’s not our capital, so I don’t know how those investors move on from here, but I look at the opportunities out there and fixed income funds have narrowed a lot, but equity funds could not be more out-of-favor. You have general equity funds trading at 16 percent discounts, and that’s a pretty easy opportunity to hedge out if you’re an activist, and I think that’s probably going to be attractive. I would like to see the closed-end fund sponsors be more proactive and try to narrow the discounts themselves, but I think activism is a healthy way of keeping discounts in a fairly tolerable range. If activists are the catalyst to narrow the equity discounts, certainly, we’d enjoy that narrowing as well.

ALLEN: Steve, thanks for your comments, and we’ll see you next month.

STEVE: My pleasure, thank you.


Video recorded 8.10.2016.

Produced by RiverNorth Capital Management, LLC ("RiverNorth" "we" or "us").

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The price at which a closed-end fund trades often varies from its NAV. Some funds have market prices below their net asset values - referred to as a discount. Conversely, some funds have market prices above their net asset values - referred to as a premium.

The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy based on the changing aggregate market value of these 500 stocks. The index cannot be invested in directly and does not reflect fees and expenses.

Muni is short for municipal bonds.

Basis Points (BPS): A common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument.

Shareholder activism: A way in which shareholders can influence a corporation's behavior by exercising their rights as owners. Although shareholders don't run a company, there are ways for them to influence the board of directors and management. These can range from dialogue with management to voice their concerns about a particular issue to formal proposals that are voted on by all shareholders at a company's annual meetings.

A tender offer is an offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price.

A proxy battle is when a group of shareholders are persuaded to join forces and gather enough shareholder proxies to win a corporate vote.

Source: RiverNorth, Morningstar, Inc.