October 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 October 2016.

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[BEGIN VIDEO TRANSCRIPT]

ALLEN: Steve, October capital markets performance saw the S&P down about 180 basis point and the Barclays agg down about 75 basis points, which, by the way, is the third consecutive decline in the Barclays Agg and I think the worst month of the year. Did that translate into closed-end fund performance across all asset classes?

STEVE: It certainly did. When the fixed income market is down, closed-end funds are generally down with it. Muni funds were down about 5 percent. Taxable bond funds were down about 200 basis points. Equity closed-end funds were down about 4 percent. That's about two times worse than the S&P 500. Keep in mind the equity closed-end fund market has a lot of bond proxy equities that have consumer staples and utilities.

ALLEN: Steve, on the discount side I think we widened from about 4 1/2 to 6 1/2 on the All Closed-End Fund Index. I think 4 1/2 was roughly in the 50th percentile. Does it move to 6 1/2? Is that meaningful for the market, or, to your point in several videos, are there — there's still attractive discounts that have been there all year at some wider levels?

STEVE: Sure. I think the names that have been attractive all year have basically had a parallel shift, and so names that were 12 percent before this month are now 14 percent and kind of just move with that 200 basis point change. I think what's more interesting is that a lot of popular funds have widened out substantially. I don't know the number at the top of my head, but I've seen plenty of closed-end funds widen out 600, 700, 800 basis points. Those opportunities, I think those fresher ideas create more, I think, more short-term mean reversion opportunities. That's what our portfolio management team is excited about today.

ALLEN: Last question. We're shooting this video 2 days post the presidential election. Certainly the outcome of that election was not a high probability for a lot of people out there. Can you talk about what if any effect there's been on the closed-end fund market and any comments you want to make as we look forward now to a Donald Trump presidency?

STEVE: Sure. I think the story of interest rates is dominating the closed-end fund market and president-elect Donald Trump's focus on fiscal spending to provide a shot in the arm of the economy, that has basically caused the equity markets to rally. It's also caused yields to increase on the fixed income side because bond investors are expecting inflation — so, kind of more of the same from October. When interest rates are rising and bond prices are declining, closed-end fund discounts are widening, and so we're selling a lot of bond funds that — the NAVs are down in October. They're down in November. The market prices are down two, three X of that amount because investors are — They hear inflation and they get scared. The Fed's still around the corner. The expectations are that they're going to raise in December. Investors are basically saying, I'm out of the fixed income market. It's creating a lot of excess supply on the fixed income side. So, everything we talked about earlier is basically becoming more acute in the last 2 days and we're seeing a lot of volatility where five to 10 days volume for a lot of closed-end funds — I'm sorry, five to 10 days daily volume in the last couple of days, which is really incredible. It's hitting a market where investors are kind of on the sidelines. You're seeing really big price declines, two to 5 percent moves today which is Wednesday. I think that that should continue. A big part of that is that we're coming into year end. It's just a kind of quirky reality in a closed-end fund market, but tax law selling is really powerful and self-fulfilling. A lot of names, especially in the fixed income side are kind of circling the drain for performance this year. A lot of names are in the red and I think that causes more investors to say look, this is a different market dynamic, and rates are going up. They've moved up in a 10- year, 60 basis points in just a couple of months, Maybe it's time to sell. Let's just lock in that gain or book that loss. I think discounts can continue to widen for the next couple weeks. The reality is there's always a buyer of traditional asset classes at a discount. Looking at munis, we're seeing a lot of 10-plus percent discounts on billion-dollar bond funds. It doesn't —

ALLEN: Sorry to interrupt. To go backwards, not 60 days the muni market was trading at an average premium, correct?

STEVE: At a premium. You're basically seeing 15 percent price declines in a very short period of time. That certainly excites our team. Everything what we think about allocations is going to be from the top down. But when you think about fixed income it's a lot more interesting to buy muni closed-end funds now that the navs are down — looking at rates across the board, a 10-year at two one is more interesting than a 10-year at one six. It creates the opportunity to diversify portfolios. I think there will be buyers of discounted closed-end funds. I don't think you're going to see much discount stability until the end of the year, which is really what creates opportunities. Again there's a big chunk of the market that's already cheap across asset classes, but each day there are new names that maybe are trading a couple hundred basis points narrower than the average closed-end fund. They come to market trying to sell big blocks. It gaps out to the peer group average. That volatility, it scares more investors to push prices low. It's going to be dependent on interest rates. If all of a sudden interest rates back down, then closed-end funds will rally. If we kind of hang around here above two on the 10- year and the expectations — that kind of drumbeat of rising rates from the Fed is around the corner as well you probably expect more volatility in a closed-end fund market. That's very, just to bifurcate - the equity closed-end funds. Despite the fact that a Trump presidency has been good for stocks so far, those discounts have widened out too. Those are always going to be a different part of the story. Those are more driven by, in my view, corporate actions and activism. Those continue to be wide. Equity closed-end fund opportunities are out there at 16 percent. Between now and year-end I would say get your wish list together. Stay on top of relative values because they change quite quickly. It's our team's job to have our wish list, but on a day like today maybe 10 new names popped up that I didn't think would be a trading opportunity, but prices were down 5 percent. I think it's a good time to be watching the market but certainly one where volatility should remain high.

ALLEN: Steve, very interesting comments. We'll see you next month.

STEVE: Thank you.

[END VIDEO TRANSCRIPT]

Video recorded 11.10.2016.

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

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Opinions referenced are as of the day recorded and are subject to change due to changes in the market, economic conditions, or changes in the legal and/or regulatory environment and may not necessarily come to pass.

Past performance is not a guarantee of future results. Diversification does not ensure a profit or guarantee against loss.

Investing involves risk. Principal loss is possible.

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.

Par is a term that refers to a financial instrument that is trading at its face value.

Definitions

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 Barclays Capital U.S. Aggregate Bond Index is an unmanaged index of investment-grade fixed-rate debt issues with maturities of at least one year. The indices cannot be invested in directly and do not reflect fees and expenses.

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.

Muni is short for municipal bonds. Yield is the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.

Source: RiverNorth, Morningstar, Inc.

CEF Index Definitions

The High Yield CEF index total return and discount statistics are based upon the Morningstar Unweighted High Yield CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a high yield investment strategy. High yield closed-end funds are defined as funds that seek high current income through investing in non-investment grade debt instruments.

The Preferred CEF index total return and discount statistics are based upon the Morningstar Unweighted Preferred CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a preferred investment strategy. Preferred closed-end funds are defined as funds that invest primarily in preferred and/or convertible preferred stocks.

The Municipal Bond CEF index total return and discount statistics are based upon the Morningstar Un-weighted Municipal Bond CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a municipal bond investment strategy. Municipal bond closed-end funds are defined as funds that invest in a diversified portfolio of investment-grade municipal bonds in a variety of sectors and States.

The Global Income CEF index total return and discount statistics are based upon the Morningstar Un-weighted Global Income CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a global income investment strategy. Global income closed-end funds are defined as funds that invest primarily in a mixture of U.S. and foreign government and corporate debt, with an emphasis on developed countries.

The Investment Grade CEF index total return and discount statistics are based upon the Morningstar Un-weighted Investment Grade CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a investment grade investment strategy. Investment grade closed-end funds are defined as funds that invest primarily in investment grade debt instruments.

The Emerging Income CEF index total return and discount statistics are based upon the Morningstar Un-weighted Emerging Income CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing an emerging income investment strategy. Emerging income closed-end funds are defined as funds that invest primarily in emerging market government and corporate debt securities.

The Multi-Sector Bond CEF index total return and discount statistics are based upon the Morningstar Un-weighted Multi-Sector Bond CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a multi-sector bond investment strategy. Multi-sector bond closed-end funds are defined as funds that invest across several fixed income asset classes, with typically less than 50% in any one of these asset classes.

The Bank Loan CEF index total return and discount statistics are based upon the Morningstar Unweighted Bank Loan CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a bank loan investment strategy. Bank loan closed-end funds are defined as funds that invest primarily in collateralized senior bank loans issued by corporations. Most of these securities are typically rated below investment grade.

The Convertible CEF index total return and discount statistics are based upon the Morningstar Unweighted Convertible CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a convertible investment strategy. Convertible closed-end funds are defined as funds that invest primarily in Convertibles bonds / Convertible preferred stock.

The Mortgage Bond CEF index total return and discount statistics are based upon the Morningstar Un-weighted Mortgage Bond CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a mortgage bond investment strategy. Mortgage bond closed-end funds are defined as funds that invest primarily in a variety of mortgage-backed securities and mortgage derivatives.

The Government and Agency CEF index total return and discount statistics are based upon the Morningstar Un-weighted Government and Agency CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a government and agency investment strategy. Government and Agency closed-end funds are defined as funds that invest primarily in U.S. Treasuries and Agency debt.

The Emerging Market Equity index total return and discount statistics are based upon the Morningstar Un-weighted Emerging Market Equity Index, which is the average of all closed-end funds categorized by Morningstar as utilizing an emerging market equity investment strategy. Emerging Market Equity closed-end funds are defined as funds that invest primarily in emerging market government and corporate debt securities.

The Covered Call index total return and discount statistics are based upon the Morningstar Unweighted Covered Call Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a covered call investment strategy. Covered call closed-end funds are defined as funds investing in equities and generate additional income by writing calls on at least 50% of their portfolio.

The Global Equity index total return and discount statistics are based upon the Morningstar Unweighted Global Equity index, which is the average of all closed-end funds categorized by Morningstar as utilizing a global equity investment strategy. Global equity closed-end funds are defined as funds that invest primarily in equity securities in U.S. and foreign countries, with an emphasis on developed countries. Most of these funds seek long-term capital appreciation rather than high income.

The Domestic Equity index total return and discount statistics are based upon the Morningstar Un-weighted Domestic Equity index, which is the average of all closed-end funds categorized by Morningstar as utilizing a domestic equity investment strategy. Domestic equity closed-end funds are defined as funds investing their assets primarily in U.S. equity securities; generally, these funds are seeking long-term capital appreciation rather than income.

The Hybrid index total return and discount statistics are based upon the Morningstar Un-weighted Hybrid index, which is the average of all closed-end funds categorized by Morningstar as utilizing a hybrid investment strategy. Hybrid closed-end funds are funds investing in both equity and fixedincome securities in U.S. and foreign countries, with an emphasis on developed countries. Funds are categorized into this peer group if they have a policy of investing no more than 70% of their assets in either equities or fixed income.