Closed-end-funds finished the first quarter up as the Federal Reserve continued to hike interest rates amid a volatile opening to 2023.
Closed-end funds had a market-price return of 4.1% in the first quarter, as measured by the S-Network All Taxable ex- Foreign plus Capped Muni CEF Index1. By comparison, the S&P 500 Index2 and the Bloomberg U.S. Aggregate Bond Index3 had total returns of 7.5% and 3.0%, respectively.
Investment Review
Closed-end-funds finished the first quarter up as the Federal Reserve continued to hike interest rates amid a volatile opening to 2023. It was a tale of two halves as January kicked off the year strongly with a risk-on tone before the regional banking crisis and sticky inflation numbers caused returns to dip. The 10-year U.S. Treasury yield declined roughly 40 basis points during the first three months of the year.
All three major closed-end fund categories ended the quarter up with equities leading the way with a 5.5% return. The average discount to net asset value (NAV) in equities narrowed from 5.0% to 3.9% during this timeframe. The U.S. hybrid and option income sectors had the highest returns within equities, while commodities experienced flat performance.
Taxable fixed income also performed well for the quarter with a 3.1% return. The average discount in fixed income narrowed from 4.8% to 4.3%. Preferreds funds were the main negative outlier in this category, however, as banking stresses in March negatively impacted the group. Otherwise, most sectors in fixed income had market-price gains of 2% to 6%.
Tax-exempt municipal bond funds, which returned 2.2% for the quarter, continued to feel the impact of a challenging 2022 calendar year. Discounts noticeably widened in this group from –8.3% to –9.9% during these first three months of the year.
Investment Outlook
Inflation continues to be a challenge for the Federal Reserve and other central banks. While some investors felt the rate hiking cycle was nearing its end in January, data has shown that inflation is proving to be sticky, which means rates will likely have to stay higher for longer. As a result, we remain concerned on the macro-economic environment despite heavy lifting by central banks.
The primary market for closed-end funds remains closed— and will likely continue to stay quiet for the first half of this year—until positive performance begins to embed itself in the marketplace. Desire for new offerings continues to be low as investor sentiment favors more seasoned issues.
(1) Returns are based on market price. Prior to 7/31/19, the benchmark was the Morningstar US All Taxable Ex-Foreign Equity Index. Thereafter, it is the S-Network All Taxable ex-Foreign plus Capped Muni CEF Index. The S-Network All Taxable ex-Foreign plus Capped Muni CEF Index is a market capitalization-weighted index comprising all taxable closed-end funds and Diversified Municipal Bond Funds, except for single-country funds and region-specific equity funds. The Morningstar US All Taxable Ex-Foreign Equity Index measures the market-capitalization-weighted total return of taxable equity and fixed income closed-end funds; it excludes international, regional and country closed-end funds. Index returns update frequently and are subject to change. All closed-end fund sector returns are based on Cohen & Steers calculations and classifications of the current U.S. listed closed end fund universe.
(2) The S&P 500 Index is an unmanaged index of 500 large capitalization, publicly traded stocks that is frequently used as a general measure of stock market performance.
(3) The Barclays Capital U.S. Aggregate Bond Index includes U.S. government, corporate and mortgage-backed securities with maturities of at least one year. Benchmark returns are shown for comparative purposes only and may not necessarily be representative of the Fund's portfolio.
Data quoted represents past performance, which is no guarantee of future results.
The S-Network All Taxable ex-Foreign plus Capped Muni CEF Index is a market capitalization-weighted index comprising all taxable closed-end funds and Diversified Municipal Bond Funds, except for single-country funds and region-specific equity funds. The index reconstitutes and rebalances quarterly.
Index Source: S-Network Closed End Fund Indexes are calculated, distributed and marketed by S-Network Global Indexes Inc. which have been licensed for use. All content of the S-Network Closed End Fund Indexes 2022 are the intellectual property of S-Network Global Indexes Inc.
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