Closed-end fund commentary 1Q 2024

3 minute read

April 2024


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Closed-end funds moved broadly higher during the first quarter.

Closed-end funds had a market-price return of 7.5% 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 10.6% and –0.8%, respectively.

Closed-end funds moved broadly higher during the first quarter. Stronger-than-expected economic data continued to support a rosy outlook for growth prospects, and the market rally broadened beyond its previously narrow technology- related focus. The 10-year U.S. Treasury yield ended the month modestly lower.

All three major closed-end asset categories rose with the equities group (8.6%1) posting the strongest performance, followed by taxable fixed income (7.5%) and municipal bond funds (3.1%). Overall, discounts to net asset value (NAV) narrowed from –8.1% to –5.7% during the period, with taxable discounts narrowing most of the categories from –4.1% to –0.4%.

Within the equity group, all sectors experienced positive performance with the risk-on backdrop. Commodity-related funds experienced especially strong returns during quarter, with MLP funds (15.3%) leading the way. Other sectors experiencing strong performance included U.S. hybrid (11.5%), global hybrid (9.8%) and sector equity funds (9.6%). Discounts within equities also narrowed to –6.7% from –8.2% in the first quarter.

Regarding taxable fixed income, higher quality and interest rate sensitive groups performed strongest—most notably investment grade bonds (11.2%) and preferred funds (9.7%). U.S. government (1.7%) and taxable municipal funds (1.4%), conversely, lagged due to duration sensitivity. This occurred as discounts tightened by 374 basis points over the quarter. Within the municipal bond category, discounts tightened to –10.4% from –13.0% with high yield municipal bond funds (7.4%) outperforming.

Following the overshoot in the speed and magnitude of potential Federal Reserve easing, we believe incremental news regarding hiring, unemployment, inflation, and earnings will be the key drivers of market movement and volatility in the coming months. It is from this volatility that selective market opportunities will present themselves.

The primary market for closed-end fund IPOs remains closed and will likely stay quiet until positive performance begins to embed itself in the marketplace. However, tighter valuations within the taxable fixed income space have put opportunities for incremental capital raises more into focus.