Closed-end funds had a market-price return of 3.14% 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 –4.27% and 2.78%, respectively.
Investment Review
Closed-end funds rose in the first quarter, buoyed initially by expectations of a vibrant U.S. economy and potential benefits from reduced regulation under the new administration. However, a series of developments and announcements through the quarter, including the threat of a trade war, led to heightened market volatility, prompting a shift towards more stable and defensive sectors. Inflation eased but remained stubbornly above the Federal Reserve’s 2% target. The Fed left its benchmark interest rate unchanged during the quarter, while the 10-year and 2-year U.S. Treasury yields fell. For closed-end funds, market price returns were higher than the underlying asset returns. This improvement in valuation provided an additional boost to closed-end funds, particularly the fixed income group.
All three major closed-end asset categories ended higher during the quarter, with equities rising the most, followed by the taxable fixed income and the municipal bond groups. Overall, discounts to net asset value (NAV) narrowed from – 3.9% to –2.4% during the period.
Equity funds experienced a significant boost from single commodity funds focused on precious metals, driven by the strong performance of gold. Utilities, sector equity funds (dominated by health care), and real estate funds also performed well as investors favored relatively defensive, income-generating assets amid increased economic uncertainty. Conversely, equity funds with growth exposure underperformed due to the market’s rotation towards defensive sectors.
Taxable fixed income funds ended the quarter at a 3.0% premium to NAV, benefiting from the lower-rate environment. Valuations improved most substantially in the fixed income group, with attractive income rates drawing investors’ attention. U.S. government bond funds and emerging market bond funds led the way. Multi-sector bond funds also posted strong price returns, leading to further premium expansion. In contrast, convertible bond funds declined significantly due to their exposure to underperforming growth stocks and the narrowing of the premium to NAV. Bank loan funds underperformed due to the fall in short-term interest rates.
Investment Outlook
The backdrop for risk assets and for closed-end funds has become increasingly uncertain. The Trump administration’s tariff policy has heightened concerns about future economic activity and the labor market, raising the odds of a recession. Renewed inflation concerns stemming from these tariffs have diminished the likelihood of significant easing from the Federal Reserve in the near term. Going forward, any further rate cuts will depend on the pace of economic growth and labor market trends. While the economy is perceived to be in a solid state, the risks have increased significantly. Policy specifics from the new administration remain a key factor to consider.
The primary market for closed-end fund IPOs remains closed and will likely stay quiet until positive performance and more confidence in the future path of interest rates take hold. However, tighter valuations within the taxable fixed income space may bring opportunities for incremental capital raises into focus.
- 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.
- 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.
- The Bloomberg 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. Risk of loss is possible. This information is not representative of any Cohen & Steers account and no such account will seek to replicate an index. You cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.
Data quoted represents past performance, which is no guarantee of future results. Risk of loss is possible.
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 2024 are the intellectual property of S-Network Global Indexes Inc.
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An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations as volatility and other characteristics may differ from a particular investment. The Fund is actively managed. The composition of the Fund is not constrained by the composition of the benchmark.
The views and opinions in the preceding commentary are as of the date of publication and are subject to change. There is no guarantee that any historical trend discussed above will be repeated in the future, and there is no way to predict precisely when such a trend might begin.
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