Closed-end funds finished the second quarter up as the Federal Reserve hit pause on its 15-month rate hiking cycle for the first time in June.
Closed-end funds had a market-price return of 1.9% in the second 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 8.7% and –0.8%, respectively.
Investment Review
Closed-end funds finished the second quarter up as the Federal Reserve hit pause on its 15-month rate hiking cycle for the first time in June. Most of the quarter’s returns—and then some—occurred towards the latter end of the period, with taxable fixed income being the top performing asset class. The 10-year Treasury rose by nearly 40 basis points over the three-month timeframe.
Of the three major closed-end fund categories, taxable fixed income and equities were positive while tax-exempt municipal bonds finished down. Within taxable (3.4% return on market price), credit sensitive and higher-yielding sectors led the way, with the group’s average discount narrowing from –3.8% to –2.8% during the quarter. Investment grade bond funds and convertibles were the top performing sectors, followed by multi-sector and high yield.
Within equities, a risk-on environment in June boosted the asset class, with returns ending up 2.3% for the period.
Despite the late risk-on tone, discounts in the category widened from –4.0% to –4.8%. As for specific sectors, U.S. hybrid and U.S. general equities were the top performers while commodities underperformed.
As for municipal bonds, the category returned –1.2% for the quarter, with discounts widening modestly from –9.9% to – 11.5%. National municipal bonds, for their part, returned – 1.4% for the period.
Investment Outlook
While inflation remains a challenge, there is belief that the Federal Reserve is nearing the end of its rate hiking cycle. With that said, investor focus will remain on the Fed (and other central banks) as fresh data comes to light and further guidance is given.
The U.S. equity markets have been rising in recent months— albeit led by a narrow subsector—as fundamentals remain strong amidst wage growth and job hiring. The economy, in short, hasn’t reacted in a highly sensitive manner to elevated interest rates and we expect that to continue.
The primary market for closed-end funds remains mostly closed and will likely continue to stay quiet 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. Risk of loss is possible.
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 2023 are the intellectual property of S-Network Global Indexes Inc.
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