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Closed-end funds finished the third quarter down as yields reached multi-year highs due to inflation concerns and the narrative of ‘higher for longer’ rates set in.
Closed-end funds had a market-price return of –3.9% in the third 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 –3.3% and –3.2%, respectively.
While the Federal Reserve paused its rate hiking during this period, comments from the bank indicated that it saw room for another rate hike, even as the inflation rate continued to moderate.
All three major closed-end categories ended in negative territory over the quarter with taxable fixed income (–1.2% return on market price) being the most resilient, followed by equities (–4.3%) and municipal bond funds (–9.5%).
Within taxable fixed income, the group’s discount to net asset value (NAV) widened from –2.6% to –4.5% as interest rates created a headwind. Within the group, convertible bond funds (–6.9) were the top detractor for the quarter while bank loans (5.1%) continue to perform well on higher short-term rates.
From there, the municipal bond group, perhaps the most impacted category due to surging yields, saw its discounts to NAV widen from –11.5% to –13.7% over the period. All municipal sectors detracted significantly during this time with national municipal bonds falling –9.5%.
Equities, for its part, also saw its discounts to NAV widen, albeit modestly, from –5.1% to –5.8%. MLPs (4.2%) and diversified commodity funds (3.9%) were top performers as the energy sector gained during the quarter, while real estate (–10.4%) and utilities (–9.3%), both of which have more leverage, fell.
While inflation appears to be moderating, we believe there is some ways to go before we reach the Federal Reserve’s goal of 2% inflation. 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. In addition, as we near year- end, we feel tax-loss selling will be active, but not as pronounced as the 2022 calendar year.
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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