Closed-end fund commentary 3Q 2023

3 minute read

October 2023


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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.

Investment Review

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.

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Investment Outlook

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.