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Closed-end funds tallied negative total returns during a challenging 2022 as the rising interest rate environment put pressure on most major asset groups.
Closed-end funds had a market-price return of –18.6% in 2022, as measured by the S-Network All Taxable ex-Foreign plus Capped Muni CEF Index1. By comparison, the S&P 500 Index2 and the Barclays Capital U.S. Aggregate Bond Index3 had total returns of –18.1% and –13%, respectively, for the year.
Closed-end funds tallied negative total returns during a challenging 2022 as the rising interest rate environment put pressure on most major asset groups. The hawkish tone from the Federal Reserve and other central banks, alongside the Russia-Ukraine war and energy price shocks, added to the discomfort many investors felt. As a result, most closed-end fund sectors had negative returns for the year.
Closed-end funds, which ended 2021 trading at narrow discounts or even premiums to NAV, saw discounts widen through 2022. Equities were among the more resilient asset classes, ending 2022 with an average discount of 4.8%, which represents a modest widening from 1.4% at the start of the period. Fixed income taxable and municipal bond funds also saw their discounts widen, to 5.4% (from a small premium) and 8.1%, respectively.
Long duration municipal bond funds felt the most pain during the calendar year as rising long-end rates put pressure on underlying assets while rising short-end rates undermined the earnings power of these leveraged funds.
Following more than 20 new deals totaling $24 billion over the previous two years, the closed-end fund IPO window was mostly closed in 2021. With discounts available across the board in the secondary market, the appetite for IPOs didn’t materialize; investors could purchase more attractively valued existing funds instead.
We continue to have a cautious outlook on the market as we believe inflation will linger and be difficult to squelch overall. Investors are firmly focused on how the Federal Reserve will act in 2023 and are gauging data and commentary to understand the speed and depth of upcoming rate hikes as well as when they will cease. While some optimism has emerged in the market, we continue to invest defensively until repricing has more fully occurred in our view.
We believe the current environment is not set up for a new wave of closed-end fund launches. The number of funds being offered at discount prices puts new launches into a holding pattern. We believe this will stay the case until a change in tone from the broader capital markets occur, likely coincident with a shift in policy stance from the Federal Reserve.
(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.
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 2022 are the intellectual property of S-Network Global Indexes Inc.
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