Closed-end funds moved broadly higher during the first quarter.
Closed-end funds had a market-price return of 7.5% 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 10.6% and –0.8%, respectively.
Investment Review
Closed-end funds moved broadly higher during the first quarter. Stronger-than-expected economic data continued to support a rosy outlook for growth prospects, and the market rally broadened beyond its previously narrow technology- related focus. The 10-year U.S. Treasury yield ended the month modestly lower.
All three major closed-end asset categories rose with the equities group (8.6%1) posting the strongest performance, followed by taxable fixed income (7.5%) and municipal bond funds (3.1%). Overall, discounts to net asset value (NAV) narrowed from –8.1% to –5.7% during the period, with taxable discounts narrowing most of the categories from –4.1% to –0.4%.
Within the equity group, all sectors experienced positive performance with the risk-on backdrop. Commodity-related funds experienced especially strong returns during quarter, with MLP funds (15.3%) leading the way. Other sectors experiencing strong performance included U.S. hybrid (11.5%), global hybrid (9.8%) and sector equity funds (9.6%). Discounts within equities also narrowed to –6.7% from –8.2% in the first quarter.
Regarding taxable fixed income, higher quality and interest rate sensitive groups performed strongest—most notably investment grade bonds (11.2%) and preferred funds (9.7%). U.S. government (1.7%) and taxable municipal funds (1.4%), conversely, lagged due to duration sensitivity. This occurred as discounts tightened by 374 basis points over the quarter. Within the municipal bond category, discounts tightened to –10.4% from –13.0% with high yield municipal bond funds (7.4%) outperforming.
Investment Outlook
Following the overshoot in the speed and magnitude of potential Federal Reserve easing, we believe incremental news regarding hiring, unemployment, inflation, and earnings will be the key drivers of market movement and volatility in the coming months. It is from this volatility that selective market opportunities will present themselves.
The primary market for closed-end fund IPOs remains closed and will likely stay quiet until positive performance begins to embed itself in the marketplace. However, tighter valuations within the taxable fixed income space have put opportunities for incremental capital raises more into focus.
(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 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.
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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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.
There is no guarantee that any market forecast or investment objective set forth will be achieved. This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict the performance of any investment.
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