Closed-end fund commentary 4Q 2023

7 minute read

January 2024


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Closed-end funds moved higher across the board in 2023 following a challenging 2022.

Closed-end funds had a market-price return of 10.7% in 2023, 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 26.3% and 5.5%, respectively, for the year.

Closed-end funds moved higher across the board in 2023 following a challenging 2022. The majority of the year was marked by investor expectations of a “higher for longer” rate environment, but that gave way in the fourth quarter when dovish signals from the Federal Reserve led investors to believe numerous rate cuts would be coming in 2024, which prompted a risk-on environment. The year also saw the 10- year bond yield hit 5% for the first time in 16 years, before retreating below 4% by year-end.

Taxable fixed income (13.3% return on market price) posted the strongest performance of the three major asset categories during the period, followed by equities (12.6%) and municipal bonds (3.7%). This occurred as overall discounts to net asset value (NAV) widened. Currently, discounts to NAV for all three categories stand wider than their long-term averages.

Within the taxable fixed income group, interest rates were the decisive variable throughout the year. Preferreds (3.5%), which are the most interest rate sensitive within taxable fixed underperformed, while bank loans (17.9%), which have nearly zero duration, outperformed. However, as rates came down in the fourth quarter, preferreds performed strongly while bank loans underperformed. Overall, the discount to NAV for taxable fixed income stayed level on the year at –4.7%.

With regards to equities, the asset category had a strong year overall following two years of volatility, bringing the three-year return figure to 5.9%. From a sector perspective, MLP funds (18.8%) continued their strong run of performance, now returning 31.0% over a three-year period. MLPs also saw their discounts tighten during the year to –11.6% from –15.2%. On the other end, utilities funds (-2.7%) underperformed partly due to their defensive nature. The group also saw its valuation come under pressure, moving from a 6.2% premium at the start of the year to a –1.0% discount at the end of the year.

As for municipal bond funds, which are primarily composed of investment grade rated long duration bonds, 2023 represented a modest recovery from a difficult 2022, which returned –23.2%. The overall group saw its discount to NAV widen to –12.9% from –8.4% at the beginning of the year. National municipal bond funds (3.3%), for its part, performed mostly in-line with the group, while seeing its discount to NAV also widen to –12.9% from –7.9%.

The year’s fourth quarter market rally took place under the backdrop that the Federal Reserve will make four to five rate cuts in 2024, a figure we believe is likely too aggressive. As a result, we believe volatility will enter the marketplace as economic data and news is released, thus creating opportunities as they are presented.

The primary market for closed-end funds remains 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.

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Closed-End Sector Returns
Q4 2023YTD 2023
Single Commodity9.66%10.47%6.90%7.12%
Diversified Commodity0.42%2.01%3.48%3.47%
Option Income7.13%8.87%16.27%20.02%
US General Equity8.72%11.40%16.47%20.05%
US Hybrid7.20%8.94%22.54%20.99%
Global Equity9.31%10.49%11.32%14.04%
Global Hybrid12.77%11.19%11.74%12.47%
Sector Equity7.51%9.16%0.77%3.51%
Real Estate18.43%17.39%8.88%12.72%
EM Bond11.55%11.18%13.03%14.68%
Global Income10.62%8.10%17.71%11.98%
US Government6.81%5.58%5.08%5.02%
High Yield10.03%7.73%19.19%15.22%
Bank Loan4.49%3.34%17.93%13.95%
Short Duration8.15%7.11%12.98%13.63%
Investment Grade5.93%9.44%16.91%14.61%
US Sector Bond4.88%5.32%7.72%5.74%
Taxable Municipal9.78%10.61%5.57%11.69%
Regional EME7.90%7.78%18.62%17.91%
Diversified EME10.04%8.38%8.87%11.77%
Regional DME10.12%10.66%15.35%16.24%
National Municipal14.04%12.17%3.26%8.60%
CA State Municipal15.62%12.73%3.75%7.48%
NY State Municipal14.55%13.47%6.97%9.18%
State Municipal-Other13.48%12.39%6.10%8.03%
Municipal High9.47%12.12%3.21%7.35%