Emerging Market Trusts Going Cheap
Sep. 12, 2017 - Morningstar, Inc. -
Stifel has revealed that emerging market closed-end funds are trading at double digit discounts despite strong recent performance
Are Convertible Bonds the Best of Both Worlds?
Sep. 08, 2017 - Morningstar, Inc. -
What Is a Convertible Bond?
Like a regular bond, a convertible bond pays coupons, but this security gives investors an option to convert the debt into equity if the issuing company’s share price rises above a prescribed price.
7 Cheapest Gold Rated Investment Trusts
Apr. 03, 2017 - Morningstar, Inc. -
It is getting more difficult to snap up closed-end funds on the cheap, as discounts narrow following a significant stock market rally
The New CEFs on the Block
Mar. 09, 2017 - Morningstar, Inc. -
PIMCO made headlines last month when it launched an interval fund (PIMCO Flexible Credit Income) and registered to raise $1 billion in assets. The last closed-end fund, or CEF, to raise more than $1 billion in assets was Goldman Sachs MLP and Energy Renaissance Fund (GER) in the fall of 2014.
Libor to Bank-Loan CEFs: Float On
Nov. 10, 2016 - Morningstar, Inc. -
With the U.S. election in the rearview mirror, the biggest question on investors' minds is when the Federal Reserve will raise rates again (it did so in December 2015, increasing its target rate by 25 basis points). According to the CME's FedWatch, as of early November, the market assigned a 76% probability to a 25- to 50-basis-point hike in December, which would move the target federal-funds rate to 50-75 basis points from 25-50 basis points.
Income-Starved Investors Are Flocking to Closed-End Funds
Oct. 13, 2016 - Morningstar, Inc. -
Over the past year, income-starved investors have flooded in to closed-end funds. Closed-end funds typically offer very attractive yields compared to mutual funds thanks to their use of leverage. The average long-term municipal bond closed-end fund, for example, had a distribution rate of 5% at the end of September. The mutual fund average was just 3%.
Morningstar’s Top Tips For Investing in CEFs
Aug. 11, 2016 - Morningstar, Inc. -
Investors willing to take the time to learn the ins and outs of CEFs will discover a relatively unfollowed and often mispriced slice of the market.
Gotta Catch This Muni CEF
Jul. 14, 2016 - Morningstar, Inc. -
Nuveen Municipal Value is one of our top picks, despite a recent manager change.
UK Small and Mid-cap Investment Trusts Fall Up to 20%
Jun. 30, 2016 - Morningstar, Inc. -
Closed-end funds invested in small and mid-cap stocks have dropped in price since the Brexit vote was revealed last week, creating an opportunity for the brave contrarian investor
Municipal CEFs: Hold the Door
Jun. 16, 2016 - Morningstar, Inc. -
The threat of rising rates caused a brief sell-off in municipal bond CEFs in May. Plus, muni CEFs aren't as expensive as they look.
The Future of CEFs Gets Dimmer With DOL Ruling
May. 12, 2016 - Morningstar, Inc. -
Last month, the Department of Labor released its finalized rules on the Fiduciary Standard. We've discussed what that standard could mean for closed-end funds, particularly the IPO market, previously. This month, we will briefly revisit that discussion under the context of the new rules.
No Market for Covered-Call CEFs
Apr. 14, 2016 - Morningstar, Inc. -
Covered-call closed-end funds can benefit when volatility rises, but recent returns have been disappointing.
Closed-end Fund Investors Favour UK Equities
Apr. 14, 2016 - Morningstar, Inc. -
Which are the top closed-end funds according to Morningstar readers? Equity trusts top the charts, in particular those offering exposure to developed market stocks
Should These Funds Close?
Mar. 20, 2016 - Morningstar, Inc. -
Morningstar.com readers fear these Vanguard, Fidelity, and other funds are getting too big to continue their winning ways.
MLPocalypse Averted for Now
Mar. 10, 2016 - MLP HINDSight -
This month, we highlight some of the issues master limited partnership closed-end funds have faced in the past year and a half (and are likely to face in the future as the volatility in sentiment and oil prices is far from over). We discussed some of these concerns in the November CEF Monthly and will build on them here.
Unlock the Potential of Muni CEFs
Feb. 11, 2016 - Morningstar, Inc. -
Closed-end funds can offer investors a superior way to invest in a diversified basket of tax-advantaged bonds, but the complexity of the CEF wrapper might understandably scare some investors away. This month we will attempt to demystify municipal-bond CEFs so that investors can unlock the potential within.
A Mixed Year in Closed-End Funds
Jan. 14, 2016 - Morningstar, Inc. -
At the start of 2015, major market concerns included rising interest rates in the United States, falling oil prices, a hard landing for China, and turmoil in the Middle East. Twelve months later, many of those issues remain at the top of investors' minds. The Federal Reserve did raise interest rates in December, but the path forward remains unclear--how fast and how high will rates eventually rise?
The Force Awakens in Municipal Bonds
Dec. 10, 2015 - Morningstar, Inc. -
In a year with incredible volatility in both equity and fixed-income markets and with the Barclays U.S. Aggregate Bond Index up a paltry 0.88% for the year to date through November, municipal bonds and the funds investing in them have offered decent returns, especially after tax savings are considered.
PIMCO CEFs Not Immune to Grossapalooza Hangover
Oct. 08, 2015 - Morningstar, Inc. -
It's been a rocky year for shareholders of Bill Gross' former CEFs, despite solid performance from the new management team; PIMCO High Income's shares have fallen 26% this year through September.
There's A Fire (Sale) in Bond CEFs
Sep. 10, 2015 - Morningstar, Inc. - Stock market volatility has sent taxable-bond CEF share prices spiraling downward, but is this the best deal since the financial crisis?
PIMCO Prevails in a High-Profile Proxy Battle
May. 14, 2015 - Morningstar, Inc. -
A proxy fight at a PIMCO closed-end fund caught the attention of investors outside of the typically insular CEF world. In early 2015, Ironsides Partners initiated a proxy fight with PIMCO Dynamic Credit Income (PCI). At that point, the firm owned about 1% of the fund's outstanding shares and attempted to add founder Robert Knapp and a lawyer for the firm, Richard Cohen, to the fund's board.
Japan Equity CEFs Win the First Quarter
Apr. 16, 2015 - Morningstar, Inc. -
These closed-end funds were unstoppable in early 2015; plus, did the first IPO of 2015 usher in a new era for CEF shareholders?
A Divergence of CEF Returns in February
Mar. 19, 2015 - Morningstar, Inc. -
Europe's quantitative easing and a strong U.S. dollar lifted the eurozone and Japan, but negative headline news pushed the municipal market lower.
No Reprieve for Energy CEFs in October
Nov. 20, 2014 - Morningstar, Inc. -
Oil prices continued their descent in October, leading some to question the future health of the country's largest oil producers. Consumers of oil and gas, however, have benefited from this steady decline in prices. Airlines, for example, have fared extremely well this year, in part because of low fuel costs. Despite the hit that oil and gas firms and energy and related mutual funds took last month, the broader equity market did quite well. The S&P 500 Index gained 2.4% in October and was up nearly 11% for the year to date.
PIMCO CEFs Post-Gross
Nov. 04, 2014 - Morningstar, Inc. -
Checking in on PIMCO’s CEFs a month after Gross’ sudden departure.
Commodities CEFs Tank in September
Oct. 16, 2014 - Morningstar, Inc. -
The unexpected departure of PIMCO founder and chief investment officer Bill Gross dominated the headlines at the end of September, but PIMCO investors were far from the most disappointed folks last month. Gold prices dropped 6% in September, continuing a months-long decline from its mid-March high of $1,391.77 per ounce. Since that high, gold prices have fallen more than 13% through the third quarter. The strengthening of the U.S. dollar and improving economy also put pressure on the prices of other precious metals and commodities like oil and gas.
Should PIMCO CEF Investors Jump Ship?
Oct. 01, 2014 - Morningstar, Inc. -
The sudden departure of PIMCO founder and CIO Bill Gross on Friday, Sept. 26, rocked the investment world. As pundits mulled over who might be crowned the next "Bond King," closed-end fund investors had concerns of their own. Because several PIMCO CEFs have historically traded at relatively high premiums, some CEF watchers predicted extreme share price declines, particularly for the five CEFs that Gross managed. It’s also widely known that Gross owned a significant amount of shares of many PIMCO CEFs. Some wondered whether Gross would dump all of his shares, putting further downward pressure on share prices and premiums.
From the Mailbag: Rising Rates and CEFs
Sep. 26, 2014 - Morningstar, Inc. -
Last week, the Federal Reserve announced that it will continue the unwinding of its bond-buying as planned in October. The Fed also noted that it would stop all of its asset purchases at the next meeting if economic indicators point to continued improvement in unemployment and GDP growth and if inflation remains within an acceptable range. With that in mind, readers may be concerned about the potential effects of rising interest rates on closed-end funds.
CEF Update: News You Can Use
Sep. 23, 2014 - Morningstar, Inc. - Leverage Changes
Gabelli Health & Wellness (GRX
) announced that it recently completed the offering of 1.4 million 5.875% Series B Cumulative Preferred shares, raising a total of $35 million.
The Central Europe, Russia, and Turkey (CEE
) fund announced the final results of its tender offer that expired Sept. 9, 2014. Under the final calculations, 7.33% of the fund’s shares were repurchased at a price of $29.88. Given that the shares currently trade for $25.81 as of Sept. 19, 2014, this was a good deal for shareholders.
Sector Equity CEFs Excelled in August
Sep. 12, 2014 - Morningstar, Inc. -
Despite continued turmoil overseas, the U.S. economy chugged along in August. In its July meeting minutes, released in late August, the Federal Reserve commented that inflation and labor market conditions had moved closer to its longer-run objectives and that it anticipated continued progress toward those goals. In that vein, the Fed kept rates unchanged and took another $10 billion out of its monthly asset purchases. But, the minutes also contained language that caused some hubbub among investors.
Are Discounts and Premiums Important When Selecting CEFs?
Sep. 05, 2014 - Morningstar, Inc. -
Early September is a great time of year. Kids are back in school, the football season is getting under way, and the weather is still great here in Chicago--at least for now. But September is not always very kind to investors' portfolios. In fact, The Wall Street Journal recently reported that September is the only month that has experienced an average decline in the market during the past 20, 50, and 100 years.
Return-of-Capital Special Cases
Sep. 03, 2014 - Morningstar, Inc. -
Last week, we tackled the issue of return of capital in closed-end funds. The ideas and calculations presented were appropriate for evaluating most CEFs but, importantly, not master limited partnerships.
A Rundown on Return of Capital
Aug. 27, 2014 - Morningstar, Inc. -
Return of capital in closed-end funds is a hot-button issue for investors. On one side of this often-polarizing argument are investors who believe all return of capital is bad and who avoid any fund that has ever distributed return of capital. On the other side are investors who believe return of capital isn't that bad in light of a fund’s discount. The truth lies somewhere in the middle.
Why Do You Own High-Yield Bonds?
Aug. 20, 2014 - Morningstar, Inc. -
The high-yield market was rattled last week causing a $6.5 billion outflow out of high-yield funds and exchange-traded funds for the week ended Aug. 6. This brought a four-week streak of net redemptions totaling $12.5 billion. The massive outflows followed months of commentary suggesting the high-yield market was showing signs of froth and highlighting the risks to this sector after a multiyear bull run. It'll be interesting to see whether these outflows continue or whether investors waiting on the sidelines will now jump back into the fray given slightly higher yields following the sell-off.
July Was a Mixed Bag for CEFs
Aug. 14, 2014 - Morningstar, Inc. -
At the start of July, the markets were relatively calm despite escalating crises in Russia and the Middle East, though as the month wore on news from abroad began to weigh on the market. Despite largely positive economic news out of the United States near month-end, Argentina's pending default cast a shadow on the market. The S&P 500 Index plunged 2.4% in the last five trading days of July, closing the month down 1.4%.
The Z-Statistic Is No Silver Bullet
Aug. 01, 2014 - Morningstar, Inc. -
Investing in a closed-end fund is more complicated than investing in a mutual fund that's run by an experienced manager with a consistent and repeatable process and that charges low fees. Investors must also carefully evaluate a CEF's distribution policy and consider its sustainability, as well as the amount and type of leverage, to understand the potential volatility of returns. The final piece is valuation.
How Safe Is Your CEF's Distribution?
Jul. 25, 2014 - Morningstar, Inc. -
It’s no secret that income-oriented investing has been all the rage for several years now. This makes a lot of sense, after investors were burned during the 2008 financial crisis. Many now view a bird in hand (income today) as worth more than two in the bush (capital gains at some point in the future).
CEF Update (7/23/14): News You Can Use
Jul. 22, 2014 - Morningstar, Inc. -
It was a quiet week in closed-end fund news. Rights Offerings and Tender Offers
Nuveen announced tender offers for four of its muni funds. Nuveen Dividend Advantage Municipal 3
), Nuveen Dividend Advantage Municipal Income (NVG
), Nuveen Municipal Advantage
), and Nuveen Quality Income Municipal
) will purchase up to 10% of outstanding common shares for 98% of net asset value on the purchase date. The offer will commence after the funds' 2014 annual shareholder meetings. In conjunction with the tender offer, activist investor Karpus Management agreed to vote their shares in accordance with the recommendations of the board and has agreed to be bound by "standstill" covenants until Sept. 30, 2017.
In 2014's First Half, MLPs Reign King
Jul. 18, 2014 - Morningstar, Inc. -
While bond investors spent much of 2014 fretting over what the improving economic outlook means for interest rates, U.S. equity investors earned decent returns in the first half of the year. Investors expecting a repeat of 2013's surging equity markets in 2014, though, were disappointed. The S&P 500 Index, for example, dropped sharply in January and put up gains of less than 100 basis points during March and April, netting a respectable, but not amazing, 7% return for the first six months of the year.
CEF Update (7/15/14): News You Can Use
Jul. 15, 2014 - Morningstar, Inc. -
Waddell & Reed announced that the lead portfolio manager of several of its high-yield bond funds, William Nelson, was terminated from the firm for causes unrelated to his portfolio-management responsibilities. Nelson was appointed manager of the fund following the departure of previous lead manager Bryan Krug, who left the firm in November 2013 to join Artisan Partners. Chad Gunther, an 11-year veteran at Waddell & Reed, will replace Nelson as lead manager on several funds, including Ivy High Income Opportunities (IVH)
and its open-end counterpart, Ivy High Income (IVHIX).
Comeback Kids: Municipal Funds Made a Strong Showing This Year
Jul. 11, 2014 - Morningstar, Inc. -
Not generally known as an exciting asset class, municipal funds are what investors typically turn to for tax-advantaged income. But the municipal market made headlines last year with Detroit’s bankruptcy and Puerto Rico’s perilous financial situation. Those events, combined with the bond market’s so-called "taper tantrum," caused many investors to flee municipal open-end funds in droves. The open-end category experienced 10 consecutive months of outflows between March 2013 and December 2013. Although pension deficits in cities and states across the country and the potential for rising bond yields remain a concern for investors, tax-advantaged income lured some back to the asset class in 2014.
CEF Update: News You Can Use
Jul. 01, 2014 - Morningstar, Inc. - Share OfferingsH&Q Healthcare Investors (HQH)
and H&Q Life Sciences Investors (HQL)
both completed rights offerings, which gave existing shareholders the option to purchase additional shares at a ratio of three-to-one. The Healthcare Investors fund raised $189 million, while the Life Sciences fund raised $70 million. We’re surprised to see these funds raise additional capital while the shares of both currently trade at discounts to net asset value. In general, we think it makes more sense for funds trading at a discount to take active measures to buy back shares rather than issue new ones.
Muni Takeaways From the Morningstar Conference
Jun. 27, 2014 - Morningstar, Inc. -
Last week, Morningstar hosted the 26th annual Morningstar Investment Conference. During the conference, attendees heard keynotes from some of the industry's highest-profile fund managers, including Franklin Templeton's Michael Hasenstab, PIMCO's Bill Gross, and AQR's Cliff Asness. While these speakers didn't disappoint, several of the most interesting and engaging conversations happened between keynotes in more intimate panel discussions.
CEF Update: News You Can Use
Jun. 24, 2014 - Morningstar, Inc. - Merger CompletionCohen & Steers Total Return Realty (RFI) completed its merger with Cohen & Steers Dividend Majors. The board also declared an increase to the third-quarter distribution by 10% to $0.24 per share from $0.22 per share.
3 Reasons Closed-End Funds Are Unpopular
Jun. 20, 2014 - Morningstar, Inc. -
During the past decade, U.S. open-end fund assets under management have grown by 160%. Meanwhile, exchange-traded fund net assets grew more than 900%. Closed-end funds, on the other hand, grew a paltry 54%. Even with historically low interest rates and a tremendous marketwide thirst for income, CEFs still make up less than 3% of market share in U.S. fund assets.
CEF Weekly Update - June 17, 2014
Jun. 17, 2014 - Morningstar, Inc. - Merge, Merge, Merge
BlackRock announced board approval of the merger of three taxable fixed-income funds. BlackRock Income Opportunity
) and BlackRock Income
) will merge with BlackRock Core Bond
). The merger is subject to shareholder approval and expected to complete in late 2014.
10 Inexpensive Medalist Closed-End Funds
Jun. 13, 2014 - Morningstar, Inc. -
Morningstar’s methodology for investing in individual stocks is based on buying high-quality firms trading at a discount to intrinsic value. This is easier said than done--intrinsic value is determined by forecasting a company’s future cash flows and discounting those cash flows back to today, a task that is extremely difficult to do with much accuracy. As such, intrinsic value for a stock could be viewed as a range of values that incorporate different best- and worst-case scenarios for the company’s future prospects.
A Number of CEFs Tweak Distributions
Jun. 10, 2014 - Morningstar, Inc. - Capital Transactions
Gabelli Dividend & Income (GDV
) announced shareholder approval for the spin-off of a new fund, Gabelli Global Small and Mid Cap Value Trust. GDV will contribute $100 million to the new fund, which anticipates a NAV of about $12 per share. The shares will trade on the New York Stock Exchange under the symbol GGZ on June 24.
Should Your Fund Manage Its Distribution?
Jun. 06, 2014 - Morningstar, Inc. -
Many closed-end funds live and die by their distributions. A high distribution rate can woo investors, pushing share prices up, but a below-average distribution rate can create a persistently wide discount. Even during times of poor performance, funds are reluctant to lower distribution rates for fear of driving investors away.
CEF Weekly Update - June 3, 2014
Jun. 03, 2014 - Morningstar, Inc. -
As summer temperatures rise, closed-end fund news cools off.
Tortoise announced the approval by its shareholders to merge Tortoise Energy Capital
) and Tortoise North America Energy
) into Tortoise Energy Infrastructure
). The merger is expected to close June 20, 2014.
Where to Look for Cheap Muni Funds
May. 30, 2014 - Morningstar, Inc. -
As a whole, municipal-bond closed-end funds are not screaming bargains at current valuations, but they look fairly cheap on a relative basis. As of May 27, the average muni CEF traded at a 5.6% discount, which was wider than the 3.4% average discount for the sector over the past 16.5 years (as far back as Morningstar data goes). Even after omitting the hot muni market of January 2010 onward, muni CEFs look slightly cheaper than average: These funds traded at an average discount of 3.9% for the 13-year period ended December 2009. That market environment was also less favorable for leveraged muni funds, as higher short-term interest rates made leverage financing more expensive.
CEF Update: A Gabelli Fund Approves a Transferable Rights Offering
May. 27, 2014 - Morningstar, Inc. -
The start of summer didn't keep funds from announcing rights and tender offers, changing distribution payments, and updating leverage.
In a recent article, we highlighted different ways shareholders can take full advantage of a fund's rights offerings. This week, three funds announced rights offerings
Smarter CEF Investing Starts With a DRIP
May. 23, 2014 - Morningstar, Inc. - A version of this article was published on Feb. 3, 2012.
A Dividend Reinvestment Plan, or DRIP, allows current investors to reinvest their fund's distributions at an advantageous price instead of receiving cash. Such programs are offered by most closed-end funds, or CEFs, though we've been told by many fund firm insiders that very few shareholder take advantage of this option. Reinvesting distributions can, over time, significantly benefit long-term investors' returns.
CEF Weekly Update - May 20, 2014
May. 20, 2014 - Morningstar, Inc. - Merger News
Nuveen Investments announced that the proposed merger of three of its municipal closed-end funds, Nuveen New York Dividend Advantage Municipal Fund(NAN)
, Nuveen New York Performance Plus Municipal Fund (NNP)
, and Nuveen New York Dividend Advantage Municipal Fund 2 (NXK)
failed to receive approval due to lack of shareholder participation. The majority of shareholders that cast a vote did so in favor of the merger, but total participation was not enough for the vote to pass. Nuveen did not indicate whether it will make another attempt to merge these funds. In general, though, we would expect that the merger of similar funds should lead to more efficiencies and lower costs for shareholders.
Where Do Bank-Loan CEFs Go From Here?
May. 16, 2014 - Morningstar, Inc. -
We've written about the pros and cons of bank loans before
, but the space is worth revisiting given the uncertainty facing floating-rate investors.
Bank loans (also known as floating-rate loans or senior loans) feature rates that regularly reset to a spread over Libor and are relatively immune to price changes driven by changes in broad-market interest rates. While interest-rate risk is minimal, borrowers (or issuers) in this market tend to have highly leveraged balance sheets.
CEF Update - May 13, 2014
May. 13, 2014 - Morningstar, Inc. - Muni Fund Mergers
Nuveen continued to clean up their fund lineup last week, announcing that shareholders of several state-oriented municipal closed-end funds approved a series of mergers. Nuveen California AMT-Free Municipal Income
) plans to acquire Nuveen California Premium Income Municipal
), which would increase its net assets to $714 million from $625 million.
This Portfolio Beat Its Category by a Comfortable Margin
May. 09, 2014 - Morningstar, Inc. -
Since its October launch
, the Strategic Income Portfolio--our model portfolio of best ideas for taxable fixed-income closed-end funds--has seen fairly high levels of volatility. Nevertheless, its 5.3% share price total return for the six-month period beat its Morningstar Category, multisector bond, average of 3.6% by a comfortable margin. Despite the volatility, the SIP accomplished this with similar levels of credit risk and a lower level of interest-rate risk compared with the category average.
CEF Weekly Update - May 6, 2014
May. 06, 2014 - Morningstar, Inc. - Fund Mergers
Nuveen announced the restructuring and combination of several of its equity-option closed-end funds in order to streamline its offerings. The funds affected includeNuveen Equity Premium Income (JPZ)
, Nuveen Equity Premium & Growth(JPG)
, Nuveen Equity Premium Opportunity (JSN)
, Nuveen Equity Premium Advantage (JLA)
, Dow 30 Premium & Dividend Income (DPD)
, Dow 30 Enhanced Premium & Income (DPO)
, and NASDAQ Premium Income & Growth(QQQX)
Thoughts From Capital Link 2014
May. 02, 2014 - Morningstar, Inc. -
Last Thursday, several members of Morningstar attended the 13th annual Capital Link conference for closed-end funds and exchange-traded funds. The conference was widely attended by analysts, portfolio managers, and product specialists. Some key topics included sector-specific trends in areas like energy investing and emerging markets, as well as product-level issues such as how to raise capital for CEFs and master limited partnerships. Morningstar's Steve Pikelny moderated the CEF industry round table panel discussion.
CEF Update: A Merger and an Unusual Rights Offering
Apr. 29, 2014 - Morningstar, Inc. - Merger
Cohen & Steers announced last week that shareholders of Cohen & Steers Dividend Majors (DVM
) and Cohen & Steers Total Return Realty (RFI
) approved a consolidation of the two funds. The firm expects the reorganization to take place by June 2014, with RFI as the surviving fund. Both funds are relatively small, with RFI containing $128 million in net assets and DVM containing $215 million in net assets. Considering that neither fund uses leverage nor has a substantial balance of undistributed net investment income, the merger should be relatively straightforward.
Rights Offerings: Have Your Cake and Eat It, Too
Apr. 25, 2014 - Morningstar, Inc. -
Most closed-end fund, or CEF, investors are familiar with the mechanics behind a fund's IPO but know decidedly less about rights offerings. To be sure, IPOs are more prominent and typically outnumber rights offerings in terms of both frequency and size, but when your fund announces a rights offering, what is it doing? And what should you, as a shareholder, do?
Avoid These Incredibly Overvalued Closed-End Funds
Apr. 18, 2014 - Morningstar, Inc. -
Many closed-end fund investors are quite well-informed. They understand the intricacies of relatively complex investment vehicles, diligently read the footnotes of their funds' annual and semiannual reports, and are disciplined enough to know when to buy and sell their holdings. However, it appears some investors less familiar with CEFs are willing to venture far outside their circle of competence for the sake of picking up some extra income. As a result, some CEFs that pay high distributions are occasionally driven up to exorbitant premiums. Experienced CEF investors generally steer clear of these funds, but this may not be as obvious a move for CEF newbies.
CEF Update: TIAA-CREF Acquires Nuveen Investments
Apr. 15, 2014 - Morningstar, Inc. - Acquisition
The biggest news of the past week was the announcement that TIAA-CREF would acquire Nuveen Investments for total consideration of $6.25 billion, including $4.6 billion in outstanding debt. Nuveen is one of the world's largest closed-end fund managers, with $57 billion in total CEF assets under management, including leverage. TIAA-CREF has no immediate changes planned for Nuveen or its CEF platform, but we will watch closely for any updates.
This Bank-Loan Fund Is a Standout
Apr. 11, 2014 - Morningstar, Inc. -
Few asset classes have received as much attention lately as bank loans (also known as senior loans or floating-rate loans). In the past 12 months, $54 billion has flown into the open-end bank-loan category as income-seeking investors look for protection against a potential rise in interest rates. As we've discussed before, senior loans pay interest to investors based on a floating rate that is generally reset quarterly. That rate is based on a reference index or rate (usually Libor) plus a spread, which is generally determined based on the credit risk of the portfolio's underlying assets. So, in a rising-rate environment, floating-rate loans should pay investors more income.
CEF Update: 10 Large Distribution Changes
Apr. 08, 2014 - Morningstar, Inc. - Leverage Refinancing
Nuveen continued to refinance the fixed-rate munifund term preferred shares (MTPs) issued by its muni funds. Last week, Nuveen Dividend Advantage Municipal 3
) and Nuveen NY AMT-Free Municipal Income (NRK
) both announced that they issued institutional munifund term preferred shares (iMTPs) and variable-rate munifund term preferred shares (VMTPs) to refinance the rest of their outstanding MTPs. This will likely reduce leverage costs for both funds as long as short-term rates remain low.
Are Some Investors in for a Tax Surprise?
Apr. 04, 2014 - Morningstar, Inc. -
As investors finish their taxes for 2013, many will reflect on their decisions for the year and vow to make more tax-efficient choices in 2014. For closed-end fund investors, this is rarely straightforward. CEFs are more complicated than many other investment vehicles, and their taxable implications aren't always clear. Their distributions often contain several components such as net investment income, realized short-term capital gains, realized long-term capital gains, return of capital, and pass-through return of capital. Keeping all this straight might be difficult but is instrumental in making tax-efficient investment decisions.
CEF Weekly Update: 2 New MLP Funds
Apr. 01, 2014 - Morningstar, Inc. - Two MLP Funds Launch
After nearly three months of no closed-end fund IPOs in 2014, we saw two new master limited partnership CEFs launch last week: First Trust New Opportunities MLP & Energy (FPL
) raised $440 million, and Nuveen All Cap Energy MLP Opportunities(JMLP
) raised $255 million. Assuming the full exercise of underwriters' overallotment options, the proceeds could raise to $530 million and $293 million, respectively. Despite the roughly four-month dry spell in CEF launches, MLP funds are still fairly hot. Five of the last 10 CEFs launched focus on MLP investing.
Good Corporate Governance Benefits Shareholders
Mar. 21, 2014 - Morningstar, Inc. -
Many citizens take the election of government officials quite seriously, as they should. These elected officials will go to Washington, D.C., or to our state capitals in an effort to represent us and our political beliefs. They are tasked with making hundreds, if not thousands, of decisions that will affect our everyday lives. In making these decisions, they should embody the interests of the citizens that elected them. At least, that's the ideal on which our electoral system is based. This is also the ideal for the board of directors of a closed-end fund, but shareholders take these elections far less seriously.
CEF Weekly Update - March 18, 2014
Mar. 18, 2014 - Morningstar, Inc. -
The past week saw significant activity in the closed-end fund world. Many funds remain busy on the issuing and repurchasing front, while Templeton is looking to expand its investment options in China. Leverage ChangesNuveen Dividend Advantage
) and Nuveen NY AMT-Free Muni
) both announced the filing of notice for the redemption of all their outstanding Variable Rate MuniFund Term Preferred and MuniFund Term Preferred shares. The funds expect to finance the redemptions with proceeds of newly issued preferred shares. The anticipated redemption date is April 11, 2014.
CEF Spotlight: Muni CEFs That Could Be Worth the Risk
Mar. 14, 2014 - Morningstar, Inc. -
With tax season upon us, many investors will soon assess their tax burdens for 2013 and promptly vow to increase the tax-efficiency of their portfolio. For taxable accounts, some will find themselves underwhelmed by the many low-yielding municipal-bond funds available to them. With this in mind, we're highlighting five Bronze-rated muni closed-end funds that are run by BlackRock and conduct identical strategies: BlackRock MuniVest
), BlackRock MuniVest II
), BlackRock MuniYield
), BlackRock Municipal Income
), and BlackRock Municipal Income II
). To be sure, these are high-octane muni funds, and are certainly not for every investor. But for the most aggressive, they are definitely worth a look.
CEF Weekly Update - May 11, 2014
Mar. 11, 2014 - Morningstar, Inc. -
It's been another busy week for closed-end funds. Following is a summary of recent CEF news over the past week.
Oxford Lane Capital
)announced that its rights offering will result in the issuance of more than 4 million additional shares. The subscription price for the oversubscribed offering was $17 per share. Shareholders on record as of Feb. 4, 2014, will receive one nontransferable right for each share held.
Taking a Closer Look at Aberdeen Asia-Pacific Income
Mar. 07, 2014 - Morningstar, Inc. -
Between a recent management shuffle, the rapid depreciation of the Australian dollar, and refinancing its leverage structure, it has been an eventful 10 months Aberdeen Asia-Pacific Income
). But with this Bronze-rated fund trading at a 7.8% discount, now might be a good time for contrarian investors to take a look. To be sure, Aberdeen Asia-Pacific Income is not for everyone. As evidenced by its nearly 21% loss on a share price total return basis for 2013, the portfolio entails a large amount of currency risk.
CEF Weekly Update: An Overvalued Fund Now Slightly Less Overvalued
Mar. 04, 2014 - Morningstar, Inc. - A Collapsing Premium
After reaching an inexplicably high premium in late January, shares of Chile Fund(CH
) are finally coming back to earth. Partially because of its persistently high levels of return of capital, and partially because of the poor performance of Chilean equity markets, the fund's net asset value has depreciated close to 33% during the past year. Meanwhile, share prices have seen some odd behavior during that period, reaching a 30% premium last August before falling down to NAV by December.
Will Gold Add Some Shine to Your Portfolio?
Feb. 28, 2014 - Morningstar, Inc. -
The roller-coaster ride experienced by gold investors during the past year shows no signs of stopping. Still, many investors consider gold a safe haven from inflation or a hedge against financial calamity, and consider a small allocation to gold as a prudent diversification tool. This article will explore a few different vehicles that investors can use to gain exposure to gold.
CEF Weekly Update
Feb. 25, 2014 - Morningstar, Inc. - Capital Structure ChangesDNP Select Income
) announced the successful placement of $267 million of floating-rate mandatory redeemable preferred shares, or MRPS. The fund will use the proceeds to redeem all outstanding shares of Series D and Series E remarketed preferred stock. The preferred shares will be redeemed for 100% of their liquidation preference plus accrued and unpaid dividends. The Series D shares will be redeemed March 12, 2014, and the Series E shares will be redeemed March 19, 2014. The fund will use the remaining proceeds from the MRPS placement to repay $128.8 million of the $861.8 million principal outstanding under its credit facility.
The Importance of Limit Orders When Investing in CEFs
Feb. 21, 2014 - Morningstar, Inc. -
Closed-end funds are often touted as vehicles for investors to access illiquid securities such as stock of emerging markets companies and certain fixed-income investments. Frequently ignored, however, is the illiquidity of CEFs themselves. Due to limited investor audiences, some of the most thinly traded CEFs are municipal funds and, more specifically, those concentrated in issuers from a single state.
CEF Weekly Update
Feb. 18, 2014 - Morningstar, Inc. - Leverage RefinancingPioneer High Income
) announced last Tuesday that it plans to redeem all of its outstanding auction-rate preferred shares at par, totaling about $150 million. The board of directors plans to finance the redemption with the authorization of a third-party debt facility. The refinancing will be completed March 18, 2014. Considering that alternative forms of leverage financing are typically more expensive than ARPS, investors should expect an increase in the fund's total expense ratio.
Should You Become a Convert to Convertibles Funds?
Feb. 14, 2014 - Morningstar, Inc. -
As a steady economic recovery pushed equity securities higher in 2013, convertible securities also benefited. A convertible security is a bond that also carries the right to buy the stock of the issuing firm once it hits a certain (conversion) price. As a result, convertibles funds tend to provide much, but not all, of equities' upside with less of their downside risk. For example, last year, SPDR S&P 500
) gained 32%, the typical open-end convertible fund gained nearly 22%, and the typical convertibles closed-end fund gained nearly 20%. In an equity bear market, convertible securities should provide some downside protection--in 2008, SPY dropped nearly 37%, but the typical open-end convertibles fund lost 26% and the typical CEF lost 34%.
CEF Weekly Update
Feb. 11, 2014 - Morningstar, Inc. - AllianceBernstein Income Fund
) announced that its board of directors approved a proposal to eliminate the fund's fundamental and nonfundamental investment policies, which will be submitted to shareholders at the annual meeting on March 27. The fund's primary fundamental policy requires it to invest at least 65% of total assets in obligations issued or guaranteed by the U.S. government, including agency securities and repurchase agreements pertaining to U.S. government securities.
A Closer Look at Preferred-Stock Funds
Feb. 07, 2014 - Morningstar, Inc. -
On Nov. 4, 2013, Morningstar launched the preferred-stock category. This Morningstar Category includes funds with a majority of assets invested in preferred stock over a three-year period. For an overview of preferred stock and the new category, refer to this article
Preferred stocks were off to a decent start at the beginning of 2013, but took a hit after the Federal Reserve's taper talk in May. Because most preferred securities are long term (often perpetual in nature), prices dropped dramatically as long-term interest rates jumped. Adding fuel to the fire, soon after its taper talk the Fed released finalized rules on bank capital requirements relating to the treatment of certain preferred shares, which took a toll on preferred-share prices.
What Looks Good in Muni Land?
Jan. 31, 2014 - Morningstar, Inc. -
Last year was not pretty
for municipal funds. Across the spectrum, rates rose from historic lows, making it difficult for many funds to break even for the year. With rates slightly higher, investors seeking tax-exempt income now have some breathing room, but they are not out of the woods yet.
CEF Weekly Update
Jan. 28, 2014 - Morningstar, Inc. -
It's cold in Chicago, but the closed-end fund world is always hot. Below is a summary of news across the (CEF) universe from the past week.
Aberdeen announced on Jan. 21, 2014, that Victor Rodriguez will take over head management responsibilities for Aberdeen Asia-Pacific Income
), replacing previous head manager Anthony Michael. Because of the manager change, we placed our Morningstar Analyst Rating for the fund under review.
Strategic Income Portfolio Quarterly Update
Jan. 24, 2014 - Morningstar, Inc. -
In October, we launched
the Strategic Income Portfolio, our model portfolio of taxable fixed-income closed-end funds. For the three months ended Jan. 21, 2014, the portfolio logged a total return of 2.71% on a share price basis. Meanwhile, the Morningstar Category of multisector-bond funds returned an average 1.21%, and the Barclays Capital Aggregate Bond Index gained 0.26%. The short time frame makes it difficult to draw meaningful insight about risk-adjusted returns, but let's take a closer look at the key drivers of the SIP's performance. Then we will discuss some adjustments to the portfolio.
Year in Review: Taxable-Bond Closed-End Funds
Jan. 17, 2014 - Morningstar, Inc. -
The last two CEF Weekly articles provided an overview of the equity
closed-end fund groups and their performances during 2013. It was a good year for equity-focused CEFs, as the S&P 500 returned 32% and the average equity-focused CEF posted a net asset value gain of 17% (including distributions) and a share price gain of 18%. Morningstar fund analyst Steven Pikelny discussed the usually steady municipal-bond space, which was hit with the double whammy of rising rates and credit concerns over cash-strapped municipal issuers like Detroit and Puerto Rico. Exchange-traded fund iShares National AMT-Free Municipal Bond
), for example, dropped 3.0% in 2013 following impressive gains in 2011 and 2012. Municipal CEFs fared even worse, as the average fund's NAV declined 6.8% and fell 13.0% on a share price basis.
Recently Updated CEF Ratings
Jan. 14, 2014 - Morningstar, Inc. -
Recently, we have updated coverage on a number of closed-end funds, upgrading or downgrading some Morningstar Analyst Ratings. We regularly check in with fund managers while evaluating a fund's rating, a process which may lead to a ratings confirmation or change.
Year in Review: Equity Closed-End Funds
Jan. 10, 2014 - Morningstar, Inc. -
As we turn the page on a new calendar year, resolutions and fresh starts are on everyone's minds. But it's also a great time to look back at the year that was. Last week, analyst Steve Pikelny provided a detailed look at the year in municipal closed-end funds, or CEFs. (Spoiler alert: The muni market was volatile and ended the year on a much lower note than it started.) This week, we tackle the equity universe, which we've broadened to include not just equities, but allocation funds, convertibles, alternatives, and commodities. Next week, we will delve into taxable fixed-income funds.
CEF Weekly Update
Jan. 07, 2014 - Morningstar, Inc. -
The end of the year usually brings around a few traditions. In Chicago, cold weather is expected, but the recent arctic plunge has already hit all-time records, leaving the entire city in a deep freeze. In warmer news, the end of year also usually brings about special distribution announcements at several closed-end funds, and 2013 was no different. Some noteworthy one-time distributions announced in the past few weeks include a $1.60 per share distribution from Aberdeen Latin American Equity (LAQ
), $1.71 per share from the Central Europe, Russia and Turkey Fund(CEE
), $2.13 per share from the Mexico Equity & Income Fund (MXE
), and $3.35 from the New Germany Fund (GF
Year in Review: Municipal CEFs
Jan. 03, 2014 - Morningstar, Inc. -
Normally regarded as a sleepy--and "safe"--asset class, municipal bonds were hammered in 2013. In fact, munis were hit twofold: first by rising interest rates, and then by credit concerns. After a spectacular run in 2012, many muni investors were likely disappointed. For example, the largest muni exchange-traded fund, iShares National AMT-Free Municipal Bond
), which tracks the S&P National AMT-Free Municipal Bond Index, lost 3.0% for the year after returning 5.2% in 2012 and 13.0% in 2011. But this was still relatively tame compared with the carnage among muni closed-end funds. These CEFs typically use leverage, focus on the longer end of the yield curve, and go after securities with greater credit risk--all of which amplified the volatile movements in the broad muni market.
10 Inexpensive CEFs to Put on Your Radar
Dec. 31, 2013 - Morningstar, Inc. -
With many closed-end funds ending the year trading at substantial discounts, it's natural for value-conscious investors to scour the CEF market for bargains. If discounts contract, they can provide a margin of safety to investors: If the net asset value stays constant, investors benefit as the share price converges toward its underlying NAV. Similarly, contracting discounts can ease the pain of a declining NAV. All that said, there's no guarantee that purchasing discounted CEFs will lead to positive returns. After all, discounts can widen and management teams can underperform. Investors should dig deeper by looking at valuation on a relative basis and by focusing on high-quality funds run by experienced managers with sound processes and low fees. Combining Morningstar Analyst Ratings with z-statistics can be a powerful way to uncover great funds at attractive valuations.
A Checklist for Fixed-Income Fund Investors
Dec. 27, 2013 - Morningstar, Inc. -
After a volatile year for fixed income, many closed-end fund investors are understandably skittish as they make year-end portfolio adjustments. Some will adjust their portfolios toward comparatively less-volatile ETFs and open-end funds, but others will find the current environment ripe with opportunities for investing in discounted funds. But with roughly 400 fixed-income CEFs in existence, sifting through the universe can be daunting. Even after drilling down into a specific sector, it can be hard to tell the difference between two funds. Especially within a single fund family, it is not uncommon to come across several funds with nearly identical investment mandates and strategies. (Are the differences between Nuveen Premium Income Muni 2
) and Nuveen Premium Income Muni 4
) truly significant?) With this in mind, a systematic approach to picking CEFs might be helpful for investors worried about covering all their bases. While the following checklist is by no means fully inclusive of all CEF-related concerns, it is a good starting point.
Deck the Halls With Higher Tax Bills
Dec. 23, 2013 - Morningstar, Inc. -
While the holiday season is generally filled with cheer, some closed-end fund investors may say "Bah, humbug!" thanks to higher tax bills this year. Investors in traditional open-end funds are quite familiar with the year-end tradition of special distributions. And although CEFs are required to distribute nearly all of their realized gains and income earned during the year to maintain their status as a registered investment company, CEF investors are often removed from this ritual. That's partly because managed and level distribution policies allow CEFs to pay capital gains throughout the year. In fact, as of mid-December, 13% of all CEFs had managed distribution policies (a stated, predetermined percentage of net asset value is paid out each year, with payments spread evenly throughout the year) and more than three fourths had level distribution policies (the same dollar amount is paid each period, usually monthly or quarterly).
A Recap of 2013's CEF IPO Market
Dec. 20, 2013 - Morningstar, Inc. -
The first half of 2013 was a promising start to the year for closed-end fund initial public offerings. There were 13 launches, two of which each raised more than $2 billion in proceeds, topping the $1 billion raised for 2012's most talked about new fund, PIMCO Dynamic Income (PDI
). Although "taper talk" in May brought the IPO market to a halt for a few months, fund launches picked back up in the fall, closing the year (as of Dec. 13) with 23 new funds launched. Net proceeds for the year were a healthy $14 billion, though much of this is attributed to a handful of $1 billion-plus funds launched in the first half of the year.
Top Picks for Emerging-Markets Bond CEFs
Dec. 13, 2013 - Morningstar, Inc. -
Emerging-markets funds have historically played a small (or even nonexistent) role in most investors' portfolios, but as the developed world remains in a no- to low-growth holding pattern, investors have increasingly turned to riskier assets in an effort to meet their investment goals. Despite a recent slowdown in some previously faster-growing emerging economies, Gross domestic product growth relative to the United States and much of Europe remains strong. China, for example, logged 9%-10% growth from 2009 to 2011 and, though 2012 GDP grew at a slower 7.8%, that's 3.5 times the 2.2% GDP growth rate in the U.S.
Alternatives Strategies in a CEF Wrapper
Dec. 10, 2013 - Morningstar, Inc. -
Closed-end funds are commonly--and incorrectly--perceived as old, stodgy investment vehicles that primarily buy and hold municipal bonds. Yes, CEFs are old (the first was launched in the United Kingdom in the late 1800s), and yes, almost half of the CEFs in existence invest in municipal bonds. But investors in the know realize that CEFs are far from boring; many employ a wide array of investment tactics, even alternative and hedge fund-like strategies. While the definition of what is "alternative" is open to interpretation, Morningstar defines alternatives using three buckets:
CEF Weekly: Medalist Edition
Dec. 06, 2013 - Morningstar, Inc. -
During the last month, we added coverage of two new closed-end funds, or CEFs, bringing the total number of funds rated to 125, accounting for 45% of the net assets in the CEF universe. (For those closely following our ratings count, that number was 126 at the start of November, but it dropped because of a merger of four rated BlackRock High Yield funds. BlackRock Corp High Yield VI Common
), the surviving fund, earned a Bronze rating.) For a detailed discussion of the Morningstar Analyst Rating for CEFs, you can find the methodology document here
CEF Mergers Abound in 2013, but Boulder's Potential Deal Sticks Out
Dec. 03, 2013 - Morningstar, Inc. -
Despite a healthy year for closed-end fund initial public offerings, a rash of fund mergers shrank the overall CEF universe from 616 at the start of 2013 to 600 as of mid-November. Although merger transactions slowed this year compared with those in 2012, the trend hasn't ended: Eight mergers have been proposed or approved this year to be completed in 2014.
Generally speaking, firms with numerous municipal offerings, especially Invesco and Nuveen, focused on merging smaller, often single-state, funds in years past. In 2013, however, there was an uptick in non-muni-fund combinations, including the recently proposed merger of four equity funds from Boulder Investment Advisors. If approved by shareholders through a proxy vote in the first quarter of next year, this will be the first equity fund merger since early 2012.
How Much Does Your CEF Cost?
Nov. 29, 2013 - Morningstar, Inc. -
Many investors avoid buying closed-end funds because of their reputation for charging high fees. After all, Morningstar regularly notes that fees are often the best predictor of performance, so why consider an "expensive" CEF? Intuitively, the mechanics behind low fees and strong returns makes sense: The risk-adjusted benefits of active management are often unclear and inconsistent, but fees are always a sure thing. In more technical terms, fees represent negative alpha. Superior management teams occasionally overcome the high-fee hurdle through superior security selection and portfolio construction, but this is the exception rather than the norm.
Are Some Investors In for a Tax Surprise?
Nov. 26, 2013 - Morningstar, Inc. -
As 2013 comes to a close, many investors will soon look to make their annual, semiannual, quarterly, monthly, weekly, daily, or hourly portfolio adjustments. For closed-end fund investors, this process might include a thorough analysis of year-end distributions and capital loss carryforward harvesting prospects. But CEFs are more complicated than other investment vehicles, and their taxable implications aren't always straightforward. With this in mind, now is a good time to dig into some of the tax considerations relevant to CEF investing. Note that this article is meant as a general overview of CEF taxes. For more-specific guidance, please consult a tax professional.
2 Ways to Invest in High-Yield Bonds
Nov. 22, 2013 - Morningstar, Inc. -
The corporate high-yield bond market is uniquely positioned at the crossroads of equity and fixed income. High-yield bonds are generally corporate bonds rated below BBB by S&P or Baa by Moody’s. A range of companies issues high-yield bonds, including casino operators, chemical companies, and financial-services firms. Companies may wind up with a high-leverage profile either intentionally (because of a leveraged buyout, leveraged acquisition, or recapitalization) or unintentionally (because of a deterioration of the underlying business of an erstwhile investment-grade firm).
Morningstar's New Preferred Stock Category
Nov. 15, 2013 - Morningstar, Inc. -
On Nov. 4, Morningstar launched new categories for open-end and closed-end mutual funds and exchange-traded funds. The preferred stock category includes funds with a majority of assets invested in preferred stock over a three-year period. Previously, most preferred share funds were lumped in with long-term bond funds because of their historically high sensitivity to long-term yields. Preferred shares have exhibited much more equitylike behavior in recent years, though, especially in periods of market distress. In fact, the historical correlation between the new preferred stock category and the now preferred-share-absent long-term bond category has come down (just 0.63 over the trailing three years ended October 2013 and 0.57 over the trailing five years).
Thoughts on Closed-End Funds From Industry Insiders
Nov. 08, 2013 - Morningstar, Inc. -
Depending on an investor's level of interest in closed-end funds, this week's Investment Company Institute's conference on CEFs can be pinned anywhere along the spectrum from boring to wonky. The conference isn't geared toward individual investors and advisors as much as it is toward CEF industry personnel. This means that speakers generally focus less on market updates and selling their specific funds, and more on discussing CEF mechanics, new regulatory concerns, and challenges of sponsorship. The agenda certainly had its less exciting parts--the new, expanded definition of commodity pools under Dodd-Frank, for example, wasn't as enthralling a discussion as one might expect--but still offered some information that investors may find useful. In particular, discussions on the new-issue market and secondary market support offer insight into the direction the industry is heading.
Medalist Movers--CEF Edition
Nov. 05, 2013 - Morningstar, Inc. -
On Friday, we provided a broad overview of where the Morningstar Analyst Ratings for closed-end funds stand as of late October. This week, we highlight two funds whose ratings have changed and two funds that are newly rated.
Ratings ChangesMFS Intermediate Income
) was upgraded to Bronze from Neutral because of its low volatility, strong management team, and reasonable expenses.
In 2008, the fund tweaked its strategy from a global government-bond focus to include emerging-markets corporate bonds (its holdings are mostly intermediate-term and investment-grade at the time of purchase). The move had the potential to add volatility to a historically low-volatility fund, but overall volatility was kept at bay during the five years since the change. While its performance has not been exciting--this unleveraged fund has trailed its mostly leveraged world-bond CEF peers over the trailing five-year period--it has offered investors a smoother ride on a net asset value basis. Compared with its unleveraged world-bond open-end peers, the fund has done well, outpacing 60% of peers over the trailing five-year period and 75% of peers over the trailing three years.
Morningstar Analyst Rating Medal Count--CEF Edition
Nov. 01, 2013 - Morningstar, Inc. -
We last checked in on the medal count for closed-end funds in August of 2012. Since that review, we've increased coverage to 126 funds from 106 with more in the pipeline. Of the 604 funds in the CEF universe, ratings on 126 (just shy of 21% of the entire universe) doesn't seem too impressive at first glance. However, many CEFs are small and illiquid and aren't worth a deep-dive Morningstar Analyst Rating. For example, 104 are single-state municipal funds that have limited appeal outside the state of investment. Note that we do cover seven of the largest California municipal funds offered by PIMCO, BlackRock, and Nuveen due to the extensive size of the municipal bond market in that state. On a net asset basis, the rated funds account for 45% of the net assets of the entire CEF universe. This week, we'll take a look at an overall medal count as well as a breakdown of medals by fund firm and Morningstar Category. In Tuesday's article, we'll highlight recent ratings changes and two newly rated funds.
8 Undervalued Positively Rated Funds
Oct. 29, 2013 - Morningstar, Inc. -
In November 2011, Morningstar launched a qualitative rating for mutual funds and closed-end funds called the Analyst Rating. The rating focuses on five pillars, which are discussed in detail as they relate to CEFs here
. While the Analyst Ratings are a helpful starting point for CEF investors to gauge the prowess of the management team and delve into a fund's underlying process, they should not be used in isolation. Part of what makes CEFs unique is the valuation component of share (or market) price versus underlying net asset value. A good fund may be a bad value at the current market price.
Diving Deeper Into the Strategic Income Portfolio
Oct. 25, 2013 - Morningstar, Inc. -
On Tuesday we outlined a model portfolio
of fixed-income closed-end funds, which includes seven of our best ideas. The funds were chosen because we like them on a stand-alone basis, but their respective valuations make them even more attractive. Today, we take a closer look at each of the funds and discuss the rationale behind the positions. From a top-down perspective, we constructed the portfolio based on three buckets: core, high yield, and long duration. Funds in the core bucket take on a moderate level of risk but are generally poised to do well in most market environments.
A Strategic Income Portfolio for Fund Investors
Oct. 22, 2013 - Morningstar, Inc. -
During the last few months, there's been no shortage of closed-end funds for us to highlight. The exodus of investors from fixed-income CEFs this year quickly turned many premiums into discounts, and many discounts into wider discounts. The average fixed-income fund is now down 8.9% for the year to date on a share price basis, even after taking into account their distributions. It doesn't take Benjamin Graham to figure out that many of these funds are now cheaper than they were in March. Excellent deals aside, investing in CEFs requires more than a quick look at valuations. Long-duration funds might be incredibly cheap, for example, but tremendous interest-rate risk still can be a concern. With this in mind, now is a good time to step back and examine how all the pieces fit together.
6 Things Every Investor Must Know About Closed-End Funds
Oct. 18, 2013 - Morningstar, Inc. -
Closed-end funds are complicated investments, at least relative to most exchange-traded funds and especially relative to mutual funds. Investors need to know how to navigate leverage, parse the details of distribution rates, and discern whether a discount represents actual potential value. Have no fear--Morningstar has a collection of educational slides on CEFs here
. There are two collections of articles on CEFs and CEF investing here
Central Securities Presents Rare Investment Opportunity
Oct. 11, 2013 - Morningstar, Inc. - A version of this article originally ran as a CEF Specialist on July 30, 2013.
Central Securities (CET
) is one of the quaintest closed-end funds that you'll ever come across. This wasn't always the case. On Oct. 1, 1929, the firm began operating as a closed-end investment company with maybe the most inauspicious launch of a fund in history: Black Thursday, Black Monday, and Black Tuesday all occurred within a month. Somehow the firm persevered, and perhaps the experiences of its early days still influence the culture.
An Undervalued Bank-Loan Fund
Oct. 08, 2013 - Morningstar, Inc. -
Over the last few weeks, we've highlighted some nuances in the bank-loan market that affect funds during a period of rising long-term rates, specifically as they relate to leveraged closed-end funds
. While issues like Libor floors and short-term versus long-term interest-rate trajectories might worry some potential investors, we believe bank-loan funds can still play a valuable role in a diversified portfolio, as long as investors have reasonable total-return expectations for these funds (that is, don't expect bank-loan funds to increase distributions as the Federal Reserve tapers--and then ends--quantitative easing). What's more, the recent hoopla in Washington over the government shutdown and the debt ceiling have seemingly spooked the Fed enough to push any tapering further into the future. Some portfolio managers and market pundits believe Ben Bernanke may not make any taper moves during the rest of his tenure as chairman, which ends Jan. 31, 2014.
Understanding Distributions From MLP-Focused CEFs
Oct. 04, 2013 - Morningstar, Inc. - A version of this article was first published on July 2, 2010.
When it comes to investing, I believe that complexity often leads to opportunity. If a security is complex or a company's story is complex, many investors simply avoid the hassle of figuring it out, creating a market inefficiency. Small-cap stocks face this all the time: often, the companies behind these stocks have no analyst coverage, have no means to get their stories heard, and have attractive valuations. For investors who seek such stocks and are willing to do the legwork, the financial rewards can be considerable.
A Relatively Undervalued Silver-Rated CEF
Oct. 01, 2013 - Morningstar, Inc. -
Everyone who watches closed-end funds knows that discounts have widened and premiums have collapsed for most funds over the past four months or so. In such environments, value-oriented investors like to start sniffing around to see whether any CEFs have discounts attractive enough to warrant a purchase. One potential stumbling block is that at such times there seem to be a plethora of CEFs to choose from. After all, this turbulence affects the entire market--not just a few CEFs.
3 Income Ideas for the Current Market Environment
Sep. 27, 2013 - Morningstar, Inc. -
Fund firm MFS doesn't stand out much in the closed-end fund universe. The firm has run the same 12 CEFs since 1999, nine of which have less than $300 million in total assets (including leverage). None of the funds are particularly special in terms of performance, each with an overall Morningstar Rating of 2 or 3 stars. A glance at the family of funds earlier this year wouldn't have raised many eyebrows in terms of valuation either: As of the end of March, six of its 12 funds traded at fairly narrow discounts, while five traded at premiums. Nevertheless, things have changed: Even though these funds follow fairly vanilla investment strategies, the CEF market sell-off during the second quarter of this year left eight of the funds trading at (or close to) double-digit discounts. And, in our opinion, several of these funds are now trading at attractive valuations on a relative basis. Let's take a look at the three largest (and most liquid) CEFs in the MFS lineup.
Shop Now: Nearly 10% Off on Precious Metals
Sep. 24, 2013 - Morningstar, Inc. -
Usually, we don't get too excited about absolute (i.e. published) discounts or premiums. They are, after all, simply a measure of the relationship between a closed-end fund's share price and its net asset value.
A typical sign that someone is spouting myths about CEFs is when you are told that a discount amounts to "good value." In fact, in a recentBloomberg
article, Stewart Horejsi, the comanager of four equity-focused CEFs at Boulder Investment Advisers, errantly made a claim regarding his funds' large Berkshire Hathaway
) stakes and their large discounts: "If you can buy Berkshire at 80% of where it's trading, that's a better value."
Why Your Bank-Loan Fund's Distribution Might Be Cut
Sep. 20, 2013 - Morningstar, Inc. -
During the month of August, bank-loan (also called senior-loan and floating-rate-loan) open-end and exchange-traded funds took in $7.6 billion of inflows. Over the last year, investors have poured nearly $54 billion into these funds. Looking at bank-loan closed-end funds, 19 of the 25 funds are currently fairly valued on a one-year basis. It's clear that with the prospect of rising rates many retail investors have flocked to these funds in the hope of catching some extra income as rates rise. Unfortunately, this line of thinking is flawed. (For a primer on bank-loan funds, readthis article
Consider Adding Closed-End Funds to Your Investment Arsenal
Sep. 13, 2013 - Morningstar, Inc. -
Having more options is usually a good thing. In May 2011, while on my honeymoon, my wife and I were in Boppard, Germany, a small town where the Rhine River bends itself into a "U" shape. The best view of the topography is from a spot on a mountain known as Gedeonseck. Getting up there, though, took some doing. The local restaurateur, whom we befriended, suggested we spend the day taking the scenic hiking path, but we didn't want to spend the entire day getting to the destination. An athletic-looking gent at the next table suggested a bike path, but we had no bikes, and I'm not in that kind of shape.
20 Large CEF Discount and Premium Changes
Sep. 10, 2013 - Morningstar, Inc. -
No investor has to be reminded about the tumultuous market environment we've been living through since mid-May, when Mr. Market came to the realization that the Federal Reserve's quantitative-easing program would not go on forever. Throughout the summer, Mr. Market's moodiness has been on full display, perhaps nowhere better reflected than in closed-end funds, or CEFs. Because most CEFs are relatively thinly traded and moderately leveraged, their share prices tend to amplify the market's emotions.
Are Real Estate CEFs Worthy of Consideration?
Sep. 06, 2013 - Morningstar, Inc. -
With interest-rate concerns taking center stage for many investors, several closed-end fund categories have sold off in recent months. Among them, interest-rate-sensitive municipal funds, high-yield funds, and emerging-markets debt funds have gotten the most attention. Real estate CEFs have also seen their discounts widen substantially. Investors who view the sector itself as oversold, or are looking to rebalance the real estate allocation of their portfolios, might consider discounted CEFs as good instruments. But as we frequently point out, a large absolute discount does not necessarily mean that a CEF is attractively valued. Many investors will find that ETFs are the best way to gain cheap exposure to the sector. Nevertheless, some CEFs satisfy more specific investment needs, so they might still be worth considering.
Re-Evaluating PIMCO's Income Funds
Sep. 03, 2013 - Morningstar, Inc. -
Around this time last year we wrote an article
looking at the prospect of PIMCO Dynamic Income (PDI
), comparing it with sister fund PIMCO Income Opportunity(PKO
). At the time, both funds were hot: PDI had just launched, raising close to $1 billion, and PKO was flirting with a double-digit premium. One year later, the funds have fallen out of favor along with a broader sell-off in fixed-income closed-end funds. PDI and PKO now sport 7.5% and 5.9% discounts, respectively. But while both funds certainly have their pros and cons, the discount pricing certainly makes each of them more attractive. With many investors newly interested in the funds, now is a good time to revisit the pair.
From the Mailbag: Rising Rates and CEFs
Aug. 30, 2013 - Morningstar, Inc. -
While we make a concerted effort to respond to comments posted about our articles and to user feedback emails dropped into our inboxes, time often constrains our ability to do so. We thank you for reading and writing in, and, as always, we welcome your feedback. We've received numerous queries from readers about the effects of rising rates on closed-end funds. This week, we'll address some of the most frequently asked questions.
RiverNorth to Reopen DoubleLine-Subadvised Fund
Aug. 29, 2013 - Morningstar, Inc. -
On Monday, Aug. 26, RiverNorth Funds announced plans to reopen to new investors a fund that is subadvised by DoubleLine Capital Management and DoubleLine's founder, noted bond manager Jeffrey Gundlach.
Launched at the end of 2010,River North/DoubleLine Strategy Income
) employs three strategies: a closed-end fund income strategy, a core fixed-income strategy, and an opportunistic income strategy. RiverNorth manages the tactical closed-end fund income strategy, while DoubleLine oversees the core bond and opportunistic income strategies.
This Fund Has Performed Well and Poorly, Simultaneously
Aug. 27, 2013 - Morningstar, Inc. -
In 2007, I traveled for a few weeks to Morningstar's offices in Shenzhen, China. This was during the boom in Chinese equities. The markets there were becoming frothy, as it was increasingly evident that everyone who could was investing in stocks. There was a story--and I forget if this was on the news or if it was a colleague's family member--that recounted how a woman, when asked why she had purchased shares in a publicly trading meat processing company, replied that the shares were a real value because they were priced less than a pound of pork.
Should You Bet on Japan With These Funds?
Aug. 20, 2013 - Morningstar, Inc. -
At the end of 2012, many investors and market commentators declared Japan's stock market as the one to watch. After years of devastating deflation, the country's prime minister was prepared to initiate an aggressive monetary stimulus program to create jobs, pull the country out of its deflationary trap, and devalue the yen in an effort to revive the long-stagnant economy. The news sent stocks soaring, with the Nikkei 225 Index up 19% in the first quarter of 2013 (by comparison, the S&P 500 Index gained about 11% in this year's first quarter). But the Japanese stock market took a dive in late May, dropping from a high of 15,381 on May 21 to 12,686 on June 14, a loss of 17.5% in less than a month.
When Are Discounted CEFs Bargains?
Aug. 16, 2013 - Morningstar, Inc. -
In the active versus passive fund management debate, it's always important to keep one thing in mind: The reason passive funds are so popular has little to do with passive management. Instead, their popularity likely has more to do with cost. For investors skeptical of the value added by portfolio managers, choosing the fund with the lowest expense ratio is as good as any other option--it just costs less. For this reason, some investors shun the high fees of many closed-end funds. But while fees are certainly an important consideration, the relationship between performance and fees is less clear when evaluating CEFs.
2 Ideas for High-Yield Investors
Aug. 15, 2013 - Morningstar, Inc. -
There are several differences between open-end and closed-end funds, but an important one is how each is affected by negative investor sentiment. Open-end funds may be harmed when investors redeem their shares, with the resulting outflows potentially affecting the funds' portfolio construction or performance to the detriment of remaining shareholders. Conversely, as investors sell their shares of CEFs, the funds start to trade at a cheaper valuation, presenting an opportunity for remaining investors (along with new investors) to pick up shares on the cheap.
An Undervalued High-Yield Fund
Aug. 13, 2013 - Morningstar, Inc. -
With the tremendous sell-off of fixed-income closed-end funds since the end of May, there has been no shortage of interesting and attractively valued funds to highlight. While it is not particularly difficult to argue that some CEFs might be oversold, the fears that induced the overselling might not be entirely unfounded. Many funds that saw their discounts widen are incredibly interest-rate-sensitive, with long-duration portfolios amplified by leverage. Funds with large foreign currency exposure also took a hit, as rising rates implied a strengthening of the U.S. dollar.
Should You Allocate to Allocation Funds?
Aug. 09, 2013 - Morningstar, Inc. -
As investors grow weary of managing not only individual fund selection but also allocation decisions, some have turned to allocation funds to ease the burden. In the mutual fund space, some of the most popular and well-known allocation funds are target-date mutual funds. These days, many 401(k) plans include target-date funds, allowing investors to simply choose their expected retirement date and let the funds' managers do the rest (this usually means following a preset "glide path" that places more emphasis on bonds as the retirement date approaches). If you're interested in target-date mutual funds, you can read the latest Morningstar research on them here
4 Contrarian Income Funds
Aug. 06, 2013 - Morningstar, Inc. -
As interest rates spiked over the past few months, many fixed-income sectors were hit hard. Investors poured out of mutual funds and exchange-traded funds; even Vanguard saw its first net outflows in 20 years. With fixed income leaning out of favor (or, at least less in-favor than it was earlier this year), many investors argue that certain sectors of the bond market are now oversold. Municipal bonds, in particular, look increasingly attractive with their spread over longer-term U.S. Treasuries increasing drastically in the wake of Detroit's publicized insolvency.
Stick to Your Investment Plan
Aug. 02, 2013 - Morningstar, Inc. -
To state the obvious to anyone who has been paying attention: The markets for leveraged fixed-income closed-end funds have seen their share of volatility in recent months. For some, if not most, investors, such an environment is full of stress. After all, none of us like watching as our investment gains--if only on paper--begin to decline. If only markets only went up--the faster the better. But we all know better than that, even if most individual investors don't.
Central Securities Presents Rare Investment Opportunity
Jul. 30, 2013 - Morningstar, Inc. -
Central Securities (CET
) is, perhaps, one of the quaintest closed-end funds, or CEFs, that you'll ever come across. This wasn't always the case. On Oct. 1, 1929, the firm began operating as a closed-end investment company in what was perhaps the most inauspicious launch of a fund in history: Black Thursday, Black Monday, and Black Tuesday all occurred within a month. Somehow the firm persevered. And, perhaps, the experiences of its early days still, somehow, influence the culture.
Buying Currency at $0.84 on the Dollar
Jul. 23, 2013 - Morningstar, Inc. -
With recent interest-rate concerns spooking fixed-income markets, closed-end fund valuations have generally come back down to earth. In some cases, valuations have crashed straight into earth, leaving a sizable crater. Most notably, share prices of leveraged long-duration funds have fallen well below their net asset values. While these funds don't exactly stand to benefit from a rising rate environment, one has to wonder if this is an overreaction. After all, many will argue that sell-offs in the bond market already take into account concerns related to the underlying securities, and widening CEF discounts just represent a shift in investor sentiment. For those that subscribe to this line of reasoning, now is a good time to use CEFs to make contrarian bets.
A Rocky Ride for CEF Investors in the First Half of 2013
Jul. 19, 2013 - Morningstar, Inc. -
While the first quarter of 2013 was relatively calm and, overall, pretty good for closed-end fund investors, the second quarter ended with an explosion that few expected. Fund managers were surprised by the fervor with which investors fled bond funds, dumping shares with little regard to long-term investment strategies and overall portfolio allocations. After the dust settled, CEF investors saw many high-premium bond funds trading at historically narrow premiums or even discounts. Technical investors, specifically hedge funds and mutual funds investing in CEFs, have had a field day with the carnage left by tapering fears.
PIMCO's Income Funds at Bargain-Basement Prices
Jul. 16, 2013 - Morningstar, Inc. -
Investors take note of fund offerings from bond giant PIMCO. However, savvy closed-end fund, or CEF, investors have been (rightly) wary of jumping into PIMCO's typical CEF offerings because of staggeringly high premiums, despite generally good returns and high distribution payments. Interestingly, two of PIMCO's multistrategy income funds have not garnered the lavish attention paid to other PIMCO funds and they usually sell at just modest premiums. With the recent falloff in the market, both income funds are selling at discounts nearing three-year lows.
3 Professional CEF Investors Divulge Some of Their Secrets
Jul. 12, 2013 - Morningstar, Inc. -
T.S. Eliot wrote that "April is the cruellest (sic) month." While that may be true for poets and academics, for closed-end fund investors this year, late May and early June were the cruelest. Indeed, the fright that overtook some investors in fixed-income CEFs is quite apparent by looking at average discounts. Taxable fixed-income CEFs averaged a 0.12% discount at the end of April, a 3.55% discount at the end of May, and an average 3.63% discount at the end of June. Investors in national municipal bond CEFs saw the average discount widen from 0.87% at the end of April to 5.03% at May's finish, before settling back to 2.73% at the end of June.
Can Fund Investors Find Refuge in Covered Calls?
Jul. 11, 2013 - Morningstar, Inc. -
In the never-ending search for income, equity closed-end fund managers often boost income generation potential by way of derivatives. A popular strategy is selling call options on the underlying portfolio. This strategy goes by many names (covered call, buy-write, and option overlay, to name a few) and is wide-ranging in its implementation. While there are a handful of mutual funds that implement buy-write strategies (the best-known being Gateway
)), it's more prevalent in the CEF world, likely because of their closed capital structure and general income focus.
Lower Interest-Rate Risk Among High-Quality Junk Bonds
Jul. 06, 2013 - Morningstar, Inc. -
It's tempting to write off short-duration, high-yield funds as a recent example of fund family marketing. Knowing that there is investor demand for both higher income and less interest-rate risk, fund sponsors wheel out the latest investment idea du jour, sit back, and rake in the fees. Scouring the Morningstar database for funds in the high-yield category with either "short duration," "limited duration," or actual reported average effective durations of less than three years, I came across 28 such funds (mutual funds, closed-end funds, and exchange-traded funds); 16 of these were launched since Jan. 1, 2011; as of June 30, there was $10.3 billion invested in all 28 funds. It seems to be a rather perfect story, akin to the bank-loan fund phenomenon: invest in a diversified portfolio of junk-rated bonds and avoid most of the interest-rate risk so prevalent in the typical high-yield fund.
Should More CEFs Use Discount-Control Mechanisms?
Jul. 05, 2013 - Morningstar, Inc. -
Closed-end funds are often closed for good reason. Many CEFs invest in illiquid assets, utilize leverage, and engage in other investment strategies that are negatively impacted by inflows and outflows. But despite these advantages, the resulting premiums and discounts can often harm shareholders. The most obvious detriment is the added volatility of share price movements on top of changes in net asset value. But even long-term, buy-and-hold income investors who don't place much emphasis on day-to-day volatility can be negatively affected should they want to reinvest part of their distribution while the fund is trading at a premium.
Is It a Good Time to Buy American?
Jul. 02, 2013 - Morningstar, Inc. -
We've spent a lot of time during the last few weeks talking about relative deals, as market volatility opened up closed-end fund discounts to historically wide levels. But as the CEF market returns to normalcy, finding undervalued funds based on z-statistics and historical discounts is becoming more difficult. With this in mind, let's take a look at the four Build America Bond CEFs. Although these funds are trading at discounts within their historical norms, they are still good deals on an absolute basis. Although we have previously looked at these funds
, now is a good time to check in.
Bargains Abound as Investors Flee Closed-End Funds
Jun. 28, 2013 - Morningstar, Inc. -
Some avid closed-end fund investors and Morningstar discussion board commentators have bemoaned an overvalued and frothy market, particularly regarding fixed-income funds. But after the market fallout over the past month or so, previously sidelined investors are diving in. Over the last month, the average CEF lost 7% on a net asset value basis and 9% on a share price basis. Fixed-income funds suffered the most; the average taxable fund was down 5% on NAV and 10% on share price, while the average municipal fund lost 10% on NAV and 11.5% on share price. Equity CEFs fared a bit better, but still lost, on average, 6% of NAV and 8% of share price. Share prices have, in general, been falling faster than underlying portfolio NAVs, causing many premiums to shrink and discounts to widen, creating some strong buying opportunities.
A Closer Look at the 2013 CEF IPOs
Jun. 25, 2013 - Morningstar, Inc. -
With 13 IPOs in just the first six months of 2013, it is shaping up to be a banner year for closed-end fund, or CEF, launches. Last year, there were 24 IPOs throughout the entire calendar year--the most since 2007, when there were 41 new fund launches. The big news of last year's IPO docket was the $1 billion launch of PIMCO Dynamic Income (PDI
), the largest single IPO since 2007. This year we've had three $1 billion-plus IPOs. PIMCO launched another go-anywhere fixed-income fund (PIMCO Income (PCI
)) in early 2013, raising nearly $3 billion in net proceeds. DoubleLine also launched its second go-anywhere bond fund in late April (DoubleLine Income Solutions (DSL
)), raising $2.2 billion in net proceeds, and finally, First Trust Intermediate Duration Preferred and Income (FPF
)launched in late May, raising $1.4 billion in net proceeds.
Are Mutual Fund and ETF Investors Leaving Money on the Table?
Jun. 21, 2013 - Morningstar, Inc. -
No matter what the fund vehicle, Morningstar believes that strong management teams, solid portfolios, low expenses, proven track records, and established parent companies tend to lead to above-average performance over the course of a market cycle. For long-term investors who are willing to hold on to their funds throughout an entire market cycle, confidence in the soundness of these fundamental characteristics could help prevent costly trading errors in volatile markets. This is especially true for closed-end funds, or CEFs: Premiums can turn to discounts in a matter of days, adding significant volatility to share price performance.
This CEF's Discount May Be Overdone
Jun. 19, 2013 - Morningstar, Inc. -
Early signs indicate that a relatively recent addition to Advent Capital's management team is improving the risk profile of at least one CEF.
Experienced CEF investors see this scenario repeatedly: A fund is punished with a wide discount for its past mistakes, even while there is an improvement afoot. By the time the improvements are concretely confirmed, the wide discount is a distant memory. Such a scenario seems to be playing out with Advent Claymore Enhanced Growth & Income (LCM
) and at two other Advent-managed closed-end funds.
Where Is The Value in Today's Equity Markets?
Jun. 17, 2013 - Morningstar, Inc. -
In the latest instalment of the Best Advice: Closed-end Funds Forum series, several investment trust specialists evaluated the current market situation, the sustainability of trends seen in the first half of the year, and opportunities and risks that lie ahead in the second half of 2013.
The first five months of this year saw a rise in equity markets in spite of a lack of any real improvement in the wider economic environment. Gains have been focused in certain sectors and regions but, on average, the global equity market returned some 15% to end of May.
Risk and Return for Emerging-Markets Income
May. 24, 2013 - Morningstar, Inc. - Though closed-end funds, or CEFs, are known for being excellent income-generating vehicles, many income investors are confused by the distribution payments and subsequently avoid CEFs altogether. This is not entirely unwarranted, as CEF distributions can be quite complex. After accounting for discounts, leverage, return of capital, and return of UNII, a 6% distribution rate might not be all that it appears. Nevertheless, it is worth taking the time to understand two of the dimensions in which investors should view distribution rates: how much risk the fund takes to maintain its distribution and whether the fund is actually earning enough income to meet distribution payments.
But still, even after taking into account these two factors, it is difficult to make any kind of meaningful assessment in a vacuum. With this in mind, let's take a closer look at the distribution profile of the emerging-markets bond CEF category, which includes 11 funds in total.
Fund Face-Off: First Trust Long-Short High-Yield Funds
May. 21, 2013 - Morningstar, Inc. - With many income-investors petrified of rising interest rates, some are turning to alternative fixed-income strategies. As my colleague Cara Esser previously noted, senior loan funds offer some potential advantages, as the floating-rate coupon payments lower these funds' durations. But with many of the closed-end funds, or CEFs, in this sector trading at hefty premiums, it might be worth exploring other options.
This week, we take a look at two funds designed to accomplish similar goals: First Trust High Income Long/Short(FSD) (a CEF) and First Trust High Yield Long/Short (HYLS)(an exchange-traded fund). At first glance, the funds appear to be identical, despite being packaged in different wrappers. However, investors interested in the strategy should note that there are some notable differences between the two funds.
Consider Adding These Positively Rated, Undervalued Funds to Your Portfolio
May. 17, 2013 - Morningstar, Inc. - In the context of fund investing, conversations of growth versus value often refer to the underlying strategy implemented by fund managers. While these are important distinctions for all fund investors to understand, closed-end fund investors also need to consider the valuation of the fund itself before trading shares.
A completely unscientific poll of our active discussion board members shows that many are value-oriented investors, making buy and sell decisions based on current and relative valuations. Of course, the fundamentals of the underlying fund matter, and long-term investors should look for bargains on funds they believe are worthy candidates that fit in their well-diversified portfolios. There are some CEF investors, however, that play a trading game, looking solely for dislocations in valuation for short-term trading profits.
10 Richly Valued Funds to Avoid Right Now
May. 10, 2013 - Morningstar, Inc. - With the S&P 500 Index reaching new highs over the past month, many investors previously on the sidelines have begun dipping their toes back into the investment waters, however choppy they may be. Equities have been a particular favorite as credit spreads remain tight, limiting additional price appreciation for many bonds. As such, numerous fixed-income fund managers expect to simply clip coupons this year, a marked difference from the rapid price appreciation we've seen in recent years.
Now that equity markets are roaring back, timid investors are more likely to take the plunge. It's often said that individual investors have woeful market-timing skills, jumping in when markets are rapidly advancing (often entering when it's ripe for a reversal) and bailing only after they've ridden the market to the bottom--only to watch it bounce back as they wait on the sidelines.
Thoughts on Income From the Capital Link Forum
Apr. 26, 2013 - Morningstar, Inc. - Morningstar's Mike Taggart weighs in on the annual conference's general theme and how it relates to the CEF industry.
This week, we attended the annual Capital Link Forum in New York. For the third year in a row, I moderated the CEF Industry Roundtable, but this time, we shook it up a bit. In prior years, the panel's focus had been on the current state of closed-end funds. This year, the panelists and I decided to focus instead on income and education.
It's Time for a Reality Check on Closed-End Funds
Apr. 25, 2013 - Morningstar, Inc. - CEFs have a role in risk-tolerant portfolios.
In a recent article, I pointed out that adding closed-end funds, or CEFs, to a portfolio has several benefits for those seeking increased income. Judging from the comments to that article, several Morningstar.com members have already figured this out. For those of us who are heavily focused on CEFs, this notion is common sense. However, most investors are not focused on CEFs, so further explanation and a real-life example may be helpful in gaining a better understanding of those potential benefits.