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Portfolio > Mutual Funds > Equity Funds

Closed-End Funds’ Month to Shine

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July began with a good jobs report, ­followed by more worries over Federal Reserve “tapering” and a jump in oil prices. Still, the equity closed-end fund macro-group tracked by Lipper posted plus-side returns on both a net-asset-value (NAV) and a market basis during the month, with returns of 2.91% and 2.04%, respectively. Fixed-income closed-end funds, though, were hurt by fears over rising interest rates andDetroit’s bankruptcy filing; they posted their third-consecutive month of negative returns, down 0.74% in July on a NAV basis and 3.99% on a market basis, according to the Denver-based research group.

In July, 15% of all closed-end funds traded at a premium, while 17% of equity funds and 13% of fixed-income funds did so relative to their NAVs. In addition, none of Lipper’s CEF macro-groups experienced a narrowing of their discounts.

All of Lipper’s equity and taxable fixed-income CEF groups had positive returns in July, though the municipal bond fund groups did not. National municipal bond funds declined 2.48%, and single-state municipal debt funds fell 2.52%.

For July, 61% of all closed-end funds posted positive NAV-basis returns; a strong majority, 89%, of equity CEFs did so, but only a minority, 43%, of fixed-income CEFs were able to stay out of the red.

In terms of global investing, world-equity closed-end funds improved 2.48% for the first month in three, reflecting good news about purchasing in Europeand other factors. This put the group in the middle of the top-performing equity macro-group—between domestic equity CEFs, which rose 3.36% and the mixed-asset CEFs macro-group, which moved up 2.09% for the month.

With a strong mix of concerns affecting fixed-income investments, the municipal bond funds macro-group saw its performance drop 2.50%; it underperformed taxable domestic bond CEFs, which rose 1.46% on a NAV basis, and world bond CEFs, which were up 0.74%, according to Lipper.

“Only 25 equity CEFs posted returns in the red for July, with 16 of the 25 being housed in Lipper’s world-equity funds macro-group,” said Tom Roseen, head of research services for the Denver-based research group.

Categories with good performance included convertible securities funds, 4.14%; core funds, 4.14; and value funds, 3.91%. Some sectors with weaker performance in July were emerging-markets funds, 0.71%; real-estate funds, 0.93%; and income and preferred stock funds, 1.26%.

In terms of top-performing individual funds, H&Q Healthcare Investors (HQH), gained 12.52% on a NAV basis in July and traded at a 0.44% discount at month-end. This was followed by H&Q Life Sciences Investors (HQL), which had a 12.05% return and traded at a 1.62% discount on July 31.

Also notable was ASA Gold & Precious Metals Limited (ASA), a laggard in June that moved up 10.18% on a NAV basis in July and traded at a 5.21% discount at month-end. Central Gold Trust (GTU) produced a 10.07% return and traded at a 3.01% discount at the end of July, while BlackRock Health Sciences Trust (BME) rose 8.26% and traded at a 1.42% discount on July 31.

“The 20 top-performing equity funds posted returns in excess of 6.03%, while the 20 lagging funds were at or below minus 0.27%,” Roseen explained.

On the down side, for the third consecutive month, Lipper’s municipal debt CEF classifications posted negative NAV-based returns across the board. Michigan municipal debt funds dropped 3.42% and leveraged general & insured municipal debt funds declined 2.84%.On the other hand, unleveraged general & insured municipal debt funds weakened just 1.41%, and intermediate municipal debt funds moved down 0.90%, making them the top-performing sector in the group.

As world markets made some improvement in July, the two sectors in Lipper’s world-income funds macro-group (which moved up 0.73%) produced positive returns: emerging-markets debt funds, 0.71%, and global-income funds, 0.74%.

Investors, of course, continue to search out higher yields, and improved returns were experienced in July by leveraged high-yield funds, 2.44%; high-yield funds, 2.04%; and loan-participation funds, 1.60%. U.S. mortgage funds (0.09%) and general bond funds lagged the group’s average performance.

Domestic taxable fixed-income CEFs rose 1.46% on average in July, when leveraged corporate BBB-rated debt funds ticked up 0.75%, and flexible fixed-income funds improved 1.36%.

“At the head of the fixed-income CEFs class were three funds housed in Lipper’s high-yield (leveraged) funds classification,” according to Roseen. These were Avenue Income Credit Strategies Fund (ACP), up 3.47% and trading at a 2.82% discount on July 31; Franklin Universal Trust (FT), jumping 3.37% and trading at a 10.47% discount at month end; and Neuberger Berman High Yield Strategies Fund (NHS), which posted a 3.30% return and traded at an 8.16% discount on July 31.

“The 20 top-performing fixed-income CEFs posted returns at or above 2.55%, while the 20 lagging funds were at or below negative 3.38%,” the research expert said.

“For the month 16% of all funds’ discounts or premiums improved, while 83% worsened. In particular, 30% of equity funds and only 7% of fixed income funds saw their individual discounts narrow, premiums widen or premiums replace discounts,” noted Roseen. Plus, the number of funds that traded at premiums on July 31, 94, was 40 more than on June 28.

Other CEF News

The initial public offering for Principal Real Estate Income Fund (PGZ) raised about $126 million, according to Lipper, while a tender offer for up to 7.5% of the outstanding common shares of Liberty All-Star Equity Fund (USA) at 96% of NAV was expected to start at the end of August; if more than 7.5% of its outstanding shares are tendered, the fund will purchase shares on a pro-rata basis, reports Jeff Tjornejoj, head of U.S.-Canadian research for Lipper.

The recent three-for-one transferable rights offering for the Gabelli Healthcare & Wellness Trust (GRX) was oversubscribed, according to the research expert. The fund issued 3.7 million common shares and raised more than $33 million. The semiannual repurchase offer for up to 5% of the common shares of the Asia Tigers Fund (GRR) also was oversubscribed.

The Thai Fund (TTF) recently ended its contractual investment plan in Thailand through which the fund previously held its Thai assets, which are now invested directly in the securities of Thai companies.


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