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Portfolio > Mutual Funds > Bond Funds

Nuveen Exec Addresses Closed-End Fund Misconceptions

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Nuveen has continued to see significant growth in its assets under management, driven by the strength of its closed-end funds, according to David Lamb, managing director in Nuveen’s closed-end funds group.

CEFs offer investors some major advantages and make more sense than ever in portfolios today, he said in an interview with ThinkAdvisor, during which he also noted his company is seeing growing interest in environmental, social and governance investing. Misconceptions around CEFs, however, remain among at least some investors, he conceded.

Nuveen had more than $1 trillion in total assets under management as of June 30, up from $973 billion a year earlier, the company said Monday. Of that, closed-end funds comprised about $60.9 billion as of June 28, up from about $55.3 billion, it said.

The firm has been offering CEFs since 1987, Lamb pointed out, noting that was four years after he joined Nuveen. The company started fielding them because they presented an “opportunity to package” municipal bond funds “in a different structure,” he recalled, adding the ability to “leverage” CEFs is a “powerful way to add incremental income” to shareholders. “If you’re a long-term investor looking for regular cash flow,” many CEFs pay investors on a monthly basis, he noted.

A closed-end fund “also gives you a permanent capital base,” he said, adding they allow investment managers to “take a longer-term view” of an investment. They’re especially attractive now as investors look for “alternative sources of income,” he noted, giving as an example “retirees that are looking for incremental income to meet their needs.”

As “rates grind lower,” meanwhile, “demand for closed-end funds is pretty strong” in 2019 amid the “resurgence” seen in initial public offerings, he said. There’s been a “pretty strong rebound” for CEFs since the market volatility seen in December 2018, when several of Nuveen’s funds were selling at discounts of 15% or so, he noted.

The company last month said it successfully completed an IPO for the Nuveen Municipal Credit Opportunities Fund. The “primary investment objective” of that new CEF is to “provide a high level of current income exempt from regular U.S. federal income tax,” and there’s a “secondary objective” of achieving total return, it said at the time. The fund initially attracted $705 million in its common share offering, and the company’s looking to achieve its objectives by “investing primarily in high yielding, low-to medium quality municipal securities,” it said. If underwriters exercised their option to buy additional shares, the fund could have raised a total of $810 million in all. But Nuveen didn’t provide an update on whether the underwriters exercised that option.

Despite the strong performance that Nuveen has seen with its CEFs, not only are they still often ignored and unloved by investors, they’re often ignored and unloved by advisors also, in part due to their complexity. Advisors also aren’t usually motivated to recommend CEFs because typically commissions or loads cannot be earned except at the time the CEF originates in its initial public offering. As ThinkAdvisor reported last year, two-thirds of investors reported that their financial advisors had never mentioned CEFs to them, and less than 9% owned a CEF, according to a summer 2018 survey of high-net-worth and mass affluent investors conducted by Nuveen and Forbes Insights.

The two big misconceptions about these products continues to be around the term “leverage” and the discounts often seen with them, according to Lamb. While some investors are scared by the term leverage, he said they don’t need to be because “we’re regulated by” the Securities and Exchange Commission and “our leverage ratios are nowhere near other products” on the market.

For example, “we can’t go above 50% on equity leverage,” he pointed out, explaining that what his company is “trying to do is leverage yield curve or credit spreads generally.” Despite the perception of discounts on CEFs being negative, meanwhile, he said these discounts present an “opportunity to enter into funds” at an attractive level. The discounts on CEFs are also done in a completely “transparent” way, he said.

Nuveen is, meanwhile, open to offering artificial intelligence or other technology-based CEFs in the future, following funds that have been introduced by firms including Allianz and BlackRock in recent months. Nuveen hasn’t done anything like that specifically in CEFs yet, but it’s “of course not” ruling it out, according to Lamb. After all, “when there’s successful offerings and there’s capital being accumulated, we always pay attention to what others are doing,” he told ThinkAdvisor.

On the ESG front, Nuveen last month expanded its suite of ESG exchange-traded funds with the addition of the Nuveen ESG High Yield Corporate Bond ETF (NUHY) that’s trading on the NYSE. That new ETF was “designed to offer exposure to high-yield corporate bonds while adhering to predetermined environmental, social and governance” factors, “controversial business involvement (CBI) and low carbon criteria,” it said Sept. 26.

But Nuveen hasn’t offered ESG in CEFs yet, Lamb went on to say. Interest in ESG has significantly increased, however, he said, adding the possibility of offering more ESG funds including CEFs is a “topic of conversation in our product development” plans at the company. ESG is a “big theme” for the company now, he said.

And although most of the firm’s business remains U.S.-based, “another focus is to grow globally,” he said. It’s been an “ongoing” effort at the company to expand more of its business internationally as it sees growing interest from investors in Asia and Europe, he noted.

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