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2011 Closed-End Funds Year in Review

Despite the market's wild ride, most CEFs closed the year with positive share price and NAV returns. 

Cara Esser, 12/30/2011

Despite the roller-coaster ride that investors were taken on this year, closed-end funds, or CEFs, generally came out ahead in 2011. During the year, numerous funds were launched, closed, open-ended, and merged, including the merging of numerous state and national municipal funds. Overall, we saw an increase in the number of CEFs in existence: At the close of 2010, there were 625 funds, and, at 2011's year-end, there were 631 funds.

Of the 614 CEFs in existence at the close of the market on Dec. 28 with a full year's track record, 464 posted positive net asset value and 425 posted positive share-price total returns for the year. At the 2011 midpoint, losses were relatively mild-- only two funds posted double-digit NAV losses and four posted double-digit share-price losses during the first half of the year. The second half of the year was rockier, with 59 funds posting double-digit NAV losses and 86 posting double-digit share-price losses during the year.

The first table below shows the best- and worst-performing CEFs based on a NAV, total return basis (this includes distributions). Looking at NAV allows you to tell how the portfolio itself is performing, instead of how the market expects the portfolio will be performing. The most dramatic shift was seen in the top-performing funds as, during the first half of 2011, three of the top-performing funds were health/biotech funds (these funds were generally flat for the remainder of 2011). For the worst-performing funds, three individual funds appearing on the list changed, but the category and investment style of the funds remained similar. At the midpoint, three of the funds on the list invested in Asian equities and one invested in emerging-markets equities.

For the full year, the top NAV performers were all municipal funds, which saw a resurgence in popularity after a quick and deep decline at the end of 2010. Topping the best-performing funds based on NAV are three of the four Build America Bond funds. The top performer, BlackRock Build America Bond BBN, which gained nearly 34% this year, is the largest Build America Bond fund in existence with $1.2 billion in net assets. This fund also landed on the top-performing funds sorted by share-price appreciation over the year (up 33%). During 2010, after the launch of the Build America Bond program, four CEFs were launched that focused on investing solely in these taxable municipal bonds. The program was discontinued at the end of last year, but the funds remain popular among investors. Each of the four Build America Bond funds saw a narrowing of discounts over the past year and each posted double-digit share-price and NAV returns during 2011.

A broad theme of the funds appearing on the worst-performing list is exposure to emerging markets. This should not be surprising as these markets are volatile and have suffered in the current "risk off" environment. Short-term volatility ought to be expected from these funds, but, despite some large losses this year, each of the funds has posted positive three-year returns on an annualized basis. The worst-performing fund for the year, MS India Investment IIF, was also the worst-performing fund (based on NAV performance) at 2011's midpoint. The fund lost nearly 40% this year. Also making a repeat appearance on this list is the third-worst-performing fund this year, India Fund IFN. The fund is down nearly 36% on NAV this year. Both IIF and IFN, however, have been victims of poor performance in the Indian markets this year. The BSE 100 India Index, for example, is down more than 25% this year. And IFN recently changed managers and is now sponsored by Aberdeen. Such changes often have short-term effects on performance.

It's not surprising to see RMR Asia Pacific Real Estate RAP on this list either. The fund has been negatively affected by the speculative real estate bubbles in Asia. RAP is also in the midst of a merger with RMR Real Estate Income RIF. Shareholders of RIF will receive shares of RAP when the merger is complete, which is currently expected to be Jan. 20, 2012.

Net Asset Value Total Return

Cara Esser is a closed-end fund analyst at Morningstar.

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