Despite the market's wild ride, most CEFs closed the year with positive share price and NAV returns.
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
Share Price Total Return
While NAV measures the portfolio's performance, investors buy and sell shares at the market price. Investor performance is measured by share-price returns, which may or may not be similar to a fund's NAV performance. The table below lists the best- and worst-performing funds for the year to date based on share price. Only one fund, BBN, appears on the top-performing lists for both NAV and share price, but four funds make appearances on both worst-performing lists based on NAV and share price.
The top-performing fund based on share price, Invesco Insured Municipal Bond IMC, posted a share-price return that was nearly double its NAV gain for the year. Because of this, the fund is now selling at a 13% premium, compared with its 2010 year-end discount of 3.5%. Investors buying in at the start of 2011 have been greatly rewarded, but the fund's underlying portfolio has not kept pace.
What is most interesting, however, are the funds not appearing on this list. Cornerstone Total Return CRF and Cornerstone Strategic Value CLM landed the top two spots at the midyear review with share-price gains of 27% each. At the time, the funds were selling at very high premiums: 51% for CRF and 45% for CLM. And, as recently as early October, CRF was selling at a whopping 60% premium while CLM sold at a 54% premium. We've long been critical of Cornerstone's inflated distribution rates and sky-high premiums, and, over the last few months of this year, these funds' premiums quickly disappeared. While the funds' rights offerings have aided in the premium deflation, we'd like to believe that our critical articles of both funds (here and here) also had an effect. Over the past three months, CRF has lost 24% on share price while its NAV actually increased 9.5%, dropping the current premium to 8%. CLM shares a similar story: Its share price dropped 22% over the past three months and its NAV is up nearly 7%, dropping the historically double-digit premium to just 7.5%. This illustrates the trouble of investing in high-premium funds.
Of the worst-performing funds on share price, all were poor performers based on NAV as well. And share prices dropped more than the NAVs fell, creating wider-than-historical discounts. Despite these share-price drops, we are not concerned. Investors are reacting to the underlying portfolio's movements. In fact, the widening discounts have created potential buying opportunities for interested investors.
Steady and high distribution rates often attract investors to CEFs, and, while there was a slowdown in the number of distribution increases this year compared with 2010, the year still saw more increases than decreases. Of the funds making a distribution this year, the average distribution rate based on NAV sits at nearly 7% and the median is slightly lower at 6.6%. Based on share price, the average distribution rate is more than 7% and the median is 6.7%. (This data includes both constructive and destructive return of capital.) Distribution increases did outpace decreases during the year but not by much. During the first half of 2011, there were 209 increases and 162 decreases, which points to more reductions than increases during the second half 2011. With growing uncertainty in the market, boards of directors have been more reluctant to raise distributions and more willing to lower them. Looking at the actual dollar changes, meaning what investors earn per share, the increases and decreases are relatively small. For the year, the average and median increases were $0.008 and $0.005 per share while the average and median reductions were $0.0065 and $0.004 per share.
The news is not all bad. Of the funds that increased distributions this year, the median increase was smaller than last year (5.72% versus 7.50%), but of the funds that decreased distributions, the median decrease was smaller (6.45% versus 9.95%). In addition, increases did outpace reductions both by absolute number and by percentage change. The overall trend continues to be increasing distributions.
Average Unweighted Discounts/Premiums
The trend of discounts and premiums during 2011 is an interesting story. Strong returns and high distribution rates have generated interest among investors, narrowing the average discount: At the close of this year, the average discount for all funds in the CEF universe was nearly 2.5%. This is slightly wider than the 2% average discount at our midyear review but narrower than the close of 2010, when the average discount was slightly more than 4%.
The national municipal funds show a similar, but more pronounced, story. At the close of last year, these funds were hammered after doubts were cast on the ability of many states, cities, and municipalities to pay their bills. In response, the average discount widened to 2.6%. But, after the market calmed, investors jumped back into these generally high-yielding funds with abandon, pushing the average premium to nearly 2% at the close of this year.
Initial Public Offerings
During 2011, 18 new funds were launched. This is just shy of 2010's 21 IPOs. The first half of 2011 was a more favorable environment for the IPOs: 12 of the 18 funds launched before June 30, 2011. Afterward, the market's wild swings created an environment that made it much more difficult to launch new funds. To wit, only six funds were launched in the second half of 2011, compared with 12 in the second half of 2010. Compared with last year, the average offering this year was smaller ($314 million versus $420 million) and total net proceeds dropped from $8.42 billion last year to $5.66 billion this year. The most popular type of fund launched this year was the senior loan fund--five launched between January and May 2011. MLP, energy, commodities, and utilities-focused funds accounted for seven IPOs this year. Performance of the 2011 IPO vintage has been nothing to write home about, and some would say it has been scandalous, at least in the short term. Many funds saw their share prices collapse coming out of the gate. Let's hope this is a trend that does not continue into 2012.
2011 was a rocky year for investors in all investment vehicles, and CEFs were no exception. Overall, though, CEFs ended the year on a positive note with most funds posting positive NAV and share-price returns. Distribution increases still outnumbered distribution decreases, and the average CEF discount was narrower than it was at the close of last year. Let's hope these positive trends can continue into 2012.
Because of the holiday, there is no data commentary on individual closed-end funds this week.
* All data in the accompanying tables is as of the market close Dec. 28, 2011, unless otherwise noted. In some limited cases, funds do not disclose their daily NAVs, and in such cases the estimated NAV (based on the performance of their most recently published holdings) is used.