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Midyear Review for Fixed-Income CEFs

We take a look at 2012's CEF performance, distributions changes, and IPOs.

Steven Pikelny, 07/13/2012

We've reached the midpoint of 2012, and, overall, the closed-end fund, or CEF, universe has performed well. In the past, we've highlighted the entire universe of funds in our midyear review. Based on user feedback, this year, we've decided to discuss fixed-income and equity funds separately. Although equity funds steal the spotlight in terms of best and worst performers for the year to date, fixed-income funds comprise the lion's share of the CEF universe. This week, we focus on fixed-income CEFs, and next week, we will dive into equity, hybrid, and real estate CEFs.

For the first half of 2012, fixed-income CEFs logged good aggregate performance, but not for the reasons one would expect. Typically billed as income generators, many of these CEFs cut distribution payments and experienced large gains from capital appreciation. In all, only one fixed-income CEF posted negative net asset value gains for the year to date (Federated Enhanced Treasury Income FTT), and its 0.4% loss is small. Also impressive, 394 of the 403 fixed-income CEFs posted positive share price gains in the first half of the year. Even the IPO market, which typically presents a tremendous problem for new CEFs, has, so far, fared pretty well.

Let's take a look at overall performance.

Year-to-Date Top-Performing Fixed-Income CEFs
The table below shows the top and bottom five performers from a NAV perspective between Jan. 2, 2012, and June 29, 2012.

A glance at the top-performing CEFs over the past six months shows that PIMCO led the pack from a NAV perspective. In fact, the fund family runs 12 of the top 20 performing funds, as well as the top four listed here. But investors should note that many PIMCO funds utilize higher-than-average amounts of leverage, which will magnify returns in good times as well as bad. While the average fixed-income CEF had a leverage ratio (total assets/net assets) of 1.42 at the midyear, the ratio for PIMCO's CEFs ranged from 1.51 to 2.00. PIMCO High Income PHK is an exception, with a leverage ratio of 1.38. Interestingly, the only non-PIMCO fund in the top five, Western Asset Mortgage Defined Opportunity DMO, does not use any leverage, making the mortgage-bond fund's performance all the more impressive.

While cheap leverage helped some of the highly leveraged funds, the worst performers typically utilized lower-than-average or no leverage. Babson Capital Participation MPV, NexPoint Credit Strategies HCF, and Babson Capital Corporate MCI had leverage ratios of 1.12, 1.38, and 1.12 at the midpoint, while Federated Enhanced Treasury FTT and Templeton Emerging Markets Income TEI used no leverage.

Steven Pikelny is a closed-end fund analyst at Morningstar.

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