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Midyear 2012 Review: Equity Closed-End Funds

Equity CEFs were among the top-performing funds in the CEF universe in the first half of 2012.

Cara Esser, 07/20/2012

Last week, Steve Pikelny provided an in-depth midyear review for fixed-income closed-end funds, or CEFs. This week, the midyear review focuses on everything else: equity, MLP, commodities, real estate, and hybrid CEFs. (Going forward, we will simply refer to the group as equity CEFs.) Very broadly speaking, the fixed-income space did better than equities when looking at total returns. But, we saw more fragmentation in the equity space: In the entire universe of CEFs, the best- and worst-performing fund (based on net asset value) fall into the equity category. Emerging-markets equities and sector-specific investment styles tended to outperform domestic equities and energy- and resources-focused funds.

At the midpoint, there were just over 200 funds falling into this catch-all category, which accounts for about a third of the entire CEF universe. Of the funds in existence the entire first six months of 2012, 32 had negative net asset value returns and 18 saw their share prices decline. For comparison, only one (of more than 400) fixed-income CEFs had a negative NAV return and less than 10 had share price declines. At the close of the midyear, the average discount for equity funds was 6%, narrower than the 9% average discount at the start of 2012, whereas the average muni CEF, for example, at the midpoint was selling at a slight premium.

The initial public offering market also reflected a preference for fixed-income (more accurately, for high-income generating) over equity strategies. Of the 10 CEFs launched in the first half of 2012, six implement fixed-income strategies. Of the remaining four, three invest in master limited partnerships, or MLPs, (Cushing Royalty & Income SRF, Salient Midstream & MLP SMM, and ClearBridge Energy MLP Total Return CTR) and one invests globally in real assets (Nuveen Real Asset Income and Growth JRI). We continue to see interest in the IPOs and secondary offerings of MLP funds. The universe has doubled in just two years from nine to 19 in existence today.

For comparison, during the first half of 2011, there were 12 IPOs (seven equity-based strategies and five senior-loan funds) with total proceeds of $3.77 billion. The average IPO raised $314 million. This year, buoyed by PIMCO's billion dollar IPO of PIMCO Dynamic Income PDI, the total assets raised is nearly $4 billion and the average size is close to $400 million.

Best- and Worst-Performing Funds for the Year to Date
Table 1 below shows the best- and worst-performing funds in the catch-all equity category for the first half of 2012, based on NAV performance. As noted earlier, these are also the best- and worst-performing funds in the entire CEF universe for the year to date. Not surprisingly, the best-performing list includes three emerging-markets funds and two health-care funds, while the worst-performing list is entirely populated by energy and resources funds.

  - source: Morningstar Analysts

Of the best-performing funds, only one has a negative NAV return over the past year and all are solidly positive over the three-year annualized period. Thai Fund TTF has had a good run over the past few years, bouncing back nicely from its 2008 loss of 52%. Last year the fund posted a small loss of 0.10% and is off to a great start this year. H&Q Life Sciences Investors HQL and H&Q Healthcare Investors HQH appeared on this same list last year as well and have also performed well since the 2008 crash, posting double digit NAV returns in every calendar year since 2009.

Of the worst-performing funds, all have negative returns over the past year, but each shows positive returns over the trailing three years. Unfortunately, it's deja vu all over again for ASA Gold and Precious Metals ASA, which was the worst-performing fund at the 2011 midyear review also. Although it did not make the worst-performers list at the close of calendar 2011, its 2011 NAV loss of just under 20%, still stings. As shown in the table below, ASA is also the worst-performing fund for the year to date based on share price, with a loss of nearly 15%.

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

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