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Year in Review: Equity-Focused CEFs

Most equity-focused CEFs posted truly spectacular total returns in 2012, but there were a few exceptions.

Mike Taggart, CFA, 01/04/2013

Every year around the holiday season, I like to take some time to look back over the preceding 12 months to take stock of events. It's also a good opportunity to go over the portfolio and make tweaks where needed. With all the doom and gloom that surrounded the Fiscal Cliff talks heading into the final months of 2012, it was easy to lose sight of the fact that it was a rather good year in the markets, despite the fourth quarter. In fact, for the year, every closed-end fund group (with one exception) posted a double-digit total return on both a net asset value and share price basis. Commodities-focused CEFs proved the exception, posting an average 5.26% NAV total return and an average 2.55% share price total return.

There is much to be written about the past 12 months, and the specifics of various asset classes vary widely. In fact, one article would be too long to incorporate even the highlights of 2012 for CEFs. Therefore, this year we've split the annual review into parts. This week, I'll look at equity-focused CEFs. Next week, Morningstar Analyst Cara Esser will go over the taxable fixed-income CEFs. On Jan. 18, Morningstar Analyst Steven Pikelny will review the tax-exempt municipal CEFs. In a Tuesday article on Jan. 15, I'll take up the allocation and commodity CEFs.

Total Return Performance
Within equity-focused CEFs, we look at those with broad United States equity exposure, those with a sector focus (be it U.S. or global), and those with a global and foreign emphasis.

Broad U.S. equity CEFs performed well for the year, though as the table below shows, investors on average sold the funds in the fourth quarter. The average U.S. equity CEF posted a 12.25% NAV total return and a 14.79% share price total return for the year. Such performance was easy to overlook given the sketchy performance at year's end. The best average performance on a NAV basis (15.65%) came from small-cap CEFs. There are two funds in that segment: Royce Value Trust RVT, which carries a Gold Morningstar Analyst Rating, had a total return of 14.7%, while Royce Micro Cap Trust RMT delivered a total return of 16.6%. On a share price total return basis, it was the large-blend average of 16.4% that came out on top. There are 22 funds in that segment, and Gabelli MultiMedia GGT led the way with a 21.7% NAV total return and a 40.6% share price total return.



Within the sector-equity funds, the villains of the 2008 financial crisis had another banner year while the hot sector of the past couple of years fell behind in the final quarter. Real estate-focused CEFs posted an average 24.6% NAV total return and 32.0% share price total return during the year. Alpine Global Premier Property AWP, which has a Morningstar Analyst Rating of Neutral, led the sector on both measures, delivering a 36.5% NAV total return and a 50.4% share price total return. CEFs focused on financial equities also performed strongly, with an average 23.3% NAV total return and 36.7% share price total return. All three funds in this sector (JH Financial Opportunities BTO, First Trust Specialty Finance FGB, and DH Financial Trends DHFT) performed exceedingly well. The strong performances of the real estate and financial CEFs in 2012 boosted their long-term total returns, all but erasing the average annualized losses over the last five years. In fact, of the two sectors, only three funds still have negative annualized five-year share price total returns: Neuberger Berman Real Estate Securities NRO is still down 4.6%, DH Financial Trends has lost 1.5% annualized over the past half decade, and Alpine Global Premier Property is still off 0.1% despite its phenomenal 2012.

It would be improper to overlook the average NAV total return of 23.5% and share price total return of 31.3% that the health sector CEFs posted. All four funds did well in the year.

Relatively middling performance came from the MLP-focused and natural resource-focused CEFs. Both segments have been relatively hot over the past several years. Perhaps the underlying markets are becoming overly saturated with capital. MLP-focused CEFs in particular have seen new share issuances in the form of both initial public offerings and secondary offerings. However, the performance on an NAV basis in 2012 was lackluster at best and likely disappointing to investors who have bought into the latest offerings. While the underlying story of shale natural gas development in the U.S. remains compelling, it remains to be seen if the economics pan out as they historically have.

Mike Taggart, CFA, is the director of closed-end fund research at Morningstar.
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