Our increased coverage includes new medalists.
We last checked in on the medal count for closed-end funds in August of 2012. Since that review, we've increased coverage to 126 funds from 106 with more in the pipeline. Of the 604 funds in the CEF universe, ratings on 126 (just shy of 21% of the entire universe) doesn't seem too impressive at first glance. However, many CEFs are small and illiquid and aren't worth a deep-dive Morningstar Analyst Rating. For example, 104 are single-state municipal funds that have limited appeal outside the state of investment. Note that we do cover seven of the largest California municipal funds offered by PIMCO, BlackRock, and Nuveen due to the extensive size of the municipal bond market in that state. On a net asset basis, the rated funds account for 45% of the net assets of the entire CEF universe. This week, we'll take a look at an overall medal count as well as a breakdown of medals by fund firm and Morningstar Category. In Tuesday's article, we'll highlight recent ratings changes and two newly rated funds.
First, a brief overview of Analyst Ratings is in order. The ratings spectrum includes five ratings: Gold, Silver, Bronze, Neutral, and Negative. The three highest ratings (Gold, Silver, and Bronze) are considered the best-of-breed funds--those we believe are poised to outperform their peers and relevant benchmarks over a full market cycle. Neutral-rated funds are not bad funds, but we do not believe they will exhibit peer-beating returns over a full market cycle. Finally, a Negative rating indicates we believe the fund has a serious flaw that we expect will be a cause of underperformance going forward. For a detailed discussion of the Analyst Rating for CEFs, you can find the methodology document here.
Table 1 lists the total number of funds earning each rating as well as the percentage of overall ratings falling into each ratings bucket. Not surprisingly, nearly half of the funds land in Neutral territory, while only a select few make their way to the top.
It's common for investors to ask why we have positive views on more than half of the rated funds (after all, more than half of the funds can't outperform the average). Our coverage is largely determined by fund size or popularity, which means that funds receiving ratings tend to be the biggest, and usually, better-performing, funds. The two Gold-rated funds are AllianceBernstein Income ACG, an unleveraged fixed-income fund with exceptionally low fees and strong long-term returns, and newly rated Source Capital Income SOR, which we will discuss in more detail in Tuesday's article.
Table 2 breaks down the ratings by fund firm. (Note that bond fund giant PIMCO is part of Allianz Group, and we did not separate it from that firm's tally. PIMCO funds have earned four Bronze ratings and six Neutral ratings.) Looking at the largest providers of CEFs (Nuveen Asset Management, BlackRock Advisors, and Eaton Vance Management), BlackRock comes out the strongest from a percentage of ratings perspective. Of the 24 BlackRock funds with Analyst Ratings, 21% are Silver, 46% Bronze, and 33% Neutral. The fund family has no Gold-rated funds, but also no Negative-rated funds.
Nuveen's rated funds are decidedly Neutral, with nearly 70% of their funds falling into this camp. The fund's five Silver-rated funds account for 19% of its ratings, while its three Bronze ratings bring up the rear accounting for just 11.5% of the firm's total ratings. Eaton Vance, on the other hand, has three funds rated Negative (nearly a fourth of its rated funds), four rated Neutral, and six Silver.