In all, it was a good year for equity-focused CEFs.
As we turn the page on a new calendar year, resolutions and fresh starts are on everyone's minds. But it's also a great time to look back at the year that was. Last week, analyst Steve Pikelny provided a detailed look at the year in municipal closed-end funds, or CEFs. (Spoiler alert: The muni market was volatile and ended the year on a much lower note than it started.) This week, we tackle the equity universe, which we've broadened to include not just equities, but allocation funds, convertibles, alternatives, and commodities. Next week, we will delve into taxable fixed-income funds.
Overall, it was a strong year for equities--SPDR S&P 500 SPY gained 32% and iShares MSCI ACWI ACWI was up nearly 23% during the year. These gains are especially impressive compared with the 2% loss for SPDR Barclays Aggregate Bond LAG. Pure equity CEFs did quite well this year as well, though only 24 outpaced SPDR S&P 500 on a net asset value total return basis and just 17 outperformed it on a share price basis.
While CEFs are often known for leveraging up portfolios in an effort to enhance gains, many equity-focused CEFs do not use leverage. Of those that do, leverage ratios are quite small, particularly compared with many fixed-income funds. The table below shows some leverage statistics for broad investment styles.
During 2013, the average equity-focused CEF posted a NAV gain of 17% (this includes distributions) and share price gain of 18%, ending the year at an average discount of 8%. The average commodities- and energy-focused CEF gained 13% on NAV and 7% on share price, but the average is pulled up significantly by the better-performing master limited partnership funds within that subset. Commodity and metals funds, on average, lost 13% on NAV and nearly 18% on price while the typical MLP fund gained 28% on NAV and 21% on share price.
The table below breaks down the universe into broad categories for a more in-depth comparison of performance, discounts, leverage, and distribution rates and is ranked by best-performing category. Not surprisingly, only two of the broad categories (commodities and metals and emerging markets) posted NAV losses during the year. As the U.S. economy and stock market improved along with much of the developing world, gold prices plummeted. SPDR Gold Shares GLD, for example, lost 28% last year after eight straight years of gains (the exchange-traded fund's inception was November 2004). Emerging markets (both bonds and equities) took a hit during the summer's taper tantrum as investors pulled out of riskier asset classes, though the equity-focused CEFs rebounded in the back half of the year. No doubt, these funds' collectively small leverage ratios (the average ratio is essentially zero) helped keep volatility in check.
Each category ended the year with a typical fund selling at a discount, but this is not out of the ordinary for equity CEFs. Aside from MLP funds over the past few years, it's rare that these funds ever sell at premiums. About half of the categories experienced share price growth that was faster than NAV growth, though the differentials were generally small. Of those categories whose average share price didn't keep pace with underlying NAV performance, MLPs stood out. Although the category's average 21% share price return was among the best in the broader group, underlying NAVs appreciated much faster. Of course, this discrepancy created opportunities for investors to purchase shares at wider discounts or narrower premiums than we've seen in some time.
Individual fund performance was more varied, especially within the top performers. Table 3 below shows the 10 best- and worst-performing CEFs over the past year. The top performers included representation from various categories, including health care, allocation, regional funds, MLPs, and domestic equities. Because we included allocation funds in this comparison, it's notable that the best performer, NexPoint Credit Strategies NHF, uses a tactical-allocation strategy and held a decent amount of bonds, loans, and other nonequity securities throughout the year.