Wed, 13 Jun 2012
Morningstar's Cara Esser examines recent trends in the CEF IPO market, fund-merger activity, and some names for your radar.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Cara Esser. She is a closed-end fund analyst here at Morningstar, and we are going to get her take on this state of the closed-end fund IPO market.
Cara, thanks for joining me.
Cara Esser: Thanks for having me.
Glaser: Let's talk a little bit about the funds that have come to market in 2012 so far. How many IPOs have there been, and what kind of sectors have they been investing in?
Esser: So far this year, we've had eight IPOs, which is a little bit behind last year at this time when we had about 12 IPOs. So, normally you will see a trend in the types of IPOs that are launched. You see a lot of the same kinds of funds launched at the same time. This year, we see less of a trend, but we do have a lot of debt-oriented funds coming out. Five of the eight have been fixed-income oriented. Two are real estate, and then one is a master limited partnership.
Glaser: So of the funds that have launched, are there any that kind of stand out either because of investor interest or because you think that they are interesting funds?
Esser: There are two that really stand out. The first is DoubleLine Opportunistic Credit, ticker DBL. This one came out in the beginning of the year, and this was a highly anticipated IPO. This is from the DoubleLine team that also runs multiple open-end mutual funds using some fixed income strategies as well. And this is multistrategy fixed income, so it's kind of a go-anywhere fixed-income fund with very little limits on what they can invest in.
And it launched at an 8% premium, which is not unusual for closed-end funds, but what is unusual is that within the six months that it's been out, the premium has not dissipated, but it has increased. It's now at about a 10% premium, but the performance has been extremely good. The net asset value since launch is up about 10%, and the share price is up a whopping 25% in less than six months.
And the other interesting IPO that came out just a few weeks ago was from PIMCO. It's called PIMCO Dynamic Income, ticker PDI, and this one is also a go-anywhere fixed-income fund. It has very few limitations on maturity, credit quality, and even geographic location of where the assets will be invested. This one launched at a 5% premium, which, again, is not surprising for an IPO, and during the last few weeks, the premium has again widened to about 7%.
So it'll be interesting to watch this fund to see if it follows the same sort of premium dissipation pattern that we typically see in IPOs because it's a PIMCO fund, and PIMCO funds generally sell at very premiums, some in the range of 50%-60%. So, this would definitely be something that we are watching to see what the pattern of the premium is.
Glaser: And you mentioned that an MLP fund launched. It's next in line of a lot of new MLP funds. Could you talk a little bit about what's motivating those launches? Why are so many investors interested in those pipelines right now?
Esser: People really like MLPs because of income. Income is a big deal in closed-end funds, and income is a big deal in MLPs. That's basically what they do. They collect income and distribute it. The average MLP fund right now is trading at about an 8% premium, which is pretty high, and the average distribution rate is about 7% in net asset value, which is also pretty high.
So last year and the year before, 2011 and 2010, we saw a lot of IPOs launch. There were seven in total over the two-year period, and this year we've seen only one. Perhaps we are kind of at the end of how many MLPs the closed-end fund space can handle, but we might see a lot more. It's always hard to tell.
Glaser: Now, if we look at some fund mergers, there have been a number over the course of the year. Can you talk about those and what's motivating those mergers?
Esser: There've been a lot of fund mergers especially in the first part of this year. This has been happening for about a year, a year and a half, but it has really picked up at the start of this year in 2012. Just by way of starting at the beginning, because closed-end funds are closed, if a fund family wants to have more assets in a specific investment strategy or fund, they can issue new shares via there's a right offering or some other similar way is that, but a lot of times it's not advantageous for the shareholders or for the fund family to do a secondary rights offering. So instead, they just launch a new fund, and the new fund typically has the same management, the same strategy, and oftentimes the very same holdings.
You'll see [this activity with] a lot of municipal funds for example, three municipal funds that invest in the same state and in the same holdings with the same management team. A lot of the families, specifically Nuveen and BlackRock have begun combining these funds, because some of them are very, very small, very thinly traded. It's difficult for investors to get in and out of them.
The thought behind it is to combine these funds and generate larger assets under management hopefully to lower some of the bid-ask spreads, make trading a little bit easier, and also use some economies of scale to lower the total expense ratios that the fund will charge.
Glaser: So generally, if you are in a fund that's merging or having a fund merged into it, you shouldn't be concerned. It's probably a good sign for you?
Esser: Yes. You likely shouldn't be concerned. Most of them are just similar funds, merging into other similar funds, and you don't typically have to do anything. Your shares will be turned over to the new fund at whatever rate that the fund family has said that you will be converting your shares.
But you do need to be careful because there are some funds that merge that have slightly different strategies. So you want to be sure that you know exactly, if your fund is merging, what the new strategy is going to be. If it's different from what you think it is, then maybe you should consider selling.
Glaser: Cara, thanks for joining me today.
Esser: Thanks for having me.
Glaser: For Morningstar, I'm Jeremy Glaser.