Wed, 11 Jul 2012
Although the asset class saw some changes during the first six months of 2012, the numbers were somewhat similar to those at the 2011 midpoint.
Jeremy Glaser: For Morningstar, I am Jeremy Glaser. We recently passed the half-way point in 2012. I am here with Cara Esser, a closed-end fund analyst, to get a state of the union of the closed-end fund universe. Cara, thanks for joining me.
Cara Esser: Thanks for having me.
Glaser: Let's just get a brief overview of what's happening with closed-end funds right now. How many new funds have we've seen launched? What kind of mergers have we seen? What are kind of some basic facts around that?
Esser: At the midpoint of this year, we have about 620 closed-end funds in the universe, and that's about the same as we were last year at the midpoint. This is despite the fact that so far this year we've had 12 closed-end funds launch, and this is mostly because we've also had a lot of mergers, a lot of open ending of funds, and some liquidation. So the base of the closed-end fund universe has remained relatively stable over the last year despite some new funds being launched.
Glaser: How about performance? Is anything interesting there?
Esser: In general, we saw pretty good performance for the first half of this year. It's very similar to last year in that about 90% of all the closed-end funds in the entire universe have had positive net asset value performances for the first part of the year; 95%, a little more, have had positive share price performances for the first half of the year. So it's a pretty good start to the year so far.
Glaser: What are some of the top performers and worst performers?
Esser: I don't think anyone would be surprised that a lot of top-performing funds invest in emerging markets. Three of the five of the top-performing funds focus on emerging markets, and two are health-care closed-end funds. So [one of] the very best-performing closed-end funds for the year to date through the half-way point of the year was Thai Fund, ticker TTF, and that fund had double-digit share price and net asset value returns for the year. It was also a top-performing fund last year at this point, as well.
The worst-performing funds mostly are in the energy and resources sectors. The single worst-performing fund was ASA Gold and Precious Metals, ticker ASA. This was also the worst-performing fund last year at this point, too.
Glaser: If we think about distributions, a lot of people are buying closed-end funds for income. What did distributions look like? Was there anything surprising there?
Esser: We've seen a reversal of a trend that had been going for a couple of years now. After the crash, there were a lot of distribution reductions and very few increases. And then we sort of turned a corner, and funds tended to increase the distribution more often than they decreased the distribution. We saw that last year at this point; we saw it for the whole calendar year of 2011. But this year, for the first part of the year, we've seen over 200 instances of a distribution reduction and only about 125 increases.
So, we're seeing more decreases than increases, and we're seeing the decreases concentrated in fixed income, specifically municipal space, as opposed to the equities where we saw about an equal number of distribution increases and decreases.
But that being said, overall, the average distribution rate for all closed-end funds is 6.5%, which is on par with historical averages and is very high on an absolute and relative basis compared with what else you can get out there in the market today.
Glaser: Certainly, one of the enduring features of closed-end funds are premiums and discounts, that the funds trade either above or below their net asset value. What have we seen? Have we seen more premiums? Have we seen more discounts? What's happened so far this year?
Esser: We're seeing a trend of narrowing discounts, though it's sort of slowing. Last year, at this time, the average closed-end fund was selling at about a 2% discount, and now it's about 75 basis points. So, it's slightly narrower. When you look closely at the equity versus fixed income with the municipal segment, we see that the average equity fund is selling at about a 6% discount, much wider than the municipal space where the average fund is actually selling at a 2% premium.
So, with this trend, obviously, we see people more interested in munis than they had been in the past. The munis are clearly propping up the overall discount narrowing as the equity funds have been widening in their discounts.
Glaser: You mentioned munis; it's obviously been an area of intense focus. What's going on in muni space. Was anything interesting there?
Esser: As I mentioned earlier, a lot of distribution cuts are going on in the muni space, but this is a natural part of the municipal fund market. Interest rates are low. They have been low for a long time. A lot of these funds have securities that are coming due. They are maturing, so they have to sell them. They have to buy something else. Well, they're not going to get as much as they were getting on something they bought five years ago. So, this is not unexpected, and typically when the distributions are being cut most investors are OK with that. It's to be expected.
Municipal funds make up about 40% of the entire closed-end fund universe, which is why we like to pay attention to them, and in addition to the distribution cuts, we've also seen the premiums increasing in the muni space. So, as I said earlier, the average municipal closed-end fund is selling at a 2% premium. At the end of 2011, the average premium was just over 1%. So despite the distribution cuts, despite any worries that people have about munis, people are still interested and people are still buying. In fact, every single municipal closed-end fund had positive net asset value performance in the first part of the year, and only a handful had negative share price performance in the first part of the year. So investors are clearly interested in the muni space still.
Glaser: Cara, thanks for the update.
Glaser: For Morningstar, I'm Jeremy Glaser.