Thu, 27 Dec 2012
Almost every closed-end fund had a positive performance this year, though equity CEFs are trading a discount compared with fixed-income funds, says Morningstar's Cara Esser.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Morningstar closed-end fund analyst, Cara Esser. We are going to take a look back at the year in closed-end funds.
Cara, thanks for talking with me today.
Cara Esser: Thanks for having me, Jeremy.
Glaser: So, let's take a look first just at the entire universe. Closed-end funds obviously have IPO'd. Sometimes they go away. Where did we end up? How many new funds came to market this year?
Esser: We had 20 new funds come to market this year. But the most interesting part of this is that the entire universe has actually shrunk this year. So, we end the year with about 600 closed-end funds, and we started the year with about 630 despite the 20 IPOs. And this is because we had a lot of mergers this year. A lot of single-state municipal funds, for example, merged to create larger funds. This was great for shareholders that could get better cost efficiencies by one larger fund as opposed to a bunch of smaller funds. So, that was a big trend that we saw this year.
The 20 IPOs this year was a little bit more than we had last year. There was about 18 last year, and the most notable IPO that we had this year was the PIMCO Dynamic Income, ticker PDI, That was notable for its size. It raised over $1 billion which was one of the largest that we've seen in recent history.
Glaser: Certainly, the closing of funds is not an indication of bad performance. Closed-end funds had a pretty good year. Can you walk us through some of the numbers.
Esser: Yes. Almost all of the closed-end funds this year had positive performance, and in fact 480 had double-digit net asset value returns this year. So, we saw only 10 closed-end funds that had negative net asset value performance this year, which is really amazing.
Some of the best-performing funds were in the global real estate segment, also in finance, health care, and biotech. We saw some of the worst-performing funds in commodities, energy, resources, and master limited partnerships likely because of the runup that we've been seeing in the last year. A lot of MLPs also launch this year. So, it wasn't a great year with regard to performance for some of these newly launched funds.
Glaser: Let's talk a little bit about premiums and discounts then. Is that outperformance coming from the fact that premiums are growing or discounts are shrinking, or is it really that net asset value that's doing much better?
Esser: It's a little bit of both because we saw both positive net asset value returns and positive share-price returns for the majority of the closed-end funds in the universe. But we have seen a continuing trend of a narrowing discount or widening premium depending on which universe that you're talking about. So, the average discount of all closed-end funds--equity, fixed income, and municipal bonds--is about 1.5%, which is much narrower than at the end of 2011, when it was about 2.5%. And at the end of 2010, the average discount was about 4.0%.
So, we see a big difference when we look at equities versus fixed income. So, the average equity closed-end fund is selling at about a 7% discount. The average taxable fixed-income fund is selling right about par and the average municipal-bond closed-end fund is selling at a 2.5% premium. So, this shouldn't be surprising because people are chasing income, people are looking for yield, and they're finding it in the fixed-income closed-end funds.
Glaser: So, after a great 2012, should investors expect more of the same next year, or is it still too difficult to tell?
Esser: It's hard to tell. The whole tax debate has to be resolved before people really can make decisions about where they are putting their money. If they're putting them into munis, those might be continuing to be popular. I mean, we saw a lot of interest in munis continued this year. Tax-free income could be really important for investors next year.
Glaser: Cara, thanks for your update.
Glaser: For Morningstar, I'm Jeremy Glaser.