Home>Video>MLP Closed-End Funds Gain Energy

MLP Closed-End Funds Gain Energy

Thu, 25 Apr 2013

CEFs that focus on master limited partnerships performed exceedingly well in the first quarter, yet there are still large discounts among equity closed-end funds, says Morningstar's Cara Esser.


Video Transcript

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Cara Esser. She's a closed-end fund analyst. With the first quarter behind us, we're going to take a look at the state of the CEF industry. Cara, thanks for joining me.

Cara Esser: Thanks for having me.

Glaser: So let's start just a little bit about IPOs, new funds that we saw this quarter. Anything interesting on that front?

Esser: Yeah, well, we had five IPOs at the start of this year, which is about on par with what we had the last two years in the first quarter. So nothing too exciting, but we did have the biggest IPO that we've seen since 2007, and that was from PIMCO. It was another go-anywhere fixed-income fund. After they had success with a fund that they launched last year, they launched another one, PIMCO Dynamic Credit Income, this year at the end of January. And it raised about $3 billion.

Glaser: Now, how about performance? How have various categories have been performing? Any standouts there?

Esser: Yeah. So, on the performance front we saw a lot of the sector funds performing incredibly well. So a lot of the equity energy funds, master limited partnerships in particular, performed exceedingly well. The health-care funds performed pretty well, and also Japanese equity funds performed well. On the negative side, we saw some commodities and precious metals funds not do all that well, and also some communication sector funds performed fairly poorly over the quarter.

Glaser: Any individual ones kind of stand out to you?

Esser: On the equity energy front we had the top five fund performers for the entire universe for the first quarter, the five MLP funds, and each of them gained about 25% just in the first quarter. So it's a pretty big jump, and these funds actually performed worse at the end of last year. So we're just seeing a bounce-back a little bit there, but we've seen a lot of interest in these energy funds.

On the poor-performing side, a serial underperformer, back again on this list is ASA Gold and Precious Metals fund. It was on the worst-performing list at the end of last year and it continues to be a poor performer this year.

Glaser: One of the reasons investors have been looking at MLPs for those distributions is for that income, and then closed-end funds more generally. Did we see any big change on the distribution front, any big increases, any big cuts, or things to be aware of?

Esser: We didn't see anything too dramatic on the distribution front. We did see a continuation of a trend of more discount reductions than we saw increases by about 2-to-1. The average fund decreased its distribution by 7.5%. That would a fund that did decrease its distribution; the average distribution cut was about 7.5%. So nothing dramatic, but we are seeing funds continue to pare back on distribution payout.

Glaser: What's driving that?

Esser: I think the market in general is driving that. There is a lot of fixed-income funds in the closed-end space, and yields are just low everywhere. So, they can only pay out what they get. It's hard to find yield, and they haven't been able to do it for a long time.

Glaser: How about discounts and premiums, any big changes there?

Esser: We actually have seen shift a little bit in some of the discounts and premiums. We had seen a lot of closed-end funds that invest in bonds, especially municipal funds, see an increase in premium over the last few years, and we've seen a lot of the equity funds increase the discounts over the last few years. But we saw a reversal in that so far this year because the equity market has done pretty well. So the average equity fund is selling at about a 1% discount, which is much narrower than it was at the end of 2012. The average municipal fund is selling at a 1% premium, which still sounds pretty high, but it's actually much narrower than it was at the end of the year. The average taxable fixed-income fund is selling at a wider discount than it was at the end of the year.

Glaser: So, at the end of this quarter, do you see any big opportunities, any funds that you think look like they could be attractive right now?

Esser: Despite the fact that we see the narrowing of the discounts in the equity space, there are still a lot of very large discounts in the equity space. Investors had been ignoring those funds for some time, and the market's coming back. And it might be a good time to check out some of those funds; a lot of them are selling at double-digit discounts still.

Glaser: Cara, thanks for talking with me today.

Esser: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser.

  1. Related Videos
  2. Related Articles
  1. Commodity Price Drop Creating CEF Bargains

    The recent sell-off of gold and other commodities has led to advantageous discounts for precious-metals CEFs , but the funds should remain a small portion of your portfolio.

  2. A Midyear Look at Closed-End Funds

    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.

  3. Discounts Make These CEFs the Cheaper Option

    ETFInvestor editor Sam Lee says Fed-taper fears have forced several closed-end funds to trade at discounts compared with ETFs or mutual funds of similar strategies.

  4. What Will Higher Rates Mean for Levered Closed-End Funds ?

    With short-term rates remaining low, we don't anticipate an immediate impact on the cost of leverage financing for most CEFs .

  5. Conservative and Aggressive Picks for CEF Income

    Morningstar's Cara Esser offers several closed-end funds for an income-seeker's watchlist.

  6. Bond Market Swoon Highlights CEF Advantages

    CEF managers' ability to hold onto underpriced illiquid securities in times of market stress represents an advantage over open - end funds that may have to sell to meet unexpected redemptions, says Morningstar's Cara Esser.

  7. 5 CEFs That Shine

    Morningstar's Cara Esser breaks down our Analyst Ratings for closed-end funds and names the CEFs that are worthy of gold status.

  8. Rising-Rate Fears Create CEF Bargains

    As investors ditched certain income-producing assets on worries of rising rates, an abundance of fixed-income CEFs moved into undervalued territory, according to Morningstar's Cara Esser.

©2017 Morningstar Advisor. All right reserved.