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By Jeremy Glaser and Cara Esser, CFA | 06-13-2012 11:00 AM

These Newly Launched CEFs Stand Out

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.

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