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In Search of CEF Transparency

Mike Taggart, CFA

Mike Taggart: Hi. I am Mike Taggart, closed-end fund strategist at Morningstar. One of the things that I've been writing quite a bit about is transparency with closed-end funds. Today I have asked Anne Kritzmire, managing director of closed-end funds at Nuveen Investments, to join me. Anne thanks for being here.

Anne Kritzmire: Thanks for inviting me, Mike.

Taggart: One of the things Nuveen has known for – and indeed you've won several awards through the years – is the transparency that you offer investors on your website.

Kritzmire: Yes.

Taggart: So, can you just kind of help our viewers understand what went into that decision? Why does Nuveen put so much information about their funds out on the website?

Kritzmire: Sure. The web is a really key part of our whole investor relation strategy, because we don't know who all of the investors are, who hold our shares, and we honestly don't know all of the financial advisors who help them. The web provides the easiest place to have public access for all of the information about our funds as timely as we can make it, as digestible as we can make it. We use the word "transparent" and that's a real important thing to us is how do we be as transparent as possible to help people understand what they might be getting before they buy shares of our funds and then help them have all the info they need when they own shares of our funds as they can monitor progress and performance over time.

Taggart: Now, in addition to your own website, Nuveen sponsors the CEFConnect, which offers investors and visitors to the site information about every fund in the closed-end fund universe.

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Kritzmire: Right. And CEFConnect really is a predecessor. We've been doing that since 2000, and again that was to support both Nuveen shareholders and overall the industry, but the idea is that if we help overall understanding and perception and usage of closed-end funds that helps our shareholders, but it's also we're not so vain that we think that people only hold Nuveen products. There are other sponsors out there, very good ones, and so we want to make it very easy for people to understand, monitor their investments there. And the revision we did to the site, we really are pleased to be able to add a lot more depth and a lot more timely data for not just our funds but all those in the universe.

Taggart: One of the things I wrote about a couple weeks ago in my weekly update was leverage and how in a closed-end fund there can be, what's called 40 Act leverage, which would be where the capital structure has changed (the funds either issue debt or preferred shares), and how there is non-40 Act leverage, which could include leverage from any other source, and how the reporting on that is quite different. And in the case of non-40 Act leverage, it's really up to the fund families to report that. And I noticed on your site, you do mention effective leverage, and I think that you are one of the only fund families out there that does that. Could you talk a little bit about the challenges of reporting non-40 Act leverage on your site?

Kritzmire: Sure. We do report effective leverage, which to us is the all-in economic leverage, at least as much as we can present. There are couple of things where we are unable to totally present all of the effective leverage, but mostly that comes from having some sort of portfolio holding that's leveraged. We see the number-one way to do that is in a municipal bond funds with a structure called tender option bonds, and so we are showing that and that really is the number-one area of non-40 Act leverage, if you will call that.

There are a couple other ways where if you have a leveraged investment or a derivative investment in the portfolio, you have some sort of effective leverage, and we've got some mortgage-backed securities funds that we're able to show that also.

Some of the others where we've got other derivatives that are a little more difficult to get the exposure. Sometimes it's not just one right answer, so some of the challenges to answer your question are really, 'well, exactly what's the best way to help shareholders understand?' At the end of the day that's we're trying to do. What is their exposure? If I've got a dollar of assets, what am I exposed to? So what's the right way or the best way to help show that? And sometimes it's a matter of raw ingredients, and for us we have over 125 funds, so we need to make it very reliable and automated. I don't want manual stuff in there because it's prone to human error like anything else.

Taggart: So in some instances it does seem that the daily reporting of non-40 Act leverage, it's just not plausible overall, not just with Nuveen funds but just in terms of like you were saying with some of the derivatives that are used with the different assumptions that have to go into that, and probably auditors checking and maybe lawyers checking as well, it's just not feasible to update that every day.

Kritzmire: Yeah. It's not as feasible. We strike obviously a net asset value every day, but that's a little bit different than overall investment exposure, and so we are trying really hard. So as I said, the top two areas of non-40 Act leverage, we're definitely showing those on our website and doing our best to put them on CEFConnect as well, and that's been working fairly well. The others – there are goals, we are not there yet.

Taggart: All right, Anne. Well, thank you very much for joining us this afternoon.

Kritzmire: Thank you for the opportunity.

Taggart: I am Mike Taggart. Thanks for watching.