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Introducing Morningstar's New Closed-End Fund Center

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. We're continuing to roll out closed-end fund coverage. This week we launched our new Closed-End Fund Center.

Here with me to take a tour of the Center is Morningstar's Mike Taggart. He is a closed-end fund strategist.

Thanks for joining me, Mike.

Mike Taggart: Thanks for having me.

Stipp: So you guys have rolled out a lot of things recently. We had some new quote pages. You guys have rolled out some Analyst Reports, qualitative rating, analyst driven on closed-end funds.

Taggart: It's been pretty busy.

Stipp: And also you guys write weekly articles, have a weekly report.

The Center is meant to bring these things together. Can you just walk us through what are some of the different things that folks might find on the Center? Maybe, we'll start up here with the editorial content?

Taggart: Yeah, sure, I mean, it's very exciting. I'm very excited about this. We're going to have our editorial content out there right, so our weekly pieces and our various articles that we plan on writing, because going along with the new CEF Center, we're going to have a more regular publishing schedule with different types of articles about closed-end funds.

Stipp: So another thing that users can find here in the editorial area is the Solutions Center. This is a slide show presentation. Could you talk about what readers can find there?

Taggart: Absolutely. This is where we're going to house a lot of evergreen content, educational content ... about the unique attributes of closed-end funds. So essentially we've broken the Solutions Center down into three separate pieces. One is closed-end fund basics--just basics stuff about closed-end funds. Then there is "before investing," things we think people should know in addition to the closed-end fund basics, before they put any money in a closed-end fund. And then closed-end fund investor, which are more advanced topics.

Stipp: Another thing that you do is, you have a weekly column, but you also release a weekly PDF report that includes some data on closed-end funds from the previous week. We'll have links to the recent copies on the Closed-End Fund Center. What is it that you're looking at in that report?

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Taggart: In that report, all we're trying to do is just kind of look at relative valuation of the various sectors that we've lumped the categories into, and look at the price returns over the course of the week.

Now is that indicative of the future? No. What does a one-week price movement tell you about a particular fund or a group of funds? Week to week not much, but sometimes you can see some interesting movements within those groups, and we try to pull those out, and a lot of times, there will be a corporate action that will cause the price movement, and we try to point that out as well.

Stipp: A good way for investors to get a handle on what sorts of things can have an effect in that universe of investments?

Taggart: Right, you look at it on Friday or over the weekend, you spend 10 minutes looking at it, and you get the wrap-up of what happened in the previous week.

Stipp: Another thing that we'll have in the Closed-End Center is closed-end fund announcements, so the fund companies will send out press releases with certain news. This is a place where we've aggregated this, which is sometimes hard to find elsewhere. What might you be looking for in this area?

Taggart: Right. Well, there is only one other place that I know that does this. So, all we're trying to do here is just pull down news or announcements from fund companies, and put it in one spot, so that investors can come and get like all the pertinent news in one spot. So a lot of times these announcements will be upcoming distributions, a lot of corporate actions, but it's just the typical stuff that you see coming out of fund family.

Stipp: And also in the middle column of the new center, we'll have a list that mentions upcoming distributions. So these are things that the fund companies will also announce, as well as management calls. What might you be looking for there? What kind of data can you find?

Taggart: Well, that middle column is actually the column that I'm most excited about, and I know our programmers took a lot of time to get this sorted out and figuring out how to aggregate it.

With upcoming distributions, what that's going to show is, on the main pages, it will show maybe the top five or six of them on a broader table, but if you click "more," then that's going to take you to a broader table that shows the whole list of funds and their upcoming distributions.

So it will show the record date, the ex-dividend date, the payment date. It's going to show the upcoming amount of the distribution, and then what the previous distribution was, and then if there is any change, it will note it there as well.

So it's just a way for investors to come in get a quick snapshot of their fund, what's going on with the distribution, and when am I going to get paid.

Stipp: And the other thing that we'll be tracking here in that same area is the management calls. So what sorts of things will management be talking about on these conference calls?

Taggart: A lot of times, closed-end fund investors will say, "mangers of closed-end funds don't really make themselves available to the public." But they do. It's just unless you're looking at this specific fund and just waiting there [for] that news release, you're not going to find it.

So what we've done is we've aggregated these, and every year at the shareholder meeting, typically the portfolio managers make themselves available, but they will also perhaps do webinars or they will do management call like a corporation would do, just to give you an update of the strategy and how things are working.

So, this is going to aggregate that across the entire closed-end fund industry, and put all of those in one spot, so that investors can again look and say, "hey, this is the fund I've invested in, or this is a fund I've been interested in, or this is a fund that runs a strategy I'm interested in, I am going to listen to this call."

Stipp: Last but certainly not least, on the page, Mike, we want to highlight your new closed-end fund analyst research that will be available to investors. At the top of the page they will be able to also see what the qualitative ratings are on those funds.

Can you just briefly walk us through what are some of the main things you look at in those reports and how the ratings are assigned?

Taggart: We're looking at: What does this fund family do? Who are they? Who is the portfolio manager? Does this portfolio owner manage their own shares? Are his or her interests aligned with the shareholders'?

We look at the investment approach. So how does an idea within that fund family go from being an idea for an investment to actually being in the portfolio, and then how does an investment or a security get sold from the portfolio? What are the things that they are thinking through?

We look at discounts, the leverage, if they are using leverage, the distribution, what are the different components of the distribution, what have they been?

So really, I'm sure that we can write a more comprehensive report, but they are already very long and they take a long time to do the research, a long time to write, but I am very proud of what we've done in this space already.

Stipp: So far you're covering I believe close to 50, but you also have plans to expand on that?

Taggart: By the end of the first quarter, we'll have 100 under coverage. There are 625 closed-end funds in the universe. So, on first glance, you may say, "A 100? Boy, that leaves a lot out there."

A lot of closed-end funds are very small--$100 million, $200 million in net assets. This 100 that we'll have under coverage will represent 45% of the net assets in the industry.

Stipp: So, a lot of the big ones that a broad swath of investors might be holding out there?

Taggart: We definitely started out by looking at the largest funds, but we did that because those are the ones that are traded most often. They have the most average daily trading volume. When we got down to about 75, it started to break down a little. Some of the funds in that level, they don't trade as much as maybe funds that weren't going to be on the list, so we had to make a judgment call there, and pulled some of them up that weren't going to be there.

But our purpose is the daily trading volume would equate with investor interest, and we definitely want to cover the funds that investors are most interested in.

Stipp: So lastly, Mike, one of the things we'll be adding to the page soon that won't be on the page with the launch is the new closed-end fund screener. What are some of the highlights of the things that's we'll be letting investors screen on when that tool launches upcoming?

Taggart: That's going to be a great tool for myself and [closed-end fund analyst] Cara [Scatizzi] as well, just to be able to use it. We use another Morningstar product, right now, but it's going to be nice just to be able to be right on the site and use it.

So, one of the things we'll be able to screen on is Morningstar category, which we like because what we want, ideally is for investors to be vehicle agnostic. They are interested in this certain asset, whether it's an open end mutual fund or an ETF or a closed-end fund, and I think that this gets us a step closer to that goal.

So readers will be able to sort on the Morningstar category. We're going to be able to do sort on distribution rate at the share price, the distribution rate at the net asset value, which are two different things with closed-end funds. (Distribution rate is commonly and incorrectly referred to as yield.) So investors can sort on that.

They are going to be able to sort on the discount on the premium, all kinds of things. I do understand that we're going to have an even more advanced screener in the future, but for now I think this gets us at least halfway to our goal of a full blown screener.

Stipp: Well, it sounds very exciting, Mike, and good to have a Center with all of this great work that you are doing in one place. Thanks for speaking with me today and taking me on the tour.

Taggart: Sure. Thanks for having me.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.