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August 9, 2013

The Month in Closed-End Funds Summary: July 2013

by Ed Moisson.

Lipper’s equity CEF macro-group posted plus-side returns on both a NAV basis and a market basis, returning 2.91% and 2.04%, respectively. Pulled down by continued rising-interest-rate fears and a bankruptcy filing by one of the largest cities in the U.S. (Detroit), it wasn’t surprising to see fixed income CEFs post their third consecutive month of negative returns, losing 0.74% on a NAV basis and 3.99% on a market basis for July.

REUTERS/David Gray

REUTERS/David Gray

During the month investors turned their focus to second quarter earnings reports after being somewhat placated by Fed Chairman Ben Bernanke’s assurances that despite all the talk of “tapering,” the Fed would keep interest rates low for an extended period. At month-end our Proprietary Research team reported that, of the 303 S&P 500 constituents that had reported second quarter earnings so far, 69% had beaten their analyst forecasts. The DJIA returned 3.96% for July, while the S&P 500 produced a 4.95% return for the month. Mixed earnings and economic news put a cap on market returns toward month-end. Investors kept an eye on the global market, with a special focus on signs of China’s slowing factory output, Egypt’s growing unrest (and the impact on oil prices), and the Eurozone’s impressive preliminary PMI data.

During the first half of the month Treasury prices remained on a roller-coaster ride, whipsawed by news and Fed-tapering concerns. After coming off highs midmonth Treasury yields softened a bit, but longer-dated issues still closed above their June month-end close. Imminent tapering concerns sent the benchmark ten-year Treasury yield to its highest close since August 2, 2011—jumping to 2.70% on July 10—before closing the month up 8 basis points (bps) at 2.60%. The 117-bp increase in yield since its low on July 26, 2012 (1.43%) represents an amazing 82% increase in yield in just a year. Much as in June, the selloff in Treasuries also led to a significant selloff in municipal debt funds as investors contemplated the Fed’s next move, future tax reforms, and the credit risk of municipalities—especially after Detroit filed for Chapter 9 bankruptcy protection on July 15—for the nation’s largest municipal bankruptcy case.

For July only 15% of all closed-end funds (CEFs) traded at a premium, with 17% of equity funds and 13% of fixed income funds trading in premium territory to their NAVs. None of the Lipper CEF macro-groups witnessed a narrowing of discounts in July. For the first month in four all of Lipper’s equity CEF and taxable fixed income CEF classifications were in the black. In contrast, for the third consecutive month all of the municipal bond fund groups posted returns in the red, with national municipal bond funds (-2.48%) mitigating losses slightly better than their single-state municipal debt fund brethren (-2.52%). With China continuing to show some economic weakness and with interest rate-sensitive issues struggling, it wasn’t surprising to see Emerging Market Funds (+0.71%), Real Estate Funds (+0.93%), and Income & Preferred Stock Funds (+1.26%) at the bottom of the equity universe in July.

To read the complete Month in Closed-End Funds: July 2013 FundMarket Insight Report, please click here.

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