Lipper Closed-End Funds Summary: December 2013

After the Federal Reserve announced it would begin tapering its $85-billion/month bond-buying program by $10 billion a month starting in January, it wasn’t surprising to see—for the second consecutive month—equity and fixed income CEFs going their separate ways. Equity funds remained in the black for December, gaining on average 1.57% on a NAV basis, while fixed income CEFs lost 0.06%. However, both asset classes posted positive monthly market-based returns—1.77% and 1.78%, respectively.

REUTERS/Kim Kyung-Hoon

For fourth quarter 2013 both asset classes posted plus-side NAV-based returns, with equity CEFs gaining 5.09% and fixed income CEFs rising 1.37%. Despite ever-present expectations of rising interest rates throughout the year, fixed income CEFs finished 2013 down 1.74%, while equity CEFs rallied 16.03%, underperforming the Dow Jones Industrial Average and the NASDAQ Composite one-year returns of 26.50% and 38.32%, respectively.

Ironically, over the last several months any hint of the Fed removing the easy-money punchbowl caused markets to tank; however, in last quarter 2013 Fed members did a much better job letting investors know that if they decided to remove some of the easy-money policies, it was because they felt the economy was in a strong enough condition to handle such a move.

So, in December, after revised third quarter GDP data showed the U.S. economy had expanded at a better-than-expected annual rate of 4.1% on stronger consumer spending and business investment and on the earlier-reported nonfarm payroll numbers (showing the U.S. economy created 203,000 new jobs versus the 180,000 expected and the unemployment rate dropped to 7.0% for November), the market had already priced in the Fed’s decision.

In the last two weeks of the year longer-dated Treasury debt declined on the better-than-expected revised third quarter GDP growth, manufacturing and industrial output, November durable goods orders, and obviously the Fed’s decision to begin tapering. The ten-year Treasury yield rose to 3.04% on December 31, its highest close since July 7, 2011—29 basis points (bps) above its November month-end closing value.

For December 54% of all CEFs posted NAV-basis returns in the black, with 80% of equity CEFs and only 38% of fixed income CEFs chalking up returns in the plus column. Unlike the previous month when Chinese market fears led to downside performance for a few of Lipper’s classifications, for December none of Lipper’s 15 equity CEF classifications posted returns in the red. However, for the second month in a row none of Lipper’s municipal debt CEF classifications posted plus-side NAV-based returns as investors digested the Fed’s decision to begin tapering its bond-buying program in January and remained concerned over a default on Puerto Rico municipal debt.

At the end of the year, the median discount of all CEFs narrowed 147 bps to 8.66%—considerably lower than the 12-month moving average discount (5.59%).

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