Lipper Closed-End Funds Summary: September 2014

In September investors showed amazing resolve in the face of enough geopolitical risk to bring about the oft-called-for but so far elusive 10% technical correction. Warnings of imminent attacks on Western targets by Islamic State jihadists, increasing tensions in Russia/Ukraine, Syria’s civil war, and Hong Kong’s recent democratic protests—while being closely watched—had yet to produce wholesale selloffs in the market. Nonetheless, for the second month in three both equity and fixed income CEFs posted negative NAV-based returns (-3.28% and -0.50%, respectively) and market-based returns (-3.68% and -1.37%, respectively).

REUTERS/Kai Pfaffenbach

While many investors initially fretted about the lower-than-expected August jobs report at the beginning of September (the U.S. economy added just 142,000 new jobs in August—the smallest gain since December 2013), news of the European Central Bank’s aggressive easing measures and hints of plans to buy asset-backed securities, accompanied by renewed commitment by the Federal Reserve to facilitate the economic recovery, and Scotland’s vote to remain part of the U.K. kept investors in the game but still on guard. Notwithstanding the increase in demand for Treasuries during the month, the better-than-expected economic reports and anticipation the Fed will soon begin to increase rates, the Treasury yield curve steepened at all maturities one year or greater, with seven- and ten-year yields rising the most during the month—17 bps to 2.22% and 2.52%, respectively.

For the month only 36% of all CEFs posted NAV-basis returns in the black, with a mere 5% of equity CEFs and 57% of fixed income CEFs chalking up returns in the plus column. Rising geopolitical concerns, Scotland’s vote for independence, China’s slowing economy, Hong Kong’s pro-democracy protests, and concerns over an economic slowdown in the Eurozone continued to weigh on World Income CEFs (-2.96%) and World Equity CEFs (-4.23%),  both at the bottom of their respective groups.

On the equity side mixed-asset CEFs (-2.01%) mitigated losses better than the other macro groups, followed by domestic equity CEFs (-3.18%). Lipper’s Income & Preferred Stock CEFs classification (-1.46%) led the equity universe, benefitting from investors’ search for income-producing securities and on investors’ risk-avoidance mood.

Despite the Fed’s reiterating its commitment to facilitate the U.S. economic recovery by maintaining its view on its timing of interest rate hikes, Treasury yields rose during the month as investors continued to worry about how the Fed will eventually begin to normalize interest rates. Investors pushed the ten-year yield up 17 bps to 2.52% at month-end, pressuring prices of taxable fixed income instruments. Municipal bond CEFs (+0.45%) remained at the head of the class, with all classifications in the subgroup experiencing returns in the black for the ninth consecutive month  as investors still found buying opportunities. The muni group was followed by domestic taxable bond CEFs (-1.36%) and world bond CEFs (-2.96%).

For September the median discount of all CEFs widened just 57 bps to 9.40%—worse than the 12-month moving average discount (8.46%). Equity CEFs’ median discount widened 38 bps to 9.42%, while fixed income CEFs’ median discount widened 62 bps to 9.40%.

To read the complete Month in Closed-End Funds: September 2014 FundMarket Insight Report, please click here.