Lipper Closed-End Funds Summary: August 2014

Strong Q2 2014 earnings reports, better-than-expected economic data, and possibilities of quantitative easing by the European Central Bank offset dismal geopolitical news during the month, sending the S&P 500 to new closing highs in August. For the sixth month in seven, equity and fixed income closed-end funds (CEFs) posted plus-side NAV-based returns (+3.12% and +1.69%, respectively) and market-based returns (+2.90% and +1.61%, respectively) in August.

REUTERS/Price Chambers

At the beginning of the month markets remained mired in the geopolitical concerns in Ukraine, Gaza, and Iraq. While investors cheered a better-than-expected ISM manufacturing report, they generally continued to fret about the impact of economic sanctions on Russia. During the month markets traded in a sideways fashion, with fits and starts, after mixed news came from all three regions. Nonetheless, strong economic data and better-than-expected earnings reports during the month kept U.S. investors in the game. While July nonfarm payrolls at 209,000 came in slightly short of consensus estimates, investors embraced the news of a sixth consecutive month above 200,000—a feat not achieved since 1997.

While the off-and-on nature of the news out of Ukraine and Gaza played into some mad dashes by investors to safe-haven investments, better-than-expected July industrial production, Q2 nonfarm productivity, July housing starts, and July durable goods orders sent the U.S. indices  to new highs (achieved, however, on the lowest trading volumes of the year). The S&P 500 closed the month at 2,003.37 for its thirty-second record close this year, producing  its best August return (+3.77%) in 14 years.

Despite real Q2 GDP being revised to a 4.2% annual growth rate, beating analyst expectations, the demand for U.S. government debt increased during August because of the rise in global tensions and on speculation that the European Central Bank will add monetary stimulus. The Treasury yield curve flattened at all maturities one year or greater, with 20-year yields declining the most during the month—24 bps to 2.83%.

For the month 96% of all CEFs posted NAV-basis returns in the black, with 93% of equity CEFs and 97% of fixed income CEFs chalking up returns in the plus column. The conflicts in Ukraine, Gaza, and Iraq continued to weigh on World Income CEFs (+0.86%) and World Equity CEFs (+1.98%). While both Lipper macro-classifications were positive, they were both at the bottom for performance.

On the equity side domestic equity CEFs (+3.93%) ruled the roost, followed closely by mixed-asset CEFs (+2.17%). Lipper’s Energy MLP CEF classification (+8.09%, July’s laggard) led the equity universe, benefitting  from investors’ search for income-producing securities on the possibility of future increases in bond interest rates and on recent M&A deals.

Despite hints during Federal Reserve Chair Janet Yellen’s presentation at the annual gathering of central bankers in Jackson Hole that the economy is getting closer to the Fed’s goals of stable inflation and full employment, Treasury yields declined during the month as investors did a lot of handwringing over recent geopolitical concerns. Investors’ flight to safety pushed the ten-year yield down 23 bps to 2.35% at month-end, sending fixed income returns into positive territory. Municipal bond CEFs (+2.25%) jumped to the head of the class, with all classifications in the subgroup experiencing returns in the black for the eighth consecutive month  as investors still found buying opportunities. The muni group was followed by domestic taxable bond funds (+1.06%) and world bond funds (+0.86%).

For August the median discount of all CEFs widened just 2 bps to 8.84%—worse than the 12-month moving average discount (8.35%). Equity CEFs’ median discount widened 15 bps to 9.04%, while fixed income CEFs’ median discount narrowed a fraction of a basis point to 8.78%.

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