The NAVigator

John Cole Scott, President of Closed-End Fund Advisors, doesn't have a crystal ball, but he does have a mountain of data, and he digs through it to look at the stories he anticipates to be central to the closed-end fund landscape in the new year. Beyond looking at the big stories, John identifies five investments poised for breakout performances in the next 12 months.

Ken Burdon, a partner in the registered funds practice at Simpson Thacher and Bartlett, discusses how the return of President Donald Trump might benefit closed-end funds. One key development he will be looking for is for the approval of new investment vehicles that give retail investors more access to private credit markets and other alternative assets that have been until now the domain of affluent investors and institutions. He notes that the first Trump Administration was generally in favor of making more investment opportunities available, and he thinks that will pick up in the new term, especially with the selection of Paul Atkins as a potential new SEC chairman. Burdon also talks about how activist investors might be impacted by the regime change.

Ravi Chintapalli, Client Portfolio Manager on the Global Fixed Income team at Nuveen, says that the bond market has seen a structural change in the market for below-investment grade or junk bonds. Chintapalli says investors think of junk bonds as it was in times like 2007, when nearly one-third of the paper was teetering on the edge of default; today, however, only 10 percent of the below-investment grade paper carries those same low ratings, and default risk is much lower than in the past. As a result, investors can expect high-yield bonds to live up to their promise, with 7 percent income levels moving forward, and some extra risk cushion in the many cases where the bonds are selling below par.

Michael Lowenberg of White Mountain Capital — Portfolio Manager for the Modern Capital Tactical Income fund (ticker MCTOX) discusses the factors he considers when picking closed-end funds for the portfolio. Lowenberg — whose fund buys both stocks and closed-end funds — likes the funds for their downside protection, and explains that he values the assets for the portfolio more than he values any discount, noting that he will actually buy funds trading at a premium if conditions are right. He particularly likes high-yield funds right now, dislikes tech-heavy issues and is a bit heavy in cash with discounts having narrowed in recent months.

Kevin Mahn, President and Chief Investment Officer at Hennion & Walsh Asset Management — which runs the Smart Trust Unit Investment Trusts — says that he expects the Federal Reserve to cut rates over the next two years, which will drive investors to turn for income alternatives "since they can't find the 5 percent in the short-term CDs any more." That will drive investors toward business development companies and leveraged municipal closed-end funds, the latter benefitting from a reduced cost of leverage in a declining rate environment, as rates drive down. Mahn talks about using unit investment trusts — and specifically covers his firms UITs that invest in BDCs and closed-end funds — in current conditions, and talks about how the UIT structure can be a benefit for investors now.

The day after Thanksgiving is all about shopping at the biggest possible discounts, and John Cole Scott of Closed-End Fund Advisors puts a closed-end fund spin on it for the third straight year, culling through funds the way bargain shoppers look for the best deals. Scott — Chairman of the Active Investment Company Alliance — identifies three different closed-end funds and one business development company that, based on his firm's data, are particularly good bargains entering the holiday and tax-loss selling seasons.

The NAVigator this week offers a taste of the action from the Active Investment Company Alliance's 2024 Fall Roundtable, which was held on November 13 in New York City. Individual investor Jim Cohen discusses how consumers in closed-end funds are caught between activist "whales" and fund sponsors, wanting to hold funds to account to narrow discounts and improve management, but sometimes coming away with lesser results. Axel Merk, President and Chief Investment Officer at Merk Investments — manager of ASA Gold and Precious Metals Limited — discusses why gold has worked better as a geopolitical hedge but has been less successful as an inflation hedge. He adds that precious metals perform better in higher-rate environments, and he doesn't think the current round of rate cuts will go so far as to pose a problem for gold in the medium term.

Josh Duitz, Portfolio Manager for the Aberdeen Global Infrastructure Fund, took a break from the program at the Active Investment Company's Fall Roundtable in New York this week to discuss the state of infrastructure investing now that the presidential election has been decided and the policies of the second Trump Administration are becoming more clear. Duitz says that deregulation and lower corporate taxes will help certain freight, for example, balancing out initial concerns about how tariffs might impact demand. He also notes digs into renewable energy — which critics have said they expect the Trump Administration to hurt — noting that he expects demand to keep it rolling, with some of that demand also coming from the nation's increasing reliance on artificial intelligence.

Jared Hagen, Vice President at XA Investments, discusses this year's unprecedented growth in interval and tender-offer funds and how the number of funds in registration guarantees the trend will continue through 2025. Hagen talks about why the investment community has taken a shine to interval funds and covers how the expansion into the space has included some unique partnerships, with firms like KKR and Capital Group pairing up to bring new products to market.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, digs into his firm's data to break down a great three-month stretch for closed-end funds and business development companies. He says it was a period in which discounts narrowed dramatically and changed the opportunity set without it becoming overvalued or unattractive.

Jonathan Browne, Senior Investment Analyst at RiverNorth Capital Management — and Portfolio Manager on five of the firm's municipal bond closed-end fund-of-funds — says that the headwinds that made for big struggles in the muni bond space have shifted to become tailwinds, creating opportunity despite the strong recent rebound among muni bond funds. Browne says that the rising-rate cycle had led to discounts reaching the 12 to 15 percent range — a level previously only reached during financial crises — making munis about as cheap as they had ever been. Now, even after a run of more than 30 percent, muni closed-end funds are at the 70th percentile of cheapness, with "quite a bit of room to run."

Dana Staggs, President of Arrowmark Financial Corp., talks about how regulatory capital relief securities — bank-generated floating-rate notes that are currently producing yields of up to 15 percent — can function as an alternative investment. He notes that due to their emergence during the financial crisis of 2008, regulatory capital relief securities can also function efficiently in low-rate environments. Staggs says he believes the economy has "a lot of room to absorb continued declines in interest rates," and that banks are relatively healthy right now. However, he notes that concerns over potential troubles in commercial real estate can't be ignored.

John Cole Scott, President of Closed-End Fund Advisors and the Chairman of the Active Investment Company Alliance, discusses interval funds and digs into the data on four funds that use the structure to create promising investment opportunities for investors. Plus, learn about the NAVigator Podcast's first-ever contest, in celebration of its fifth anniversary!

Sean Feeley, part of the U.S. High Yield Investment Group at Barings, says he believes that with the bulk of interest rate adjustments happening at the short end of the yield curve, a wave of refinancing of shorter-term debt is coming, and that this typically makes high-yield investments look more attractive. Feeley expects the economy to avoid a recession, with strong balance sheets contributing to a soft landing situation that plays out into 2025.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, looks ahead to the fourth quarter on today's podcast. He discusses two equity and two fixed-income funds that hit his trifecta — an analytical mix of discount, dividend, and net asset value — and that he says look particularly promising for year-end portfolio moves.

Miguel Laranjeiro, Investment Director at abrdn, says we are seeing "the beginning of a robust in-flow cycle into the muni space," noting that credit spreads and all-in yields are attractive and that the value of the tax exemption will particularly pay off now. He says he expects the Federal Reserve's long-awaited rate cuts will end the longest yield curve inversion ever for municipal bonds. Once the yield curve has normalized, Laranjeiro expects leverage costs to become a positive for the total return of levered muni funds, creating an additional impetus for investors.

Mitchel Penn, Managing Director of Equity Research at Oppenheimer and Co., says that while business development companies (BDCs) have struggled this year, they are positioned well to ride out the changing interest rate cycle. He says that when the Federal Reserve starts cutting interest rates, he expects BDCs to see higher fee income, though some of that could be offset by a higher level of defaults. However, he notes that because those defaults are a hangover from high-rate conditions, they have already been priced into many portfolios, creating a cushion against potential credit losses. Penn also discusses the kinds of BDCs that balance out the current risks and that historically have generated high returns on equity with low credit losses, naming several BDCs that fit that description.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, discusses how investors in funds trading at premiums can use sector swapping to turbocharge their gains. He describes a process where an investor sells out of funds trading at premiums and purchases similar funds trading at discounts, locking in profits and expanding the buying power of their money. He cites examples of how making swaps — even within the same fund family — could deliver instant advantages.

John Cole Scott, president of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, explains how closed-end funds have responded historically to corporate actions like tender offers, liquidations, transitions to open-end funds, rights offerings, and big changes in dividend policy. He notes that understanding how those events play out gives investors a guideline on what to look for and how to act if they see those same actions in the funds they own.

Maury Fertig, Chief Investment Officer at Relative Value Partners, discusses how the changing interest rate picture is impacting considerations on the closed-end funds he is considering for client portfolios — and which areas of the closed-end fund universe look particularly attractive now. He also talks about how a number of BlackRock funds are performing in the wake of a recent tender offer.

Chris Oberbeck, Chairman and Chief Executive Officer at Saratoga Investment Corp., says that private credit — which has been on the rise for several years — is being challenged by a cooling market for mergers and acquisition activity. That has put pricing pressure on managers, which should ease a bit as rates come down and mergers and financing deals become easier to do.

Aaron Filbeck, Managing Director of the Chartered Alternative Investment Analyst Association (CAIA), discusses interval funds, their evolution, fee structures, and potential. He also responds to recent media coverage that has been critical of them as investment vehicles, including a recent Wall Street Journal article on how interval fund fees "will leave you high and dry."

Kimberly Flynn, Managing Director of Alternative Investments at XA Investments, discusses the state of interval funds, which have been growing rapidly and expanding their asset reach. It's not just the 50-plus funds on file and the entry of big players and new investment ideas, but also the recent rise in media interest. In the interview, Flynn responds to a recent Wall Street Journal article critical of interval funds and their fee structure.

Duncan Farley, Portfolio Manager on the Developed Markets Special Situations team at RBC BlueBay Asset Management — manager of the BlueBay Destra International Event-Driven Credit Fund — says corporations that have been "dining out on cheap finance" now have indigestion because their debt levels, leverage, and costs have gone up, so "the math doesn't work." As a result, he's expecting trouble for corporate paper globally, with a sharp rise in default rates, though he notes that creates opportunities for special situations investors.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, provides an update on what's been happening with closed-end funds throughout the first half of 2024. He notes that discounts narrowed almost across the board, but yields increased, resulting in positive returns for most asset classes.

Jason Akus, Senior Investment Director and Head of Healthcare Investing at abrdn and manager of the firm's four closed-end funds covering biotech and healthcare, says that the stock market appears to be broadening out and that healthcare and biotech are both likely to be beneficiaries. Healthcare stocks have generally lagged the stock market since the start of 2023, but with the Standard & Poor's Health Care index up 11 percent in 2024 — respectable but still trailing the broader S&P 500 by about seven percentage points — there are strong signs of recovery. As the catch-up trade materializes, Akus believes there will be no shortage of potential opportunities ready to benefit even if the economy begins to slow.

Mark Gatto, Co-Founder and Co-Chief Executive Officer of CION Investment Group — which manages the business development company CION Investment Corp. — discusses the heavy interest and cash flow into BDCs and how that is changing the space and making it important for investors and advisers to "pull back the layers to understand what they are investing in." Gatto advises paying particular attention to the deals and credit quality a BDC engages in. He also says that the biggest players in BDCs are becoming "very homogeneous" and avoiding differentiation when they get very large. However, Gatto says that situation also creates opportunities for investors who want to diversify their BDC holdings by investing in middle-market deals, where smaller BDCs can be more nimble and offer different exposure.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, compares two high-yielding offerings from Ares, breaking down the Ares Dynamic Credit Allocation (ARDC) fund and the CION Ares Diversified Credit I (CADUX) fund. He shows that while both could be viable and attractive options for investors diversifying a portfolio into the alternative credit space, there's much more to picking between them than big yields, reasonable expense ratios, discounts, and recent results.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, shares takeaways from a recent industry conference focused on business development companies (BDCs). He talks about how BDCs compare to private credit funds, how the market is changing, and how some money managers are using artificial intelligence to get better information on market trends that could help them pick better investments or improve timing on the trades they make.

Roxanna Islam, Head of Sector and Industry Research at VettaFi, discusses the benefits and flaws of applying rules-based investing to closed-end funds. She notes that changes in the industry have forced changes on a rules-guided index of closed-end funds created by VettaFi, and how that is impacting the holdings and asset allocation of the fund-of-funds that some investors are using instead of building their own portfolio of individual closed-end strategies.

Rob Shaker, Portfolio Manager at Shaker Financial Services, says that economic conditions — the debt-ceiling debate, troubled banks, higher interest rates and persistent inflation — have created a situation where the market isn't climbing the proverbial wall of worry, but rather a 'Wall of Meh.' However, he adds that there is opportunity in the unimpressive current conditions, noting that long-term investors in closed-end funds can use lagging investor sentiment to capture discounts as early as the second half of this year, when he expects a 'generalized recovery' from today's worrisome issues.

Dave Lamb, Head of Closed-End Funds at Nuveen, says there is a "much more aggressive form of activism today than what we saw years ago," and notes that it's driven entirely by discount-arbitrage opportunities rather than whether a fund is underperforming due to management decision-making. With discounts at wide levels — particularly for fixed-income funds — sponsors like Nuveen are taking more steps to cut the gap and reduce their funds' attractiveness to activists. Lamb discusses Nuveen's strategies, which he says are largely focused on enhanced distribution tactics, trying to drive demand, and narrow the discount. Nuveen recently announced plans to increase distributions on more than two dozen funds.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, talks about the good and bad in recent industry developments. For example, Scott discusses how fund sponsors are taking steps to keep a lid on discounts, potentially reducing a fund's attractiveness to activist investors. He also highlights the trend towards managed payouts and how investors should size up distributions that might be connected more to marketing materials than to what a fund can actually deliver.

Stephen Minar, Managing Director and Head of Closed-End Funds at BlackRock, discusses a contemporary conundrum in the closed-end fund industry: How discounts drive money flows into closed-end funds but also attract activist investors whose actions may be harmful to long-term individual investors. To address this, Minar notes that BlackRock has launched initiatives in a series of new funds that can reduce discounts, thereby making a fund less likely to attract activists, while increasing consistency in distributions.

Charles Lewis Sizemore, chief investment officer at Sizemore Capital Management, says that while short-term rates are as high as they are likely to be, the "massive discount" created in closed-end funds while rates were on the rise have not dissipated. That means closed-end funds remain a compelling value now, and Sizemore said he is finding particularly strong values in REIT-oriented funds and term funds. However, he noted that he's not a big fan of most equity-based funds now because with the market looking frothy "you probably don't want to be adding leveraged exposure to the stock market."

Clayton Triick, Head of Portfolio Management, Public Strategies at Angel Oak Capital Advisors — part of the team running the Angel Oak Strategic Credit Fund — says that fundamentals and valuations seldom get aligned the way they have right now for the U.S. housing market and American homeowners. He notes that valuations are "cheaper than they should be" given the strength of the market and mortgage holders, creating opportunity. Triick says homeowners "did a really good job of locking in low mortgage rates," making them the big winners of the rising rate environment and making mortgages look more attractive than other bond types — particularly corporates where valuations have gotten rich relative to the economy's strong fundamentals.

Christian Munafo, Chief Investment Officer at Liberty Street Advisors, which runs the Private Shares Fund, discusses how late-stage private venture companies are generating a huge chunk of economic power off most investors' radar. He says now is the time for many investors to pursue the opportunity, coming off of two years in which private shares struggled and markets for taking those companies public stalled. Munafo believes the recent pickup in IPOs is a positive sign. He also discusses Destiny Tech 100, an exchange-traded closed-end portfolio that has been trading like a meme stock, with massive gains — but also nosebleed losses — since its debut in March.

Jonathan Mondillo, head of North American fixed income for abrdn says that record discount levels for municipal bond closed-end funds, coupled with attractive yields on those funds, are creating real opportunities for investors, though he warns about the middle of the yield curve, noting that the most compelling values are at the two ends of the barbell -- the short-term and long-duration paper -- which he expects to continue even as the rate cycle plays out and the Federal Reserve finally moves to cut rates.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, drills into the first-quarter data for closed-end funds. He notes that while municipal-bond funds still couldn't break out of their long-running slump, the first three months were a strong time for most closed-end funds (more than 90 percent were up for the period).

Bryce Doty, Senior Portfolio Manager at Sit Investment Associates, says the uptick in inflation is not enough to overwhelm the yields investors are earning, noting that real returns may be better than ever. He says investors should enjoy collecting the high yields while interest rates remain high, and while total returns should improve once cuts start, investors will have to wait for that to happen. Doty does not expect meaningful rate cuts this year -- he anticipates two reductions, one after the election -- but says that the long-term average gap between the Fed funds rate and inflation is well above its typical zero, so the central bank can cut rates and have a positive gap, meaning it can claim to be tough even as reductions start. Doty anticipates the important cuts -- the ones which narrow that gap back to near zero -- will occur in 2025.

Harin de Silva, manager of the Allspring Global Dividend Opportunity fund, says that the U.S. markets have remained among the best income-generating investment opportunities when it comes to the yields being generated relative to the risks being taken. While he favors a global allocation, de Silva noted that the fund has a surprising tilt toward the United States, helped along by the low volatility levels due to the strength of the U.S. economy. Globally, however, de Silva notes that the big surprise in recent markets has been how the bad news and headlines from Ukraine and Israel -- along with troubles at both the Suez and Panama Canal -- have not created uncertainty in the market and convinced investors to stop taking on risk.

Nicholas Marshi, editor at the BDC Reporter, talks about the struggles business development companies (BDCs) had at the end of 2023, saying he was shocked to see that more than a third of the BDCs his publication tracks were "performing below ... reasonable expectations regarding their key metrics." He says that troubles tend to spiral for a few quarters before they get sorted out. Marshi also notes that no BDC has cut dividends yet, leaving "a really wide disparity of value between the BDCs" and making this a classic stock-picker's market in the space.

Axel Merk, chief investment officer of the ASA Gold and Precious Metals, discusses the impact that Saba Capital Management is having on the fund and on shareholders as it entered the fund as an activist, moving to change the board as it pushes for a double-digit discount to be narrowed. Merk discusses the challenge of dealing with activist investors in a junior mining fund, the potential for the fund to be liquidated, the possible outcomes and the impact of the action on shareholders.

Dan Omstead, global head of health care investments at abrdn -- part of the team running the firm's Healthcare Investors, Life Science Investors, Healthcare Opportunities and World Healthcare funds -- says that after several years of struggling, the recent rally in health care and biotech is significant, the start of a positive trend that should be able to withstand the pressures of an election year to keep running higher from here. Omstead identifies a few areas -- most notably the GLP-1 weight management drugs -- that have the potential to not only change the world but to become massive sellers as they make and take over the market.

Cory Johnson, chief executive officer at Pender Capital -- which runs the Pender Capital Real Estate Credit Fund, a closed-end debt interval fund -- says that there's "an abundance of very interesting opportunities" as the commercial real estate market goes through big changes as regional banks pull back from the sector and reduce liquidity for borrowers. The result is "a kind of a hey day ... the most attractive risk-adjusted yields we have seen since the financial crisis [of 2009], borrowers buying at discounted valuations, looking for debt providers." He says the continued challenges for commercial real estate should keep providing good, safe opportunities for investing in senior-secured debt amid continuing headline woes.

Matt Kaufman, head of ETFs at Calamos Investments, says that years of experience running separately managed accounts of closed-end funds plus the firm's experience running closed-end funds -- as well as an investment environment where a fund that focuses on discounts had lots of investment prospects -- were part of the firm's thinking behind its new Calamos Closed-End Fund income and Arbitrage ETF which launched in January. While the fund is shopping for discounts in closed-end funds that are outside of the Calamos family, Kaufman said it will not be an activist investor in trying to narrow those discounts.

John Cole Scott, president of Closed-End Fund Advisors -- chairman of the Active Investment Company Alliance -- looks at two asset classes that investors are turning to now for yields. While business development companies and municipal bond closed-end funds have low correlation, investors are looking at both asset types in order to raise yield levels in this market. Scott digs into his firm's data to examine where the two asset classes stand and offers a few picks in each sector that he thinks are poised to handle the changing rate picture well for at least the rest of the year.

Dana Staggs, president of ArrowMark Financial Corp. -- a non-diversified, closed-end fund that trades under ticker symbol BANX -- talks about why the fund has changed in recent years to where 87 percent of its holdings are now in regulatory capital relief securities, and what that esoteric asset can add to a diversified portfolio. Staggs also discusses his outlook for banking -- where he acknowledges the potential for troubles but says they should not be systemic, disruptive problems -- and how reg-cap securities are set up to weather the potential storms.

Jonathan Mondillo, head of North American fixed income for abrdn, says the municipal bond market has been looking at a "teacup inversion," and as that changes when the Federal Reserve cuts rates later this year, it should set up well for a barbell approach, with the bargains and values being at the short and long ends of the curve. He notes that the last 12 to 18 months have been hard for muni debt and closed-end funds in general, but that with rates having come to a peak, there is now real opportunity in repositioning a portfolio, with record discount levels holding out potential for attractive income levels and heightened total return for investors willing to swim against the tide.

Ian Merrill, president of SCG Asset Management -- which runs The Alternative Strategies Income Fund, a continuously offered closed-end interval fund -- says that investors can change the risk-reward picture in equities by using derivatives to reduce risk but also set up the potential for higher income. He suggests that using derivatives allow a classic 60-40 balanced investor to go to 50-30-20, with derivatives representing the last part of the allocation and generating returns that normally would require a lot more equity exposure. Merrill says that the explosion in derivative products -- driven in part by the success of defined outcome ETFs -- makes it incumbent on investors to avoid confusion and make sure they know the investment intentions are for any manager using derivatives.