The NAVigator

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.

Roxanna Islam, head of sector and industry research at VettaFi, digs into the active and passive exchange-traded funds that invest in closed-end funds, looking at the choices, the new funds and the options investors have for buying ready-made portfolios of closed-end funds thanks to the simplicity of ETFs versus the chores of building their own portfolios. She notes that the active ETFs have some potential that the index-oriented versions have seemed to be missing in current market conditions.

Cheryl Pate, senior portfolio manager at Angel Oak Capital and manager of the Angel Oak Financial Strategies Income Term Trust, says that 2024 "will bring a still somewhat tough operating environment for the banks but net interest margins are abating, valuations are cheap and [mergers and acquisitions] activity should accelerate from here." That gives banks an attractive opportunity set, particularly by focusing on credit quality and looking for "a fundamental mispricing of bank debt" that is creating some compelling bargains for investors.

Aaron Filbeck, managing director at the CAIA Association -- industry association for Chartered Alternative Investment Analysts -- says that the evolution of alternatives over the last few decades has made it to where it's naive for investors to effectively lump the wide range of investment options under the simple label of "alternatives." Filbeck, who oversees UniFi by CAIA -- a platform that educates private wealth managers about alternative investments -- says that sophisticated investors look past the label to dig into the different risks and return profiles of assets that vary from hedge funds to private credit, real estate, commodities, infrastructure and more, but he notes that they also have a long way to go with alternatives which still represent a small percentage of investors' portfolios despite the wide range of assets available.

John Cole Scott, president of Closed-End Fund Advisors -- chairman of the Active Investment Company Alliance -- does his annual forecast for the year ahead, noting that he expects closed-end funds to outperform the general equity markets, and he expects a mild narrowing of discounts from current average levels of roughly 7 percent, noting that bond funds should benefit from changing interest rates. He also looks at shareholder activism, yields and more, before picking a few funds that he expects to be stellar performers in the new year.

John Cole Scott - president of Closed-End Fund Advisors and the chairman of the Active Investment Company Alliance - looks back at how the closed-end fund industry bounced back from the challenges of a terrible year in 2022, and how his forecasts from a year ago played out. He came out on the winning side of the ledger in his forecasts, but especially with his basket of five funds selected as likely winners for 2023.

Brenda Langenfeld, lead portfolio manager for the Nuveen Preferred and Income Opportunities Fund and the Nuveen Variable Rate Preferred and Income Fund, says that conditions are favorable on a number of different levels, setting up preferred securities for a strong year ahead as interest rates move lower in the year ahead. She noted that heightened banking regulatory oversight will be favorable for credit investors, that positive fundamentals suggest stability and growth and that valuations are at levels "that present a capital appreciation opportunity over the next year."

Adam Sparkman, client portfolio manager at Thornburg -- part of the team running TBLD, the Thornburg Income Builder Opportunity Trust -- says that current market conditions favor the flexibility of a multi-asset approach, noting that "it's a different menu within fixed income entering 2024 than it was a couple of years ago." The changes in the rate environment have allowed the firm to increase credit quality. "We're taking less credit risk and we're looking to add a bit of duration," Sparkman says. On the equity side of things, Sparkman says international investments -- especially in Europe -- are trading at relative discounts, making them particularly attractive now.

Mike Taggart, closed-end fund specialist at abrdn, says that the overwhelming majority of closed-end funds were created to generate income -- and built with that in mind -- but that the sector gets a lot of its attention as the result of discounts, and he feels the discount angle is "overplayed," because the investor who focuses on the income gets the discount as a bit of extra yield but the person who wants to capture the discount needs to ride out the market's bumps and bruises to hang on hoping to see the market change and narrow the bargains. Taggart, formerly executive director of the Active Investment Company Alliance, talks deals, discounts and more and how current market conditions are impacting closed-end fund investors.

Axel Merk, chief investment officer for the ASA Gold and Precious Metals fund, says that gold prices are most tightly correlated to "the confidence the market has in the central bank to manage inflation over time," so gold's rally over the last six weeks -- as well as its path forward -- is "favorable because we might be entering a recession, most notably a recession that is more severe than is currently priced into the market." Merk says he does not foresee a soft landing for the economy -- he sees a decline that is more significant than most observers are expecting -- which is why he does not think "we are going to have the trajectory [for gold] that is priced in right now."

John Cole Scott, president of Closed-End Fund Advisors and the chairman of the Active Investment Company Alliance, tackles the biggest shopping day of the year closed-end fund style, talking about where discounts stand in general for the industry, but also hunting for year-end bargains and looking at three cases to determine whether the Black Friday sale on the fund is a real deal, an average play or a fake-out.

Bryce Doty, senior portfolio manager at Sit Investment Associates, says that muni-bond closed-end funds using leverage -- where the cost of their borrowings are effectively wiping out returns given current conditions -- are more interested in keeping fees high than making money for shareholders, which is one reason why his firm has become a more activist shareholder. With the average muni-bond discount at roughly 13.5 percent -- more than three times its historic norms -- Doty says it should be easy for shareholders to narrow the discounts and turn profits, but it will require the Federal Reserve cutting rates and/or fund managers selling losers and reducing the negative carry of their leveraged positions.

Eric Purington, portfolio manager for the Aberdeen Global Infrastructure Income Fund, says that two mega-mergers outside of the infrastructure space -- deals involving upstream energy giants Exxon and Chevron -- have a lot of implications for middle-market/midstream energy companies and infrastructure stocks. Purington says that the larger energy companies are now poised to make big investments, which will trickle down to infrastructure and services companies, but adds that these big deals have opened the door to other mergers at all levels of the industry, which should make for opportunity ahead. Says Purington: "With the leaders in the space doing it, that is going to work it's way down."

Steven Perry, vice president at XA Investments, discusses the surge in activity and creation for non-listed closed-end funds, covering why money managers, including a number of prominent sponsors who have never been in the space before, are turning to the products now and how investors can use the new issues to access additional asset classes.

Cheryl Pate, senior portfolio manager at Angel Oak Capital -- co-manager of the Angel Oak Financial Strategies Income Term Trust (FINS) -- says the banking industry's wild ride since the failure of Silicon Valley Bank in March has created "a market dislocation" in pricing for bank equities and debt, which has created a strong opportunity for bank debt to outperform moving forward. Pate notes that the banking industry has quelled fears over failure contagion, the Fed is nearing the end of the rate-hike cycle and deposits have stabilized. Banks have proven resilient and posted solid earnings, which should combine to create stronger results as the rebound from last March continues.

John Cole Scott, president of Closed-End Fund Advisors -- the chairman of the Active Investment Company Alliance -- digs into his data to give a recap of the third quarter for the closed-end fund industry, noting that municipal bond funds and REIT funds particularly took it on the chin, with the entire categories being down during the period by 10 and 7 percent respectively. Business-development companies were the top category based on average returns, but senior loan funds were the can't-miss asset class, with all of the funds there being up in the third quarter.

Roxanna Islam, head of sector and industry research at VettaFi, says that cautious retail investors have been looking for safety and yield and that while closed-end funds have traditionally filled that bill, investors in ETFs that buy closed-end funds have been avoiding a lot of the struggles by turning elsewhere to invest. She believes that could be changing, however, as investors recognize the bargains that closed-end funds represent, particularly in ETFs of CEFs, where investors get diversification at a reasonable price.

Robert Bush, director of closed-end products at Calamos Investments, says that with risk-free money from bank accounts and Treasury bonds at high levels -- and with leverage costs up in response to those higher rates -- investors can have a lot of choices for good income without ever considering closed-end funds. But with the average closed-end fund discount widening from roughly 8 percent at the start of the year to nearly 10 percent today, closed-end investors are likely to be rewarded for their patience. Bush also discusses how CPZ, the Calamos Long/Short Equity and Dynamic Income Trust, has navigated these challenging conditions to be better positioned regardless of how the market plays out from here.

Duncan Farley, portfolio manager for BlueBay Asset Management -- manager of the BlueBay Destra International Event-Driven Credit Fund -- says that the rising cost of capital for businesses and interest rates that are staying higher for longer is creating more "special situations" opportunities and that it's not too late for investors to take advantage of those credits despite several years of strong performance in the event-driven credit arena. He noted that it's easy to shake off common worries over defaults rising when interest rates go up by buying paper as close as possible to the recovery value. His fund has largely avoided trouble -- as proven by Morningstar placing it at the very top of its peer group over its five-year existence -- and he believes it can continue to deliver strong results because good opportunities are easier to find in worrisome market conditions, though he says finding them requires more due diligence.

John Cole Scott, president of Closed-End Fund Advisors -- and the chairman of the Active Investment Company Alliance -- returns to The NAVigator noting that the discounts on muni funds have continued to get wider. He notes that the average discount for a closed-end muni fund stands now at 12.5 percent compared to their 10-year average of just under 5 percent, and talks about what is discouraging investors from heading into m unis now. He also compares muni funds to BDCs and discusses how investors should size-up current risks in credit before ramping it up in their portfolio. Plus, he discusses AICA's upcoming Fall Roundtable in New York.

Colin McBurnette, senior portfolio manager at the Angel Oak Funds, says that while high-rate and high-inflationary conditions have made a lot of investors worry about the housing market, those conditions -- along with wide spreads and low housing stocks creating an imbalance in the supply-and-demand dynamic -- have created real opportunities in the space. The tight market has made the housing market of mortgage credit particularly robust, with strong borrowers as the rate cycle is likely to turn soon; he says the housing and mortgage markets are much more robust now than the corporate credit market in the U.S.

Mitchel Penn, managing director of equity research at Oppenheimer and Co., says that higher interest rates and stubborn inflation have impacted business development companies in terms of both defaults and leverage, but he notes that BDC executives have taken steps to minimize the impacts. Moreover, current conditions should have BDCs primed for better returns than they could deliver during low-rate times; Penn also names five BDCs worth considering now.

Veteran money manager David Tepper, president of Tepper Capital Management, looks at four of the oldest closed-end funds -- Adams Diversified Equity, Central Securities, General American Investors and Tri-Continental -- that he has owned for decades, but which remain relevant and effective today, and which are trading at attractive discounts now.

John Cole Scott, president, Closed-End Fund Advisors -- chairman of the Active Investment Company Alliance -- discusses portfolio construction and the many factors that go into a diversified safe and solid separately managed account with closed-end funds and business-development companies as the primary focus. He details a diversified tax-sensitive income fund, discussing the many factors that went into selecting each security for it, and how his focus on certain key elements excludes some securities that other closed-end investors might gravitate towards. Plus, a tribute to the late Don Cassidy, best known for his time at Lipper and the Retirement Investing Institute.

In a bonus episode of The NAVigator, John Cole Scott, president of Closed-End Fund Advisors and the chairman of the Active Investment Company Alliance, discusses the historic level of deep discounts he is seeing in closed-end funds, and how that translates to buying opportunities now. Closed-end funds have seldom seen bigger discounts in the last quarter-century, Scott said, and says the current level of yields are helping to confirm the current opportunity, despite the beating that closed-end funds took a year ago. 'Buying after carnage is such a good closed-end fund decision,' Scott says.'You should be uncomfortable with the last three to 12 months of the fund you are buying today, because if it looks bad, it should look better later.'