The NAVigator

In this bonus edition of The NAVigator, John Cole Scott, chief investment officer at Closed-End Fund Advisors and executive chairman of the Active Investment Company Alliance again helps Chuck Jaffe answer audience questions, this time going into the nuts and bolts of how funds work to answer a complex inquiry about proxy votes, distribution decisions and how investors should view and respond to these actions.

Sam Brothwell, director of research at Energy Income Partners, says that the frothy market for energy has created solid opportunities for infrastructure plays, such as pipelines, storage facilities, and liquid natural gas logistics companies. Brothwell discusses the emergence of renewables, noting that while they hold tremendous potential, they are not replacing legacy energy sources for use, and they should not replace those companies in investment portfolios either.

In this bonus edition of The NAVigator, John Cole Scott, chief investment officer at Closed-End Fund Advisors and executive chairman of the Active Investment Company Alliance dispels the notion that closed-end funds are only suited for individuals in or near retirement age, investing in tax-advantaged accounts, helping host Chuck Jaffe answer a listener's question. He offers suggestions and creative ways that a younger investor can enhance an established taxable portfolio with a few well-chosen closed-end funds.

Eric Chadwick, president and portfolio manager at Flaherty & Crumrine, says that at a time when investors are searching for yield and are being tempted to take on more risk to get it, preferred securities are shining, providing a relatively attractive return without adding danger to the portfolio. Chadwick notes that preferreds now are offering the best credit quality he has seen in years, and at shorter durations, making them less risky than high-yield and emerging-markets debt, and more in line with investment-grade bonds. That said, those conditions have generated significant demand for preferreds, generating premiums that closed-end fund investors must consider.

Bryce Doty, senior portfolio manager at Sit Investment Associates, says that yield-hungry investors can pursue better payouts through closed-end funds without stretching dangerously for yield, though he notes they will want to diversify -- and offers a number of promising funds to fill those varied portfolio slots -- in order to better manage the risk that typically comes with pushing to get higher distributions.

Erik Herzfeld, president of Thomas J. Herzfeld Advisors, says that investors are sacrificing returns for liquidity when they choose traditional mutual funds and ETFs instead of closed-end funds. The issue -- which arises due to the structures of the different fund types -- is a problem because most investors never even consider it; Herzfeld notes that most investors would be willing to trade liquidity -- to lock in for longer -- if it meant for better returns from fixed-income on long-term investments.

In this bonus edition of The NAVigator, Jonathan Browne, director of research at Robinson Capital, talks about how closed-end funds can help investors meet their needs for income in ways that traditional fixed-income strategies are struggling to do given current rate levels. By managing duration and supplying above-market yield -- and by focusing on credit risk at a time when it is more worrisome than interest-rate risk -- Browne says investors can better achieve income goals.

James Thom, senior investment manager in Aberdeen's Asian equities team based in Singapore and portfolio manager for The India Fund, says that the country's economic recovery from Covid-19 has resulted in astronomical growth levels -- significantly higher than in the United States -- that have the potential to continue longer, since the recovery there is still in early stages. Still, with vaccination levels low and concerns over variants, Thom noted that he expects more volatility ahead during the recovery process before, ultimately, the nation's demographics win out and pay off in a long-term growing market ahead.

Michael Ordonez, director of client portfolio management at Thornburg Investment Management, says that the biggest issue income investors face today is economic dynamics that are leading to a 'very difficult sustained income demand landscape, with less and less opportunities to generate that income.' That situation led Thornburg to enter the closed-end fund space for the first time with the Thornburg Income Builder Opportunities Trust, a new fund that uses the new, commonplace pricing structure, which Ordonez describes as 'Closed-End Fund 2.0' thanks to enhancements that should make the investing experience better for investors.

Daniel Wildermuth, chief investment officer for the Wildermuth Endowment Fund -- an interval fund that uses an endowment-like investment strategy built around alternative investments -- discusses how private equity investments have not only weathered the storm of the pandemic, but have largely outperformed the broad stock market over the longer term, and how they can spark and diversify a portfolio.

The right mix of closed-end funds creates a quasi-bond, delivers steady ionJohn Cole Scott, chief investment officer at Closed-End Fund Advisors -- the founder/executive chairman of the Active Investment Company Alliance -- discusses what is involved in turning portfolios of closed-end funds into 'synthetic bonds,' delivering consistent returns above what is available in the fixed income markets, during times of concerns over inflation interest rates and possible tax hikes.

Roxanna Islam, associate director of research for Alerian and S-Network Global Indexes, discusses why her firm's indexes of closed-end funds show particularly high yields right now, but suggests that investors keep an eye on distribution coverage ratios -- which look at whether a fund's earnings can cover its payouts -- to identify issues where distribution cuts are more likely in the future.

Mike Taggart, founder of Taggart Fund Intelligence, joins the NAVigator to discuss current trends in closed-end fund mergers, and while he says that most deals benefit shareholders and management alike, he raises concerns about those times when consolidations and investment-mandate changes aren't great for a fund's owners. Taggart cites two affiliated funds that have been going through transitions, NexPoint Strategic Opportunities and Highland Income, as examples, noting that the former has been in the process of converting to a REIT for year, while Highland Income is currently proposing to morph into a diversified holding company, a move that has drawn scrutiny from activist investors; Taggart says the cases highlight the importance of shareholders reading their fund's documents, to learn the benefits and downsides before approving a fund's change.

Portfolio manager Brian Kessens of Tortoise Ecofin, who oversees the closed-end Tortoise Pipeline and Energy, and the Tortoise Power and Energy Infrastructure Fund, says he expects double-digit total returns from midstream and other energy companies based on current high yields, supported by stock buybacks and debt paydowns. The energy sector had a rocky time through 2020 and has rebounded sharply, but Kessens says valuations generally remain reasonable and that 'as the market starts to appreciate some of these growth opportunities, there's further upside ahead.'

Nicholas Marshi, editor of the BDC Reporter says that business development companies are heading into 'a bit of a golden age' over the few years as a result of low interest rates continuing to help with the cost of capital, improved credit conditions generally, and thanks to mergers that have swallowed up some of the weaker players in the field. It all combines to make Marshi's take on the BDC sector as good as it has ever been in his two decades covering the field. Marshi also gives his take on the sector's second-quarter earnings picture, which looks like it will see nearly all BDCs return to record NAV levels, completing the strong bounceback from a disastrous fall early in 2020.

Jerry Paul, senior vice president of fixed income for ICON Advisors -- manager of the ICON Flexible Bond Fund -- says that fears of rising interest rates and inflation haven't made reasonable yields on closed-end investments dry up. Paul continues to look at closed-end activism situations, which has brought him to bank-loan funds; he worries about decreased investor activism but thinks they will always play a role in closed-end fund investing.

Patrick Galley, chief investment officer at RiverNorth Capital Management -- which runs four municipal bond closed-end funds that invest in both individual bonds and in other muni closed-end funds -- says that as tax-equivalent yields in the muni space have become relatively attractive, the supply-demand picture has changed, narrowing discounts. That doesn't diminish the tax edge provided by the bonds, but makes selective buying critical for investors looking for tax advantages now.

Dan Omstead, chief executive officer at Tekla Capital Management -- which sponsors four health-care oriented closed-end funds -- says that the pandemic proved the promise of health care and biotech companies as it helped vaccine maker Moderna grow from a small form to one of the largest health-care companies in the world, and now he is looking at 'a new generation of companies that are well funded and developing very innovative products against every health-care target you can imagine.'

Long-time activist investor Phillip Goldstein, co-founder and portfolio manager at Bulldog Investors, says that narrowing discounts and regulatory and legal changes have made it tougher for shareholders to find appropriate targets where they can mount a viable campaign against management. A new law proposed in Congress would take that further, Goldstein says, but he ultimately believes that activists will adjust and continue to bring action in cases that warrant the approach.

It's the 100th NAVigator podcast, and John Cole Scott, chief investment officer at Closed-End Fund Advisors and the executive chairman of the Active Investment Company Alliance returns to discuss narrowing discounts and why investors shouldn't wait for them to widen before investing, developments in the closed-end business, the state of closed-end funds now and a few funds worth considering for the second half of 2021.

Portfolio manager Rob Shaker of Shaker Financial Services returns to The Navigator, having been a happy camper when discounts grew massive at the start of the pandemic, and having been more circumspect as they narrowed late in 2020. Now, he's seeing pockets of opportunity, looking for relative bargains and watching to see whether closed-end funds now are repeating their pattern from the financial crisis of 2008, when discounts got huge, then tightened up, then struggled during the "taper tantrum" reaction to Federal Reserve efforts in 2013. He's watching the Fed -- and the market's reaction to it -- now to see if history will repeat for closed-end investments.

Daniel Ashcraft, portfolio manager for Gateway Investment Advisers -- part of the firm's team responsible for running the Nuveen S&P 500 Buy-Write Income Fund -- says that with volatility on the rise and likely to stay that way, covered-call strategies are headed for a period that should be ideal, where they can deliver their 'bread-and-butter' of lower-volatility exposure to the markets with attractive risk-adjusted returns.

Bob Long, chief executive officer at Conversus, discusses how 'tender funds' give investors access to private markets, which creates improved diversification and generates an investment premium. Long discusses the pros and cons to the fund structure, as well as the challenges of evaluating the funds given the absence of ratings and rankings for the funds.

Randy Anderson, chief executive officer at GC Asset Management and portfolio manager for the Griffin Capital Institutional Access Real Estate fund says that the bad headlines the real estate market got during the coronavirus pandemic have not materialized as expected, at least where institutional real estate (high quality properties/investable markets), noting that the market has largely recovered and are now showing new opportunities ahead. That said, he noted that there will be heightened volatility, which is countered particularly well by interval funds, which themselves have limited liquidity helping shareholders ride out the bumps.

Kimberly Flynn, managing director for alternative investments at XA Investments, discusses how money managers benefit from opening London-based unit investment trusts -- roughly the equivalent of a US-based closed-end fund -- and how the strategies have synergies, especially with illiquid alternatives, that are making for new and interesting investments, notably right now in the development of ESG-based infrastructure funds.

Eric Boughton, chief analyst at Matisse Capital and portfolio manager for the firm's closed-end strategy funds, says that since taking a beating during the 2020 pre-pandemic market meltdown, closed-end funds have rebounded to where discounts on average are now 3 percent, compared to a long-term average discount of 5 percent, making this 'a less-than-average time to invest in closed-end funds from a discount perspective.' Still, he noted that there are sectors and industries that remain cheap, and he highlighted master limited partnerships, noting that the median discount for the sector is currently 16 percent, compared to the average of 6 percent over the last 15 years. In this NAVigator bonus -- originally broadcast as the Money Life Market Call with host Chuck Jaffe -- Boughton also discusses the prospects of some individual funds.

Mark Asaro, director of investments for Noble Wealth Management, says that investors who are staring down low interest rates that have them questioning the classic, traditional 4 percent 'safe withdrawal rule' should be looking at closed-end funds to bolster returns and to act as a paycheck-replacement, providing steady income that -- when applied tactically -- should weather changing inflation and interest-rate conditions.

Mike Taggart, founder and chief executive at Taggart Fund Intelligence -- a new analytical firm being built to cover closed-end funds -- says that individual investors and financial advisers should move away from their obsession over discounts in closed-end funds, noting that total return and other factors drive long-term satisfaction with a closed-end fund investment. He discusses the factors he is focusing on -- and that he thinks investors should be looking for -- as well as the need for independent fundamental analysis of closed-end offerings that he feels the industry currently lacks.

John Cole Scott, chief investment officer at Closed-End Fund Advisors and the executive chairman of the Active Investment Company Alliance, says that with strong recent performance, 'getting big fat discounts continues to be hard,' but he says that shouldn't dampen enthusiasm for closed-end funds and business development companies. He cites opportunities in energy, real assets and real estate funds and notes that narrower discounts make this a time to consider non-listed funds, which tend to be less levered and volatile in the choppy market conditions we're likely to see moving forward.

Tom Dinsmore, chairman and chief executive at Dinsmore Capital Management, which manages the 50-year-old Bancroft Fund and several other issues that specialize in convertible securities, says that investors looking to increase yields with a 'bond-like equity' will be hard-pressed to create a portfolio of currently available convertible issues that do the job. He notes that many new convertible issues -- coming from health-care and technology companies -- require the underlying common stock to do well, and don't carry big coupons, so that investors should use them as a lower-volatility equity alternative.

Michael Spatacco, director at Bancroft Capital, discusses how ESG investing -- for environmental, social and governmental factors taken into consideration -- is starting to gain a foothold in the closed-end funds with the opening of a new issue from Nuveen that he has been an adviser to. He expects the trend to continue, as the closed-end fund space more fully reflects the rest of the world, which has seen tremendous movement of monies into 'social investments.'

With many experts questioning the validity of classic investment allocations, Patrick Galley of RiverNorth Capital Management discusses how closed-end funds fit into the standard 60-40 stocks/fixed-income mix as a way for investors to get more from the bond side of the equation without actually changing their broad asset plan. He also discusses how current market times -- with the threat of rising interest rates and inflation mixing with lingering discounts from the market meltdown of early 2020 make for interesting opportunities now as both a closed-end fund investor and for fund sponsors.

Keith Ashton, portfolio manager for the Ares Dynamic Credit Allocation Fund (ticker ARDC), talks about why he likes collateralized loan obligations and other credits as a way of adding low-duration, high-yielding income instruments to a portfolio, and discusses what investors should expect from adding these alternative credits for the income-generating side of their portfolio.

Michael Naughton, chief operating officer for U.S. retail at Lord, Abbett and Co., says the interval-fund structure -- which limits shareholder redemptions -- has given managers of the Lord Abbett Credit Opportunities Fund the ability to pursue the firm's best ideas, including illiquid investments, and discusses how the liquidity risk of interval funds can balance out other risks faced by fixed-income investors in today's challenging interest-rate environment.

Craig Packer, co-founder, Owl Rock Capital Partners and chief executive officer at Owl Rock Capital Corp., says that business-development companies held up well through the pandemic -- noting that his own company has been making loans at rates that are twice the cost of the financing -- with better-than-expected performance which should only get better as the economy re-opens. He also discusses the impact of interest rates and inflation and more on lending activity, and whether booming activities in SPACs -- special purpose acquisition companies -- is having any impact or fallout on BDCs.

John Miller, head of municipals at Nuveen, says that the combination of the American Recovery Act and the progress towards recovery and the growing vaccination numbers, have made it so that state and local governments that had been crying poverty are now seeing a boom. He notes that municipal tax revenues have held up better than expected through the pandemic, and now are poised to increase; coupled with stimulus monies, he believes conditions are right for improved credit quality which should help muni bonds thrive for at least the next few years.

Will Rhind of GraniteShares talks about balancing high yields against risk in the GraniteShares High-Income Pass Through Securities ETF, a fund that invests entirely in business development companies and closed-end funds. Rhind discusses why the fund currently favors closed-end funds slightly, how he believes it is miscategorized by the 'stack-and-rank services' like Morningstar and talks about a few investments and why they pass muster with the fund's methodology.

Nick Holmes, portfolio manager for the Tortoise Essential Assets Income fund, discusses how investing in water infrastructure is mostly lumped in with other infrastructure plays, which he considers a mistake, noting that water is viewed differently as an asset class around the world than it is in the United States. He explains why his fund gets involved in private investments, how it was hit harder than most closed-end funds during the market';s 2020 decline and why he thinks both the fund and water assets are poised for success moving forward.

Paul Wick, long-time manager of the Columbia Seligman Communication and Information Fund -- one of the most successful sector funds in history -- talks for the first time about managing a closed-end fund, Columbia Seligman Premium Technology Growth, and discusses the similarities and differences between the two, and whether he views the closed-end fund as a chance to get a bargain price on his flagship fund. One similarity between the funds: annualized average returns north of 15 percent since inception.

Neil Azous, chief investment officer at Rareview Capital, says that 10-year real US interest rates -- which have been on the rise for the last few weeks -- are 'the most impending danger' to investor portfolios. He says the market is now acting as if the pandemic is nearly over and says that investors need to be thinking of the big economic themes beyond the re-opening, including the changing rate picture.

Maury Fertig, chief investment officer at Relative Value Partners, discusses the factors he considers when picking closed-end funds to add to client portfolios, and how those criteria are impacted by current market conditions that have seen closed-end issues get whipsawed by the market over the last year. Fertig appeared on The NAVigator last week, but this appearance in the Money Life Market Call serves as a special bonus episode/follow-up with much more of his closed-end fund insight.

Maury Fertig, chief investment officer at Relative Value Partners, says the market's rebound from a year ago has made it harder to find closed-end issues worth buying and holding now, but he says there are selected opportunities still worth pursuing. He suggested that floating-rate funds and credit funds will continue to perform well, and that closed-end funds still offer value from a discount level, but with discounts narrowing, investors should look at cutting back. He also discusses closed-end funds as an alternative source of yield, why he never buys at a premium and more.

Bill Pekowitz, portfolio manager for the Aberdeen Global Premier Properties Fund, says that lockdowns during the coronavirus pandemic hit brick-and-mortar retail, hotels, office space and the urban apartment sectors, but boosted cell towers, warehouses, industrial data centers and more. Now, with economic recovery, he expects some troubled areas to rebound and suggests balancing real estate investments between those that are peaking with those that are recovering.

Wendy Huang, business development manager for primary markets at the London Stock Exchange Group, discusses the differences between American markets and closed-end funds and those in England and explains why fund sponsors and businesses are finding it particularly lucrative and timely to take their issues overseas now.

Anne Kritzmire, an independent closed-end fund trustee, explains how the role of directors differs in closed-end funds compared to traditional mutual funds, where boards are known for passing everything management's way. She explains the ways in which independent directors in closed-end funds have a more active hand in oversight on key factors like leverage, involvement in alternative and illiquid investments, dividend payout policies and interactions with activist shareholders, and how that involvement is crucial in protecting investors.

Michael Roomberg, manager of the Miller/Howard High Income Equity Fund, says that the end of election uncertainty -- and sustainable fiscal policy that provides a tailwind for domestic consumption -- and the development of vaccines for coronavirus fueled a rally in value stocks at the end of 2020 that should carry through 2020, especially as investors get more excited about stocks and broaden their interest beyond the few names that drove the market a year ago. While value has struggled as an asset class since the turn of the century, Roomberg notes that it outperformed growth stocks for the majority of the 1990s, and he thinks that, pos-pandemic, high-dividend value stocks are set up for that kind of run of outperformance again.

William Costigan, managing director at Guggenheim Partners and senior member of the active fixed-income team, says that with real interest rates low and nominal yields on Treasuries at or below zero, investors must look to creatively expand their bond exposure. He calls for investors to be more creative, more thoughtful and do more homework' -- looking at, for example, alternative credits -- if they are going to be satisfied with returns in the current environment.

Larry Antonatos, portfolio manager overseeing real asset strategies at Brookfield Asset Management, says that infrastructure investments will benefit in 2021 from the political changes in Washington that may spur additional government investments, as well as the end of the pandemic, which should lead to economic expansion. He says that real assets -- and infrastructure in particular -- will benefit from job creation in the short run and long-term GDP growth down the line to pick up performance in the year ahead and beyond.

John Cole Scott of Closed-End Fund Advisors, the founding chairman of the Active Investment Company Alliance, compares 2020 to unusual years from the past, looks at the best and worst performing investment areas for closed-end funds from this year and looks ahead at the opportunities ahead in 2021.

Cheryl Pate, portfolio manager for Angel Oak Capital, says that banks took steps to shore up their balance sheets and now are sitting on excess reserves, which should boost earnings in the latter half of 2021. Coupled with a positive picture on interest rates, inflation and government oversight, she says valuations are poised to show gains next year, although she notes that she has a slight preference for owning financial debt versus equity in the year ahead.