The NAVigator

Eric Boughton, chief analyst at Matisse Capital and portfolio manager for the Matisse Discounted Closed-End Fund Strategy, says that the war in Ukraine has been creating deep discounts and bigger buying opportunities for closed-end fund investors, noting that emerging markets and international stocks went into the conflict already at low levels, which now means investors are getting 'a discount on a discount.' He notes that international equity closed-end funds now are trading at a median discount of 12 percent, compared to a long-term discount of 10 percent; international bond closed-end funds now trade at a median discount of 11 percent, compared to a normal average of 8 percent. Those conditions – and wider discounts – should improve investor confidence that the investments can rebound quickly from the war.

Seth Brufsky, chief executive officer for the Ares Dynamic Credit Allocation Fund, says that conditions since the end of the year have changed from concerns over what the Federal Reserve would do, 'changing the calculus' for how people should and will invest. Brufsky says the focus entering the year was on floating-rate investments, but now that there are lingering concerns about inflation and higher rates that -- along with geopolitical concerns -- are forcing investors to re-evaluate priorities but also investment options. Brusky says that fixed-income markets are becoming increasingly attractive in these conditions -- particularly in high-yield bonds, but also with some investment-grade securities -- because the potential for capital appreciation has grown dramatically.

Mike Taggart of Taggart Fund Intelligence, the executive director of the Active Investment Company Alliance, returns to The NAVigator following up on his recent discussion of buying assets rather than discounts by answering some questions from the audience about the persistence of discounts and where discounts fit into the picture once you have purchased a fund.

John Cole Scott, chief investment officer at Closed-End Fund Advisors and the chairman of the Active Investment Company Alliance, says that 20 investment firms have launched 30 new funds under the 'Closed-End Fund 2.0' format since 2019, and the results and opportunities are promising. While the new funds show an average discount over 7 percent, the new structure returns the funds to net asset value after 12 years, which means that some of these funds are long-term bargains right now; he names four of the 2.0 funds that look particularly attractive to him now.

Mike Taggart, founder of Taggart Fund Intelligence and executive director of the Active Investment Company Alliance, says that the stock market's rough January along with the war between Russia and the Ukraine have put the market in a tizzy and widened discounts for closed-end funds by over 1 percent on average this year, but he notes that while discounts have become attractive, they don't make for automatic buying opportunities. Some closed-end funds, Taggart says, will stay at deep discounts and will see the net asset value fall towards the discount instead of rising to create the standard payoff bargain buyers are seeking. He says investors need to want the underlying assets and believe in their potential, rather than simply buying the big discounts.

Chris Oberbeck, chairman and chief executive officer at Saratoga Investment Corp., says that the structure of business-development companies -- which allows assets to increase in value when interest rates rise, while keeping liabilities fixed, thereby raising spreads -- makes them particularly attractive to investors looking for better real yields in a rising-rate environment. Oberbeck explains, generally, how BDCs will be able to weather the first rate increase, whenever it happens, with much less impact than most income investments will experience.

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 have been impacted by headlines about rising rates and inflation, along with the stock market's heightened volatility and January losses. Fertig says that current conditions have changed some of his focus, moving him away from floating-rate funds -- which were trading at a significant discount a year ago, but which are close to net asset value now -- while convincing him to 'nibble' on some credit and mortgage funds that have fallen off in recent months, becoming more-attractive bargains as a result.

Mike Taggart, founder and chief executive officer at Taggart Fund Intelligence -- the recently appointed executive director of the Active Investment Company Alliance -- talks about his research into how closed-end funds have performed in rising-rate cycles, and also looks at how senior-loan funds perform, noting that the closed-end fund structure can make it harder for senior loans to live up to their narrative as being a plus asset when rates are going up.

Rob Shaker, portfolio manager at Shaker Financial, says that the market's recent struggles have re-started a cycle and repetitive pattern that closed-end fund investors should recognize and take advantage of. It starts when excessive selling pressures -- which the market experienced in January -- results in 'excessive selling' that widens discounts; once those selling pressures ease, the market rebalances and restores equilibrium, and investors take advantage of the bigger discounts to snap up bargains, which then completes the circle by raising prices and narrowing discounts to more normal levels. Shaker says investors should be at the buying point now, particularly for bond funds.

Duncan Farley, portfolio manager at BlueBay Asset Management -- manager of the BlueBay Destra International Event-Driven Credit Fund -- says that the many headline events affecting the market aren't all buying opportunities. The best opportunities in event-driven investing come from good companies with bad balance sheets or difficult circumstances, where the interval fund structure allows management to ride them back to good health, generating above-market returns in the process.

Connie Luecke, senior portfolio manager for Duff and Phelps Investment Management and chief investment officer of the DNP Select Income Fund says that the recently passed infrastructure bill -- plus the potential for elements of the Build Back Better bill to be broken out and passed -- should provide a business boost to energy and utility companies, communications firms and more, but she also explains why legislation isn't the only reason why infrastructure is poised to be a strong sector in the post-pandemic recovering economy.

Alex Condrell, managing director at Cliffwater discusses the firm's direct lending index and corporate lending fund and how investments in middle-market corporate credit should stand up to the challenges of rising inflation and interest rates, providing something close to historic return levels of 9 percent for the asset class without extending recklessly out the risk spectrum.

Robert Grunewald, chief executive officer at Flat Rock Global discussing how the interval-fund structure provides stability that allows a 'non-bank bank' -- which is the way he describes his firm -- to trade off some liquidity in pursuit of higher fixed-income returns. Operating in 'middle market credits' and investing in first-lien credits, Grunewald says that despite changing interest-rate and inflation conditions it remains reasonable to expect a return in the 7 percent range for the year ahead.

John Cole Scott, chief investment officer at Closed-End Fund Advisors and the executive chairman of the Active Investment Company Alliance, returns to the podcast this week and turns his lens forward, giving his 2022 projections for discounts, new funds, shareholder activism and more, and including some funds he says are well-positioned and constructed to benefit from the economic conditions that lie ahead.

John Cole Scott, chief investment officer at Closed-End Fund Advisors and the executive chairman of the Active Investment Company Alliance, reviews 2021, discussing the high number of closed-end funds that are currently trading at premiums, and the rebound that has represented in performance, as well as the expansive use of leverage, current high levels of dividend yields and more.

Nathan Briggs, a partner in the asset management practice at Ropes and Gray, discusses the burgeoning trend and inner workings of 'follow-on offerings' -- where closed-end funds raise additional capital and add to their outstanding shares -- and the mostly positive impact these actions have for shareholders.

Thomas DeCapo, partner at Skadden, Arps -- one of the largest law firms representing interests in the closed-end fund industry -- discusses developments and changes to the activist environment, noting that one thing he believes will not change is the high level of activity due to the many funds facing activists with stakes of 10 percent or more. DeCapo also discusses industry rumors that regulators are considering changing control-share statutes that have a major impact on how closed-end funds are governed.

Parth Doshi, vice president of closed-end funds at Nuveen, discusses the firm's new interval fund -- Nuveen Enhanced High Yield Municipal Bond Fund -- and how it compares to other closed-end funds. Muni bonds are a new area for the interval fund structure -- the Nuveen offering is just the second muni interval fund -- and Doshi discusses why investors might favor one structure over the other, or how both could be used in a diversified portfolio.

Gaal Surugeon, portfolio manager at Brookfield Asset Management's Public Securities Group, says that investing in physical assets like infrastructure and real estate provides inflation protection with stabilized yield potential and long-term growth prospects tied to the economic cycle, but the short- and mid-term prospects for real assets is also attractive now, given the economic recovery, investments in infrastructure and the need to fund upgrades to the underpinnings of society like airports, toll roads and more.

Stephen Hester, partner at Wide Moat Research and editor at the Intelligent REIT Options Advisor newsletter, offers his take on new developments within the business-development company realm, and compares how current market conditions are making BDCs an attractive alternative to real estate investment trusts, noting that the standard BDC cycle periodically makes them a buying opportunity -- especially compared to REITs -- and one of those times is now.

Michael Spatacco, director at Bancroft Capital, says that the latest evolution in closed-end funds will have more impact on the closed-end fund business and the evolution of funds and how they are sold than exchange-traded funds had on the traditional mutual fund industry. In a wide-ranging discussion on the state of the closed-end fund business, Spatacco says that the ETF evolution mostly changed the way funds are built, with the underlying investments remaining mostly the same; the changes in the closed-end fund business have dramatically expanded new offerings and who will participate in new funds, which is leading to the development of more new and interesting closed-end funds.

Matt Kence, portfolio manager for the Aberdeen Credit Income Strategies Fund (ticker ACP), says that the headwinds facing high-yield investors -- higher inflation and concerns over rising interest rates -- can be overcome with diligent security selection from the wider range of options available now thanks to record levels of bond issuance. Kence notes that if the economy delivers inflation and growth at the same time, high-yield bonds should do well, but the worry is that if inflation stunts growth -- which is not his base expectation -- that's when real troubles could arise.

John Cole Scott, chief investment officer at Closed-End Fund Advisors and founding chairman of the Active investment Company Alliance, gives his take on wher business-development companies stand midway into earnings season and with the New Year just around the corner. He highlights four individual BDCs, talks about portfolio construction and highlights an upcoming BDC event that the Alliance will host later in November.

Larry Holzenthaler, an investment strategist and analyst at Nuveen who specializes in floating rate and high yield investments says that income-oriented investors who have allocations to junk bonds are likely under-allocated to loan funds, which offer equal returns with less risk. Holzenthaler says the floating-rate opportunities are particularly attractive in closed-end funds, thanks to persistent discounts -- despite more interest in loans -- that let investors buy the economic earning power of a dollar in loans, plus leverage, for about 95 cents.

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.