Closed-End Funds April 2012 Review and Outlook
Cohen & Steers
May 18, 2012
April 2012 Review and Outlook
We would like to share with you our review and outlook for the closed-end fund market as of April 30, 2012. For the month, the total return of the Morningstar U.S. All Taxable ex-Foreign Equity Closed-End Fund Index was +0.5% on both a market-price and net-asset-value (NAV) basis. Year to date, the index had a market-price total return of 9.9% and a NAV return of +7.6%. By comparison, the S&P 500 Index and the Barclays Capital U.S. Aggregate Bond Index had total returns of –0.6% and +1.1% for the month, and +11.9% and +1.4% for the year to date, respectively.
Closed-end funds had a modestly positive overall return in April, as gains from fixed income funds more than countered a slight loss registered by the equity group. Investors generally favored fixed income securities over stocks amid softer U.S. economic data (following positive surprises in the first quarter), renewed European sovereign risk concerns and declining Treasury yields. Closed-end fund discounts averaged 1.3% during the month; NAV performance tracked market-price returns for both equity and fixed income funds.
All sectors within the fixed income category advanced except the equity-sensitive convertibles group, which declined 2.0% based on market price. Funds that invest in preferred securities were a standout, with a return of +2.9%. Banks, the largest issuer of preferreds, continued to show a steady improvement in credit metrics, as revealed in April earnings reports. After being hit hard by short-lived weakness in mid-March, national municipal funds, which are not included in the index, bounced back strong, returning 2.4%.
Equity sectors had mixed results. The commodities (–3.0%) and energy-resources (–1.5%) groups declined as optimism over the economy cooled. The health-biotech (+3.1%) and U.S. hybrid (+3.3%) sectors were top performers. Real estate funds (+2.1%) also outperformed; REITs continued to benefit from low borrowing costs, moderate inflation and earnings reports that generally met or exceeded expectations.
The IPO market remained open
There were two closed-end fund IPOs in April: a $660 million offering that invests in short-dated high-yield securities, and a $220 million launch that targets real-assets securities, such as those issued by infrastructure and real estate companies. The total amount raised exceeded expectations for the month, although year-to-date issuance by closed-end funds through April was nearly 30% less than the same-period issuance in 2011.
Given various risks to the domestic and global economies and generally modest inflation, we expect monetary policy in the U.S. to remain accommodative. With borrowing rates likely to remain low for an extended period, we believe the yield advantage of leveraged closed-end funds will continue to draw investor interest. As a result, we see potential for the broad closed-end fund market to maintain historically narrow discounts, or even at times trade at premiums to NAV. In addition, the recent success of new issues should allow the closed-end fund IPO window to remain open in coming months. At the present pace, we do not believe new supply will pressure pricing in the secondary market or impede discount narrowing.
(c) Cohen & Steers