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How might using closed-end funds help you build a generally higher yielding tax-free municipal portfolio?
This 25 minute session will cover closed-end funds and how they work in general. Muni CEFs account for about 1/3 of 600 closed-end funds. CEFA will discuss what is “normal” across the muni sector, what benefits and risks investors should be made aware of before investing and where you can find free and paid help on the sector. We plan to record the session and will share the slides and replay links with all registered attendees, so please register even if you know you cannot attend and want to receive this information.
Time: March 4th, 2014 at 4:15PM EST
Register to attend Live or receive Replay Links: https://www2.gotomeeting.com/register/769545858
During The Session We Will Discuss:
+ Discounts: What is Normal, Now and Historically
+ Leverage: Types Used and Cost of Leverage for CEFs
+ Duration: The Difference Between Duration and Maturity
+ Credit Quality: When High Yield is Less Risky than Investment Grade
+ Total Return NAV Performance: Why it Matters & How to Judge Portfolio Managers and Expense Ratios.
+ Ways to Reduce The Risk of Dividend Cuts: When to “Buy-and-Hold” and When to be “Tactical”
Note: * The average market price yield on a National Municipal CEF is 6.4% according to CEFA’s Universe Data as of 2/14/14.
Closed-end funds (CEFs) are three things: Permanent Capital, Active Management and Investor Liquidity. The fixed capital feature is where the “closed” comes from as funds are created through an IPO and do not offer a daily exchange of shares at net asset value (NAV). CEFs have active management and offer investors daily liquidity on US exchanges. We see these characteristics as benefits because the fund manager doesn’t have to deal with redemption and in-flow pressures. CEFs are also able to offer preferred stock and employ other forms of leverage. These unique features have allowed CEFs, especially in the past 10 years, to focus on yield-oriented strategies without having to face the same pressures that open-end funds have. With past trend of falling interest rates, it has been a very favorable environment for CEFs.
According to our CEF Universe data, from December 31, 2003 through December 31, 2013, there have been 218 funds IPOed from 59 different fund sponsors, raising approximately $125 billion in investible assets at IPO. For perspective the CEF Universe is now about $250 billion in total net assets. The average IPOed fund had approximately $570M in assets. Presently, 159 or about 73% of the funds have some amount of leverage employed with 145 (67%) using more than 10% effective leverage. It is fair to say CEFs generally use their leverage capabilities.
Leverage has been broadly applied in almost every corner of the CEF universe except Covered Call Equity Funds, which by design have the goal of a less volatile NAV, for which leverage would be unlikely to facilitate. For the past decade yield and CEFs has almost been unanimous. For example, there are now only three equity funds currently showing a market yield under 5%. In the tables below we have summarized the last decade of CEF IPOs from December 31, 2003 through December 31, 2013.
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Last year, we penned an article about why we thought Municipal bond CEFs were about to suffer numerous and painful distribution cuts. The key data that suggested the cuts to our firm was a downward move in average Relative UNII from +23% to -18% in only seven months. For more detail, you can read the article on our blog (CEF-Blog.com) under the December 2012 section.
What is UNII? Undistributed Net Investment Income is a balance sheet item for a closed-end fund that helps account for retained or overpaid income distributions. Relative UNII is calculated as the funds UNII balance divided into the amount of one-year income-only yield. We have used this data point to normalize our UNII analysis for the past 6 years. We believe it allows for better fund-to-fund comparisons. Our firm’s primary research is based on comparing various data on CEFs to peer-group data and to themselves over time. In fact, UNII was the data point we wanted access to when we originally contracted with Fundamental Data to source our CEF Universe report in early 2008 though they were acquired by Morningstar later that year. We have been self-sourcing the data internally at the firm since May of 2012. Read more…
The mission of Investius is to help investors and advisors sharpen their game, and make better informed decisions, by focusing on potentially overlooked ideas and strategies.
We interviewed Brian Mitts via telephone on November 22, 2013 in order to gain a better understanding of NHF and why it was challenging for our firm to compare it to other closed-end funds that we track for our weekly Universe data service and for client accounts. Brian is not the named portfolio manager, James Dondero, but we think you will see from the interview that Brian is well aware of the Fund’s focus and involved in the investment process in a deep and meaningful way.
Highland Capital Management, headquartered in Dallas, TX, is a SEC-registered investment advisor with 17 funds under management. According to their website, the Firm is one of the most respected and experienced alternative investment managers serving the registered product market. As a manager of managers, we are dedicated to identifying and retaining best in class asset managers to serve as sub-advisers to our funds.
Highland Capital’s fund platform includes a diverse set of investment strategies—from broad-based equity and fixed income investments to alternative strategies including long/short and alternative credit strategies. They have only one closed-end fund, NexPoint Credit Strategies Fund (NYSE: NHF).
JCS: Good afternoon Brian. From my notes we have a lot of ground to cover. I would like to get started. Why did you IPO NHF, what was the initial strategy? How often do people talk about the IPO price vs. the current price?
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- Session Survey: Please answer a 6 question survey on the session: https://www.surveymonkey.com/s/9DYZB73
- Link to Destructive Return of Capital (RoC) Article:
- Fitch Ratings Webinar Replay: “2014 Outlook: Closed-End Fund Leverage” http://webinars.capitallink.com/2014/fitch/index.html
The Closed-End Fund Association: www.Closed-EndFunds.com
CEF Connect (Nuveen Sponsored): www.CEFconnect.com
Morningtar’s CEF Site:
Investment Company Institute: http://www.ici.org/research#fact_books
CEFNetwork (Pristine Advisers): www.CEFnetwork.com
CEF Insight (Activist Info from AST Fund Solutions): www.CEFinsight.com
Capital Link’s CEF Portal: http://cef.capitallink.com/
Morningstar Discussion Board (77K+posts since 1998):http://socialize.morningstar.com/NewSocialize/forums/100000006.aspx
The CEF Network on LinkedIN (1130+Members): www.CEF-Network.com
Seeking Alpha: http://seekingalpha.com/articles?filters=closed-end-funds