The following article is an edited transcript from the in New York City earlier this fall. To view slides or listen to the entire presentation please visit www.CEFnetwork.com and look under the “Events Tab” or use the following link:
John Cole Scott, EVP Portfolio Manager at Closed-End Fund Advisors
Thomas Byron, Senior Portfolio Manager, Invesco
Robert Amodeo, Head of Municipals, Western Asset Management (part of Legg Mason)
Michael Taggart, VP, Director of Closed-End Fund Research, Nuveen Investments
Note: Some minor edits were made to this article since it was first published, as well as some of the comments attributed to Tom, Rob and Mike we incorrectly noted. They have now been fixed as of 12/19/14.
JCS: We’re going to get started here with the next panel talking about the advantages of tax-free investing in the closed-end fund structure. My name is John Cole Scott with Closed-End Fund Advisers. I’ve got some excellent panelists for you, some top minds in this sector. We’ve got Mike Taggart with Nuveen Investments. He’s also spent some time with Morningstar. Then we’ve got Robert from Western and Tom from Invesco.
This is going to be less of a presentation panel and more of a conversation panel. We’ve added a lot of time at the end for questions.
When people ask why closed-end funds, there are three main answers that we give at our firm. One is that it’s fixed capital, there’s no redemption pressures for those that trade muni bond funds. They typically don’t trade, some of them very actively. Then managers in the firms up here, they’re able to pick great bonds at great prices and not worry as investor sentiment shifts.
We also have leverage. Leverage is sometimes a dirty word but, in my opinion, with fixed capitalization, you add leverage, it’s a great combination for income investing.
Then we look at active management. With many closed-end funds, including muni funds, trading at 7-11% discounts, you’re effectively getting the active management for free. It’s a huge benefit.
With that, we’re going to go ahead and get into the panel. That’s the backdrop of the conversation. Michael, if you would start. Could you just give me the sense of your firm, how you approach muni bond investing with closed-end funds, and how you build the process and do the work for shareholders?
Mike: I just want to be absolutely clear with everybody. I’m the director of closed-end fund research and Nuveen Investments. Tom and Rob are the portfolio managers on the panel. Nuveen’s roots are in municipal bond investing. Today we offer a whole range of investment strategies; we analyze more than just municipal bond funds, but they are our home base. The way we approach it is we have a team of municipal credit analysts, 23 people strong. So because of that, they’re able to dig under the hood more than say if we didn’t have that large of a team.
We have over a hundred billion dollars in assets. We’re also the largest provider of national municipal closed-end funds both in terms of the assets and in terms of the number of funds. Somebody asked earlier, why don’t Nuveen and a couple of other sponsors trim down their line-ups? We have actually trimmed down our line-ups and we haven’t said that we’re going to stop. Just in a couple of weeks we’re taking four New Jersey municipal funds and turning them into one. Over the past two years we’ve removed, through consolidation, about 40 funds, primarily municipal bond funds, from our line-up.
JCS: Robert, can you discuss some of the work you do at Western, your team’s approach to buying munis, and your background. Read more…
December 8, 2014, Richmond, VA.— Closed-End Fund Advisors is pleased to announce an in-depth interview in The Scott Letter: Closed-End Fund Report with Donald Crumrine and Chad Conwell. Donald is portfolio manager to the funds’ advisor and chairman of the board, CEO and director of the firms funds: PFD, PFO, FFC, FLC, & DFP.
We found the interview to be a timely update on how investors can gain access to preferred equity exposure. Some highlights include the percentage of the funds’ dividends that were tax beneficial with qualified dividends (QDI). We also covered how the preferred equity market has changed since the financial crisis and how last year all actively managed preferred funds beat their index or ETF counterparts.
We also discuss how the funds are being positioned in the current economic and interest rate environment. If you are not already a subscriber to The Scott Letter, a subscription is free on our website www.CEFadvisors.com.
Once you sign-up, you will receive the interview as well as gain access to our firm’s periodic email updates on our services, CEF markets and various articles, videos, webinars and live CEF conferences or meetings we host or are otherwise involved with in some way.
Free Scott Letter Registration: www.cefadvisors.com/scottletter.html.
What a difference a year makes. After last year’s difficulties, analyst John Cole Scott of CEF Advisors believes the muni sector of closed-end funds now appears relatively attractive for discount-seeking investors.
John Cole Scott, CEF Advisors:
Muni bonds in the closed-end fund world is a big, a third, of the chunk of funds out there. And if you look at it right now they’re trading at about an 8 discount… This is from our closed-end fund data dated October 17th. And if you look at a longer term, 10-year average discount for muni bond funds, being this wide is more than a 2 standard deviation event, so yes, definitely on the cheap side. We know they got hurt in 2013, but on a one-year basis their net asset values are up about 19% year to date total return and market prices are up about 16% on a one-year total return basis.
As some investors may have noticed, muni funds have come a long way since last year’s decline.
Munis had a horrible 2013. They started the year off, they peaked at a 3 premium, they bottomed out, I think, at a 13-14 discount in the middle of the fourth quarter. And so, if you think about the sector, we were very cautious about them in first quarter of 2013, because we like the structure, we like the guts, we like tax-free bonds, but we felt that as a whole there… very hard to find value in that area, versus now it’s very easy to find value.
View Video: http://investius.com/2014/11/17/muni-cefs-2/
DISCUSSION WITH FINANCIAL ADVISORS – Webcast Replay
- Research and Portfolio Management Tips from CEF Specialists
- How to Manage a CEF Portfolio through Rising Rates
- Trading a CEFs for Relative Value Swaps vs. Market Timing
- Current Attractive CEFs
Note: The following is an edited summary of the transcript from the panel.
ELI: All right. I think we’ll just get started here. I’m Eli Eliasek, I’m the closed-end fund research analyst for Bank of America. Most of the speakers at the conference today have been portfolio managers at CEFs. You have also heard from closed-end fund analysts, like myself from the major wire-houses.
This panel includes closed-end fund analysts and portfolio managers of closed-end funds, so it offers a diverse span of perspectives. We have John Cole Scott, Executive VP of Closed-end Fund Advisors and a portfolio manager there, and Rob Shaker of Shaker Financial Services. Both of them run portfolios of closed-end funds. I have a few prepared questions for them and then we’ll open it up to questions from the audience.
I will ask each of you to offer a response to all questions. Let’s hear from John first. How do you first set up a portfolio of closed-end funds, what’s your process, and how do you manage that portfolio once it’s set up? Read more…
We recorded this video to help investors and financial advisors get a sense of what to expect and look for when seeking federally tax-free income in municipal bond CEFs. We focused on answering the following questions:
1. Why would someone buy municipal bond exposure through a CEF vs. other options?
2. One-third of all CEFs are focused on municipal bond, are they attractive now?
3. What is going on with earnings and UNII trends for municipal bond CEFs?
4. Why type of investor typically buys municipal CEFs?
5. What does a typical municipal bond portfolio look like as a CEF?
6. What are some key things you look for in a municipal bond CEF?
7. What are the risk factors to watch for with municipal bond CEFs?
Muni investing through CEFs is the only way our firm knows that you can take a leveraged muni bond portfolio and keep the tax-free nature of the yield vs. applying leverage in your own investment account. Also, when discounts are as wide as they have been recently, it is easy to argue that you are getting the professional management for “free” because you are buying for “extra yield” from the discount than the friction or drag of management fees on the portfolio’s net asset value (NAV).
We regularly give updates on all CEF sectors including municipal bond CEFs in our quarterly CEF research call and periodic Municipal bond webinar.
Watch Video Here: http://vimeo.com/johncolescott/muni-cefs
Capitala Finance has more equity exposure than most other debt-based business development companies so it offers higher potential upside, said John Cole Scott, Portfolio Manager for Closed-End Fund Advisors.
Scott added that Capitala is still a relatively new fund so it is still attracting new investors.
He is also bullish on Medley Capital, saying this highly liquid BDC has swung to a discount after selling at a premium for years, providing a nice entry point for a quality portfolio.
For those that were not able to attend our Quarterly Research Call on October 9, 2014, we have the replay link and slides below. This quarter we covered The Closed-End Fund Universe, both traditional CEFs and BDCs.
We are excited to now offer coverage of Business Development Company (BDC) CEFs alongside our coverage of Traditional CEFs.
Link to Webinar replay slides:
Overview Traditional CEFs: According to our CEF Universe Service dated September 30, 2014, during the second quarter of 2014 the traditional closed-end fund universe ended with 581 funds totaling $266.5B in Total Net Assets, which reflects a net asset growth of about +5.9% year-to-date. There were 229 total Equity funds and 352 total Bond funds. The average Discount to NAV is -7.9%, the average Market Price Yield is 7.1%; 7.9% for Equity funds, 7.4% for Taxable Bond funds, and about 6% for Municipal Bond funds. In general, discounts have widened about -1 ¾% during this quarter and a -0.8% below the quarter’s average Discount per fund. US and Non-US Equity funds had generally flat discount trends, though the widening was more prevalent in the other CEF sectors. This makes many CEF groupings and individual funds very attractive for investors willing to take a slightly contrarian view of the current market environment. Read more…