Closed-end-funds offer investors exposure to actively managed investment portfolios that oftentimes feature more dynamic strategies compared to passive ETFs. While many investors are attracted to the income profile of the various funds with corresponding impressively high yields and managed distributions, this article highlights the total return performance for CEFs year-to-date in 2020 across asset classes and market exposure.
CEFs Performance YTD 2020
Amid the global coronavirus pandemic and extreme market volatility, CEFs have not been spared from large losses. Across 496 CEFs we’re tracking, we highlight that the average fund is down 19.6% year to date or 16.8%. This is an underperformance to the broader market considering the S&P 500 is down by a more modest 13% this year with data through April 20th.
(Source: Data by YCharts/graph by BOOX Research)
Themes By CEF Asset Class
In many cases, the combination of concentrated portfolios in some of the weakest sectors like energy along with the use of leverage has led to devastating declines in individual funds. Several funds specializing in high-yield energy midstream companies and master-limited-partnerships “MLPs” are among the worst performers dragging lower the group data. This is consistent with the crash in energy prices as economic activity and industrial production grind to a standstill in many parts of the world. A good example of this dynamic is the Goldman Sachs MLP Income Opportunities (NYSE:GMZ) down by 90% year to date as one of the worst-performing CEFs this year.
In terms of equity-focused CEFs, it’s a diverse group so it’s hard to generalize. The healthcare sector has been resilient during this selloff and a couple of funds investing in the space have been among the leaders. Tekla Life Sciences Investors (NYSE:HQL), for example, is a top performer able to post a positive gain of 3% this year. On the other hand, most U.S. equity funds that were big winners in 2019, even able to outperform the S&P 500, have given back some of the gains amid the broader market selloff. That’s the case with Liberty All-Star Growth (NYSE:ASG) that is down 9% year to date.
Fixed-income focused CEFs have also fared poorly this year. Again, the use of leverage and a large number of funds focusing on high-yield, low-credit quality corporates have suffered from deteriorating credit conditions and widening credit spreads. Many funds have already been forced to cut their distribution amounts to remain sustainable adding to selling pressure. The result has been widening discounts to NAV, or in some cases, narrowing premiums further dragging lower investor returns. We previously covered Barings Global Short Duration High Yield Fund (NYSE:BGH) with a bearish article back in September 2019 and the fund is a laggard in the group down 35% this year.
There are simply fewer options in CEFs that focus on high investment-grade corporates or treasuries that would have been more resilient or even gained this year. One exception is the MFS Government Markets Income (MGF) which invests in treasuries and agency debt. MGF has been one of the best-performing CEFs this year with a 5.5% total return gaining from the move lower in rates.
One area of relative strength among fixed income CEFs have been funds focused on Municipal bonds. Across 146 “muni-CEFs” the average decline this year is a negative 7% compared to a weaker 15% loss on average for all other taxable bond funds. Muni CEFs are recognized as typically lower risk but are facing some fundamental pressures considering state and local governments are likely to see surging budget deficits and overall weaker credit conditions. The Eaton Vance Municipal Bond Fund (NYSE:EIM) is down just 2% this year but still announced a 10% cut to its distribution rate highlighting the difficult environment. We have a cautious outlook on munis overall.
To recap some of the themes in CEFs this year:
- Extreme market volatility amid the coronavirus pandemic sell-off has driven negative returns among most CEFs in various asset classes.
- Leveraged CEFs have tended to underperform with more downside risk.
- High yield and junk-bond fixed income pressured from widening credit spreads.
- Municipals were relatively more resilient with less volatility this year but still down as a group.
- Several funds have been forced to cut distributions given declining NAV values.
- Widening CEF market price discounts to NAV further pressing shareholder returns.
The Best-Performing CEFs YTD
The list above highlights the best-performing CEFs this year sorted by total return on market price. As mentioned, several funds investing in the municipals space are among the top performers. That being said, only 11 CEFs in total have a positive return in 2020.
A couple of precious metals focused funds are near the top including the Sprott Physical Gold Trust (NYSE:PHYS) and Sprott Physical Gold and Silver Trust (NYSE:CEF) each with a positive return of 12% and 5% each respectively. Gold has been one of the strongest asset classes in 2020, up 11% and these two funds have benefited from holding physical bullion.
The Worst-Performing CEFs YTD
On the other end, equity CEFs focused on energy and MLPs have been among the worst-performing this year. The last column on the table below includes the stated distribution yields. Keep in mind, many of these funds have already cut their payouts so the yields are no longer relevant in some cases. Even among high yield with managed distributions CEFs, we urge investors to be skeptical of yield above 15% as a rule-of-thumb.
At the extreme, Duff & Phelps Select Energy MLP Fund (NYSE:DSE) has declined by 90% in 2020. In March, the company announced a proposal to dissolve and liquidate the fund in a measure that needs to be approved by shareholders at the annual meeting in May. Other examples of funds among the worst performers that have cut their distribution this year include the Tortoise Energy Infrastructure (NYSE:TYG), Center Coast Brookfield MLP & Energy Fund (NYSE:CEN), and Cohen & Steers MLP Income and Energy Opportunity Fund (NYSE:MIE).
Real-estate equity CEFs have also been poor performers this year. This is related to the general weakness among REITs considering the disruption to various segments like commercial, retail, and office properties during the coronavirus pandemic. The RMR Real Estate Income Fund (NYSE:RIF) and the Neuberger Berman Real Estate Securities Income Fund (NYSE:NRO) are each down by 45% and 40% each respectively.
Analysis And Forward-Looking Commentary
The ongoing coronavirus pandemic and related disruptions to the global economy continues to be the key theme in the markets. Since the period of extreme volatility in March which may have been exacerbated by signs of financial contagion and panic selling, conditions have at least stabilized over the past month. There is a sense that an “all-in” approach to monetary policy and government relief efforts around the world will help to mitigate the near-term repercussions.
That being said, there is still significant uncertainty regarding the recovery process which will be challenged by high rates of unemployment. We expect conditions to remain volatile over the coming months as economic indicators and corporate earnings shed light on the extent of financial damages while sentiment will act as a headwind for the investment environment. For equities, recognizing that it may be difficult to retest the market lows from March, we still believe risks are tilted to the downside and have an overall bearish outlook. Fixed income and bonds are looking better, but we favor high investment grade and shorter maturities on the yield curve.
5 CEFs To Buy Now
- ASA Gold & Precious Metals (NYSE:ASA) with $285 in AUM is unique among CEFs as it’s the only fund to invest in precious metal miners. ASA is long-only and does not utilize leverage. The attraction here is that this is an actively managed portfolio comparable to the VanEck Vectors Gold Miners ETF (GDX). We are bullish on gold which should benefit in the low-interest-rate environment as a store of value and safe-haven trade. Compared to the commodity funds like Sprott Physical Gold and Silver (NYSE:CEF), we believe the miners in ASA have more upside in a bullish environment for gold. What we like about ASA is that it currently trades at a wide discount to NAV of 13.4% which could narrow representing an incremental return for shareholders. Data by YCharts
- BlackRock Energy & Resources Trust (NYSE:BGR) as the name implies invests in energy sector stocks. What’s interesting about BGR is that it does not hold any MLPs but instead focuses on large-cap global E&P companies with top holdings in Royal Dutch Shell PLC (NYSE:RDS.A) (RDS.B), Total SA (TOT), and Exxon Mobil Corp. (XOM). Recognizing the enormous challenges facing oil and gas, we think these leaders are best positioned to survive the current low pricing environment and have value at current levels. Our bullish case for energy is based on value at current levels as supply coming offline from weaker and small companies beyond the OPEC cuts should create a floor for the commodity price. BGR pays a monthly distribution of $0.068 per share representing a yield of 12.3%.
Royce Micro-Cap Trust (NYSE:RMT) is down by 29% in 2020 consistent with trends among small-cap companies. A comparable for RMT would be the iShares Russell 2000 ETF (IWM) which is similarly down by 29% year to date. We think the active management of the Royce fund can better capture potential future upside compared to IWM from current levels. We think there is a relative value among small-caps compared to large-caps which have outperformed in this market environment.
- While we’re not calling a bottom for real estate, it’s hard to bet against the Cohen & Steers Total Return Realty Fund (NYSE:RFI). This was one of the best-performing CEFs over the past decade that benefited from the bull market in REITs. The fund is down 18% this year and we think it’s okay to start taking a bite for long-term investors. RFI is non-leveraged and features a distribution yield of 8.5% paid monthly with a relatively reasonable 0.86% expense ratio. This is our top pick among real estate CEFs and we would look to add on further weakness over the next year.
- The MFS Intermediate Income Trust (NYSE:MIN) invests in U.S. Treasuries and investment-grade U.S. corporates representing a defensive allocation. The shorter duration profile can serve to limit portfolio risk and add to diversification. MIN has a positive return of 0.7% in 2020 and offers a yield of 9.2% distributed monthly through regular use of return of capital payments. This is a modestly conservative CEF to ride out the market volatility and later rotate into risk assets.
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Disclosure: I am/we are long ASA, BGR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: long various funds in personal account