CEF Weekly Review: Poor performers are merged

Welcome to another installment of our weekly CEF Market Review, where we discuss closed-end fund (“CEF”) market activity both from the bottom up – highlighting individual fund news and events – and from the top down – providing an overview of the wider market. We try too provide historical context as well as relevant themes that appear to be driving the markets or that investors should watch out for.

This update covers the period up to the first week of September. Be sure to check out our other weekly updates covering the business development company (“BDC”) as well as the preferred/baby bond markets for insights into the broader income space.

Market action

CEF sectors were mixed during the week, with equity sectors posting declines in NPV due to broader equity weakness. Mostly fixed income CEF sectors retained, especially the Muni funds.

The average CEF sector discount remains on the expensive side of fair value, especially in the context of the last decade.

Market Themes

Tortoise plans to merge two of its MLP funds – NTG into TYG. To sweeten the offer for shareholders, TYG’s board approved a 40% increase in distributions, which will be paid monthly rather than quarterly. It is no surprise that NTG is merged into TYG and not the other way around. Despite the growth of MLPs over the past two years, NTG’s 5-year total NAV return is -10% per year – the worst of the remaining Tortoise CEFs – which is quite something. It makes sense to try to get this out of the market’s consciousness. We have seen the same theme in BDCs where underperforming BDCs like FCRD and BKCC have been merged into other BDCs. This is also something to keep in mind when looking at the historical returns of the BDC sector, as they can be significantly affected by survivorship bias.

Separately, the company will conduct a strategic review of CEF TEAF. Tortoise said she was disappointed with the fund’s performance and its steep discount. The performance angle applies to both price and NAV. Since inception in 2019, total price CAGR is -1% annually and total NAV CAGR is +1.2%.

The fund is somewhat unusual in combining private and public assets in its portfolio, and this strategy will be reviewed. Private assets are not in themselves the cause of the broad reduction – loan CEFs AIF and AFT held a third of their portfolio in private assets and were trading at premiums before their merger into MFIC.

The way to get the discount to move would be to: 1) improve performance, 2) halve the extremely high management fee of 1.35%, 3) say the fund closes 100% at its maturity of 2031. Alternatively, the fund may divest its private assets and switch to an open-end fund. Remember that this happens with three other turtle CEFs: TPZ, TTP, NDP.

Market Commentary

The beginning of the month brought news about the distribution of CEF. Nuveen continues to increase distributions for non-leveraged Muni funds, eg NUV, NUW, NMI, NXN, NNY. Interestingly, NIM did not get a boost this time. It remains quite attractive due to the high discount and, like other non-leveraged CEFs, very efficient net income generation.

There are no leverage costs to eat into profits, and the discount actually offsets the management fee, allowing investors to own a managed portfolio for free.

Elsewhere, Invesco raised the distribution of its VBF bond fund by 3%. BlackRock made small adjustments to their equity funds eg BMEZ, BSTZ, BIGZ, BCAT, ECAT. Eaton Vance reduced distributions for two CEF credits EFR and EFT and EVF. These are the second cuts in a row, and it certainly appears that the CEF increases in loans that investors previously enjoyed are being reversed. This will have a direct impact on their relative ratings, as shown in the recent article. The loan CEF sector remains more expensive than the average CEF sector; however, it has become cheaper in the last two months. We expect this trend to continue. I exited the loan CEF before the recent relative downtrend in valuation.