A couple of things we just learned from the Closed End Fund Association: One, there’s such a thing as the Closed End Fund Association. Two, closed-end funds have been around in the U.S. since 1893 – some 30 years before open-end funds made the scene in the 1920’s bull market. Who’d have thought?
Unlike traditional open-ended mutual funds, closed-end funds have a fixed number of shares and trade on stock exchanges
And here’s a thing we just learned from Morningstar: Of the 539 closed-end funds on U.S. exchanges today, eighty are trading at a premium to their net asset value – a market distortion that will almost surely translate to sharp declines when interest rates pick up. Who’d be so thoughtless?
The Pimco Global StocksPLUS & Income Fund yields 10.5% and trades at a 70% premium to NAV
It’s easy to figure that this outsized batch of overvalued funds is among an alternative universe of income-generating investments whose popularity has been amplified by near-zero interest rates. The resulting – and not too thoughtful – surge in demand for the closed-end funds’ fixed supply is pushing market values above the sum of their underlying assets. Who’s irrational?
The recently launched Gabelli Go Anywhere Trust Combo Fund is already trading at a premium of more than 45%.
No surprise that Mario Gabelli, one of Wall Street’s clearest thinking money managers, is advising people not to buy any CEF with a big premium, including those under his watch. Why? To quote the discerning Mr. Gabelli: “Big premiums make no sense.” That’s a thoughtful way of saying any purchase greater than net asset value can only a bet that other “investors” will be willing to pay an even higher price down the road. Who, in other words, will be the greater fool.
What the markets have been doing…
Despite a fair amount of action in both the political and earnings arenas, stocks moved little over the two-week stretch. Even the tech-heavy NASDAQ, which received a nifty boost from Microsoft’s solid earnings report, ended very near where it started. Notably, Microsoft stock finally broke through the record high it established more than 15 years ago.
The period also brought little in the way of significant economic data, though conviction appeared to grow that the Federal Reserve would raise interest rates by the end of the year, in no small part due to comments from the head of the New York Fed. Expectations of a rate hike helped the U.S. dollar reach its highest level in eight months.
|Index||Friday’s Close||Two-Week Point Change||Year-to-Date Change|
Fixed income markets were quiet as well. Intermediate and long-term Treasury prices fell only slightly, despite expectations for lower yields abroad. Among investment-grade corporates, demand was strong for new deals coming from the banking sector. On the high yield side, bonds in the energy and telecommunications sectors received healthy interest, and more volatile names in the energy sector outperformed. Municipal bonds slightly trailed the broader taxable market amid heavy new issuance.
|Fixed Income||Yield||Two-Week Yield Change|
|30-Year Municipal Bonds||2.57%||+0.09%|
Breaking bad …
Five reasons why JP Morgan thinks stocks can move higher while bonds sell off:
- Reduced imminent recession risk
- A forecast rebound in global growth
- Higher output price inflation
- Reduced uncertainty about the us elections
- A global retail investor who this year net sold equity funds in favor of credit
Quote of the Week…
“We believe the utilization of ETFs is going to continue to grow.”
Larry Fink, chairman and chief executive officer of BlackRock Inc., on company assets passing $5 trillion
Number of the Week…
This year’s return on Venezuela’s sovereign bonds
What Fund Architects has been doing…
The markets have been relatively quiet so far this month, both in terms of movement and volatility. That’s fairly good news. The better news for Fund Architect clients is that our position in global technology – iShares Global Technology ETF (IXN), added at the beginning of September – has been lights out in terms of beating the broad market. With a strong overweight the position is adding meaningful performance to the equity rotation, and we will no doubt hold onto it through November.
We never really know till the bell rings out the month, of course, but at this hour all signs are pointing to global industrials or global financials. Either position we add will be a nice complement to global technology. With interest rates inching up a bit, banks are starting to look more favorable. Many of the big name banks are still trading below their book value and yielding around 3%. Not bad.
On the fixed income side, bank loans are moving higher in our rankings. Relative to the other fixed income sectors, the space will likely outperform if rates continue higher. We’ve been holding our current positions in emerging market sovereign debt and convertible bonds for several months now, and it wouldn’t be a surprise to see loans work their way in the rotation.
All in, we’re comfortable with our positioning and with the direction of the markets. The next few months could well be the kind of environment where our clients see some nice gains.
The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional. The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.