The crash few heard last month is having reverberations in the new year.
Closed-end funds, which, as Barron's reported in late December, seemingly had plunged into an abyss, have since come roaring back, even more strongly than stocks have rebounded. That's been the product of a recovery in the funds' underlying assets, multiplied by the marked narrowing of the discounts at which the funds traded during the market's distress in the waning days of 2018.
Indeed, Saba Capital Management founder Boaz Weinstein's prediction that last month's decline would be viewed in six months' time as having been a great buying opportunity is being borne out much more quickly.
Prices of the CEFs featured in that column were up from 8.74% to 14.65% from their Dec. 20 closes through Tuesday, which was vastly more than the recovery in their net asset values of between 0.78% and 5.19%. The big rebounds resulted in large part from the narrowing of CEFs' discounts, which had gotten to historically wide levels around 15% or even more in some cases, to closer to their historic norms.
That points up a key aspect of investing in this little-understood asset class. CEFs issue a fixed number of shares, which can and often do diverge from their underlying NAVs, usually due to discounts. That can become especially acute during periods of market disruption, such as December's steep slide in risk assets like stocks and speculative-grade debt. That collided with tax-loss-selling season as year end approached to produce a near-perfect storm.
The storm appears to have cleared, at least for now, with the stock market's rebound on hopes for a U.S.-China trade deal and indications that the Federal Reserve will be “patient” in raising interest rates further, to use Fed chief Jerome Powell's words.
The best gains of the CEFs mentioned in the December column were those with the most equity risk, such as the Calamos Strategic Total Return fund (CSQ), which bounced 14.65% between Dec. 20 to Jan. 8. Its NAV rose substantially less, by 5.19%; that still was more than the 4.49% price gain in the SPDR S&P 500 exchange-traded fund (SPY) over that span.
CEFs that concentrate on preferred stocks—which combine the fixed income of bonds with some of the equity risk of stocks—also surged, but mainly because of a narrowing of their discounts. The Cohen & Steers Limited Duration Preferred & Income fund (LDP) popped 13.62%, while its NAV rose just 1.37%. The Nuveen Preferred & Income Securities fund (JPS), which was picked in this week's cover story as one of the best income investments for 2019, jumped 13.14% over that span, while its NAV edged up just 0.78%.
Also handily outperforming were CEFs that concentrate on bank loans, a sector of the credit market that came under pressure at the end of last year. That largely was the result of an exodus of $11 billion from loan mutual funds, according to a research report by Bank of America Merrill Lynch strategists Neha Khoda, Collin Chan, and Eric Yu.
The Eaton Vance Floating-Rate 2022 Target Term fund (EFL), which is supposed to liquidate and return its net assets to investors in that year, jumped 8.74% on a 2.84% improvement in NAV. The Nuveen Credit Strategies Income fund (JQC), another top income investment pick from Barron's cover story, was up 9.09% on a 4.13% NAV rise.
The rebounds have brought these closed-end funds' discounts back to close to their historic norms. While they may not offer the extraordinary bargains they did after their nearly silent crash of December, they continue to offer high yields with a relative margin of safety from their discounts.
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