Closed-end funds got off to a positive start in the New Year. The RiverNorth Closed-End Fund Index is up 1% in January, with an average discount of 3.28%. There is much optimism among Wall Street sel-side analysts for 2011, but many economic headwinds loom ahead.
One asset class to watch is the muni market, thanks to ongoing fears of state and local budget issues, rising interest rates and new issue volume.Those fears have caused municipal bond closed-end funds to continue the volatile ride that began in the fourth quarter of last year. Municipal bond closed-end funds opened the year down 5.4% mid-month and have since rebounded 3.9%, ending the month down 1.7%. To compensate investors for the perceived risks, average yields on muni bond closed-end funds have risen to 7% from 6% at the beginning of the fourth quarter, presenting an opportunity for investors to get enhanced tax-free yield.
Sector Round Up
The best performers in January were investment grade bond and bank loan closed-end funds, which rose 10.31% and 5.81%, respectively. In turn, the discount on investment grade bond closed-end funds narrowed a drastic 7.33% this month, while bank loans narrowed 2.90%.
Bear in mind, the RiverNorth CEF Index investment grade bond fund performance was skewed by the PIMCO Corporate Opportunity Fund (PTY) and the PIMCO Corporate Income Fund (PCN). Bill Gross recommended PTY in a recent Barron’s article, which sent the fund soaring and had a positive effect on other related PIMCO funds as well. PTY at month-end traded at a 16.1% premium to its net asset value versus a premium of 6.7% prior to the Barron’s article. It’s a fine example of the volatility and inefficiency within the closed-end fund space.
On the negative side, non-U.S. equity suffered losses of 5.7%. Government and agency closed-end funds have also struggled thus far this year, dropping 1.07% and discounts widening 0.95%.
Three IPOs rang in the New Year:
- Avenue Capital launched the Avenue Income Credit Strategies Fund (ACP), which will raise as much as $155 million subject to a greenshoe. The fund seeks a high level of current income with a secondary objective of capital appreciation.
- Blackstone launched the Blackstone/GSO Long-Short Credit Income Fund (BGX), which will raise as much as $285 million subject to a greenshoe. The fund seeks current income with capital appreciation through a dynamic long-short strategy on a portfolio of loans and fixed income instruments issued primarily by U.S. corporate issuers.
- Gabelli launched the Gabelli Natural Resources, Gold & Income Trust (GNT), which will raise as much as $425 million subject to a greenshoe. It seeks high current income with capital appreciation through investing in a portfolio of securities issued by companies principally engaged in the gold and natural resources sectors and by generating income through an option writing strategy.
Other News: The Zweig Total Return Fund (ZTR) successfully completed a rights offering of 29.5 million shares, raising approximately $98 million. The DWS RREEF World Real Estate Fund’s (DRP) shareholders approved the fund’s merger into the company’s open-ended fund, the DWS RREEF Global Real Estate Securities Fund (RRGAX). The merger is expected to be completed in February 2011. Currently, DRP trades at a 1.57% discount.