The NAVigator

Duncan Farley, Portfolio Manager on the Developed Markets Special Situations team at RBC BlueBay Asset Management — manager of the BlueBay Destra International Event-Driven Credit Fund — says corporations that have been "dining out on cheap finance" now have indigestion because their debt levels, leverage, and costs have gone up, so "the math doesn't work." As a result, he's expecting trouble for corporate paper globally, with a sharp rise in default rates, though he notes that creates opportunities for special situations investors.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, provides an update on what's been happening with closed-end funds throughout the first half of 2024. He notes that discounts narrowed almost across the board, but yields increased, resulting in positive returns for most asset classes.

Jason Akus, Senior Investment Director and Head of Healthcare Investing at abrdn and manager of the firm's four closed-end funds covering biotech and healthcare, says that the stock market appears to be broadening out and that healthcare and biotech are both likely to be beneficiaries. Healthcare stocks have generally lagged the stock market since the start of 2023, but with the Standard & Poor's Health Care index up 11 percent in 2024 — respectable but still trailing the broader S&P 500 by about seven percentage points — there are strong signs of recovery. As the catch-up trade materializes, Akus believes there will be no shortage of potential opportunities ready to benefit even if the economy begins to slow.

Mark Gatto, Co-Founder and Co-Chief Executive Officer of CION Investment Group — which manages the business development company CION Investment Corp. — discusses the heavy interest and cash flow into BDCs and how that is changing the space and making it important for investors and advisers to "pull back the layers to understand what they are investing in." Gatto advises paying particular attention to the deals and credit quality a BDC engages in. He also says that the biggest players in BDCs are becoming "very homogeneous" and avoiding differentiation when they get very large. However, Gatto says that situation also creates opportunities for investors who want to diversify their BDC holdings by investing in middle-market deals, where smaller BDCs can be more nimble and offer different exposure.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, compares two high-yielding offerings from Ares, breaking down the Ares Dynamic Credit Allocation (ARDC) fund and the CION Ares Diversified Credit I (CADUX) fund. He shows that while both could be viable and attractive options for investors diversifying a portfolio into the alternative credit space, there's much more to picking between them than big yields, reasonable expense ratios, discounts, and recent results.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, shares takeaways from a recent industry conference focused on business development companies (BDCs). He talks about how BDCs compare to private credit funds, how the market is changing, and how some money managers are using artificial intelligence to get better information on market trends that could help them pick better investments or improve timing on the trades they make.

Roxanna Islam, Head of Sector and Industry Research at VettaFi, discusses the benefits and flaws of applying rules-based investing to closed-end funds. She notes that changes in the industry have forced changes on a rules-guided index of closed-end funds created by VettaFi, and how that is impacting the holdings and asset allocation of the fund-of-funds that some investors are using instead of building their own portfolio of individual closed-end strategies.

Rob Shaker, Portfolio Manager at Shaker Financial Services, says that economic conditions — the debt-ceiling debate, troubled banks, higher interest rates and persistent inflation — have created a situation where the market isn't climbing the proverbial wall of worry, but rather a 'Wall of Meh.' However, he adds that there is opportunity in the unimpressive current conditions, noting that long-term investors in closed-end funds can use lagging investor sentiment to capture discounts as early as the second half of this year, when he expects a 'generalized recovery' from today's worrisome issues.

Dave Lamb, Head of Closed-End Funds at Nuveen, says there is a "much more aggressive form of activism today than what we saw years ago," and notes that it's driven entirely by discount-arbitrage opportunities rather than whether a fund is underperforming due to management decision-making. With discounts at wide levels — particularly for fixed-income funds — sponsors like Nuveen are taking more steps to cut the gap and reduce their funds' attractiveness to activists. Lamb discusses Nuveen's strategies, which he says are largely focused on enhanced distribution tactics, trying to drive demand, and narrow the discount. Nuveen recently announced plans to increase distributions on more than two dozen funds.

John Cole Scott, President of Closed-End Fund Advisors and Chairman of the Active Investment Company Alliance, talks about the good and bad in recent industry developments. For example, Scott discusses how fund sponsors are taking steps to keep a lid on discounts, potentially reducing a fund's attractiveness to activist investors. He also highlights the trend towards managed payouts and how investors should size up distributions that might be connected more to marketing materials than to what a fund can actually deliver.