The NAVigator

John Cole Scott, president of Closed-End Fund Advisors -- chairman of the Active Investment Company Alliance -- does his annual forecast for the year ahead, noting that he expects closed-end funds to outperform the general equity markets, and he expects a mild narrowing of discounts from current average levels of roughly 7 percent, noting that bond funds should benefit from changing interest rates. He also looks at shareholder activism, yields and more, before picking a few funds that he expects to be stellar performers in the new year.

John Cole Scott - president of Closed-End Fund Advisors and the chairman of the Active Investment Company Alliance - looks back at how the closed-end fund industry bounced back from the challenges of a terrible year in 2022, and how his forecasts from a year ago played out. He came out on the winning side of the ledger in his forecasts, but especially with his basket of five funds selected as likely winners for 2023.

Brenda Langenfeld, lead portfolio manager for the Nuveen Preferred and Income Opportunities Fund and the Nuveen Variable Rate Preferred and Income Fund, says that conditions are favorable on a number of different levels, setting up preferred securities for a strong year ahead as interest rates move lower in the year ahead. She noted that heightened banking regulatory oversight will be favorable for credit investors, that positive fundamentals suggest stability and growth and that valuations are at levels "that present a capital appreciation opportunity over the next year."

Adam Sparkman, client portfolio manager at Thornburg -- part of the team running TBLD, the Thornburg Income Builder Opportunity Trust -- says that current market conditions favor the flexibility of a multi-asset approach, noting that "it's a different menu within fixed income entering 2024 than it was a couple of years ago." The changes in the rate environment have allowed the firm to increase credit quality. "We're taking less credit risk and we're looking to add a bit of duration," Sparkman says. On the equity side of things, Sparkman says international investments -- especially in Europe -- are trading at relative discounts, making them particularly attractive now.

Mike Taggart, closed-end fund specialist at abrdn, says that the overwhelming majority of closed-end funds were created to generate income -- and built with that in mind -- but that the sector gets a lot of its attention as the result of discounts, and he feels the discount angle is "overplayed," because the investor who focuses on the income gets the discount as a bit of extra yield but the person who wants to capture the discount needs to ride out the market's bumps and bruises to hang on hoping to see the market change and narrow the bargains. Taggart, formerly executive director of the Active Investment Company Alliance, talks deals, discounts and more and how current market conditions are impacting closed-end fund investors.

Axel Merk, chief investment officer for the ASA Gold and Precious Metals fund, says that gold prices are most tightly correlated to "the confidence the market has in the central bank to manage inflation over time," so gold's rally over the last six weeks -- as well as its path forward -- is "favorable because we might be entering a recession, most notably a recession that is more severe than is currently priced into the market." Merk says he does not foresee a soft landing for the economy -- he sees a decline that is more significant than most observers are expecting -- which is why he does not think "we are going to have the trajectory [for gold] that is priced in right now."

John Cole Scott, president of Closed-End Fund Advisors and the chairman of the Active Investment Company Alliance, tackles the biggest shopping day of the year closed-end fund style, talking about where discounts stand in general for the industry, but also hunting for year-end bargains and looking at three cases to determine whether the Black Friday sale on the fund is a real deal, an average play or a fake-out.

Bryce Doty, senior portfolio manager at Sit Investment Associates, says that muni-bond closed-end funds using leverage -- where the cost of their borrowings are effectively wiping out returns given current conditions -- are more interested in keeping fees high than making money for shareholders, which is one reason why his firm has become a more activist shareholder. With the average muni-bond discount at roughly 13.5 percent -- more than three times its historic norms -- Doty says it should be easy for shareholders to narrow the discounts and turn profits, but it will require the Federal Reserve cutting rates and/or fund managers selling losers and reducing the negative carry of their leveraged positions.

Eric Purington, portfolio manager for the Aberdeen Global Infrastructure Income Fund, says that two mega-mergers outside of the infrastructure space -- deals involving upstream energy giants Exxon and Chevron -- have a lot of implications for middle-market/midstream energy companies and infrastructure stocks. Purington says that the larger energy companies are now poised to make big investments, which will trickle down to infrastructure and services companies, but adds that these big deals have opened the door to other mergers at all levels of the industry, which should make for opportunity ahead. Says Purington: "With the leaders in the space doing it, that is going to work it's way down."

Steven Perry, vice president at XA Investments, discusses the surge in activity and creation for non-listed closed-end funds, covering why money managers, including a number of prominent sponsors who have never been in the space before, are turning to the products now and how investors can use the new issues to access additional asset classes.