The NAVigator

In a bonus episode of The NAVigator, John Cole Scott, president of Closed-End Fund Advisors and the chairman of the Active Investment Company Alliance, discusses the historic level of deep discounts he is seeing in closed-end funds, and how that translates to buying opportunities now. Closed-end funds have seldom seen bigger discounts in the last quarter-century, Scott said, and says the current level of yields are helping to confirm the current opportunity, despite the beating that closed-end funds took a year ago. 'Buying after carnage is such a good closed-end fund decision,' Scott says.'You should be uncomfortable with the last three to 12 months of the fund you are buying today, because if it looks bad, it should look better later.'

Christian Munafo, chief investment officer at Liberty Street Advisors -- which runs the Private Shares Fund -- says that the perceived higher risks in challening environemnts like the one we are facing today often lead to attractive opportunities and oversized future gains, which makes current conditions attractive for private equity and venture capital investing. Munafo notes that private markets are more stable than their public counterparts, but signs of improvement are there now, leading him to believe the asset class will see better relative performance moving forward.

Scott Caraher, head of senior loans at Nuveen -- manager of the Nuveen Floating Rate Income fund -- says that the higher-than-expected increase in rates that has driven up borrowing costs has made credit selection 'more important today than it has ever been.' He notes that lower-rated companies can't sustain high levels of interest payments for long levels of time. As a result, Caraher says he is underweight the lower-quality part of the market, wary of a pick-up in default rates; the flip side of the situation is an opportunity to overweight better-quality companies which are generating superior returns now and which will be more stable and solid whenever the Fed starts cutting rates int he future.

Chris Oberbeck, chairman and chief executive at Saratoga Investment Corp., says that the balance of power in the lender-borrower relationship has shifted dramatically in the last 12 to 24 months, with banks now pulling back which is leaving private lenders with better terms and more power to insist on superior deals. Oberbeck notes that those conditions are putting BDCs generally -- but Saratoga specifically, thanks to an all-weather portfolio of loans -- in a better position to minimize any damage that might be done if the economy goes through a recession.

Josh Duitz, head of global income at Abrdn -- manager of the Aberdeen Global Infrastructure Income Fund -- says that private infrastructure investments have attracted so much money that valuations have gotten off-kilter, creating an 'illiquidity premium' that 'makes no sense.' Duitz explains that publicly listed companies should have higher valuations -- because investors value the liquidity and ability to trade them easily -- meaning that current conditions are making public infrastructure investments particularly attractive right now. Duitz -- who says that politics isn't likely to impact infrastructure as much as headlines suggest -- makes a broad case for infrastructure investing now, but particularly likes the renewable space.

Eric Boughton, chief analyst at Matisse Capital and portfolio manager for the Matisse Discounted Closed-End Fund Strategy, says that while the stock market has roared this year, things haven't changed much with the closed-end fund space this year, meaning there are plenty of highly discounted issues, particularly in muni bonds and some other fixed-income spaces, as well as international funds. He notes that many closed-funds that were good deals based on discounts a year ago haven't narrowed those bargains but now deliver improved yields, which is why he is buying certain issues now 'hand over fist.'

Mark Asaro, director of investments at Noble Wealth Management, says investors should not think that a traditional open-end mutual fund is a good replacement for individual bonds. Without a maturity date, bond funds don't have the pull toward par of an individual bond. Closed-end funds, however, are immune to dilution from cash flows into the fund, thereby providing a stable yield that investors can bank on, making them a better portfolio mix with individual bonds. Asaro notes that closed-end bond funds work best when the yield curve is upward sloping -- as opposed to today's heavy inversion -- but notes that there are selective opportunities looking strong now, notably in funds which buy municipal bonds.

Kenneth Burdon, an attorney in the investment management group at Skadden, Arps, Slate, Meagher and Flom says that rules proposed by the Securities and Exchange Commission that would dramatically change liquidity requirements on traditional mutual funds could result in a boom for interval funds. While noting that the proposals still have a ways to go before approval, Burdon says that they would, if passed, make it so that many bank loans and other 'less liquid securities,' couldn't be held in traditional funds. Some funds may convert to closed-end status, he says, while other firms will plan more interval offerings if the rule passes.

Kimberly Flynn, managing director of alternative investments at XA Investments, says that demand for alternative investments as a means of adding diversification to a portfolio has spurred tremendous growth in interval funds, whose limited liquidity makes them an ideal vehicle for many types of less-liquid securities. Flynn notes that there are 190 interval- and tender-offer funds in existence today, but that 27 new funds are in registration, many from companies just entering the interval-fund space. Flynn says it's still very early -- 'maybe the second inning' -- in the current interval-fund growth cycle, which will force investors and advisers to do heightened due diligence to make sure the new issues can perform up to expectations.

John Cole Scott, president of Closed-End Fund Advisors, discusses what he is seeing in the market now by delving into four of the investments he is using the most and weighing heavily in client portfolios. He notes that the recent bank collapses actually made a few of his favorites more attractive -- because the market got angry at the financial sectors, driving prices down -- but he also explains that his favorites have more going for them than just a big discount.