The NAVigator

Jonathan Mondillo, head of North American fixed income for abrdn says that 2023 has been a year of wild moves in the municipal bond market, performing well in January before selling off in one of the worst months of February ever, setting up a March rebound until the banking crisis hit. Most of those movements have been driven by macro headlines, and Mondillo says that investors want to drill down moving forward, focusing on finding credits that can outperform in a market that is likely to slow down, and ignoring the big-picture pressures that are driving the broad trend in the space.

John Cole Scott, president of Closed-End Fund Advisors, discusses how and why investors might pursue private equity and debt using closed-end funds, noting that expansion of the industry and changes in structure adding share classes have made private, alternative investments much more accessible for investors. Scott -- who also is chairman of the Active Investment Company Alliance -- He says the growth in tender-offer and interval funds is giving investors access to strategies they can't get anywhere else in the regulated-investment world in a form that is more liquid and affordable than investing in hedge funds. He includes two of his favorite funds in the space for investors to consider now.

Cheryl Pate, senior portfolio manager at Angel Oak Capital -- co-manager of the Angel Oak Financial Strategies Income Term Trust -- says that current problems in the banking sector are setting up a recovery, noting that 'opportunities like this are fairly rare, probably a once-in-a-decade opportunity for the banking space,' with the biggest opportunities being on the debt side as spreads start to normalize under the rules and conditions. Pate says investors have good reason to believe that discounts for bank-oriented closed-end funds are likely to narrow as sentiment improves for the sector, with debt benefitting from a consolidation cycle in the industry while the equity benefits from renewed confidence and better positioning for the future.

Steve O'Neill, portfolio manager at RiverNorth, says the average municipal-bond closed-end fund has a discount of 10.5 percent, which over the last 25 years would be in 'the 99th percentile of cheapness.' While O'Neill makes the case for buying muni bonds, he says the case for closed-end funds is largely because of the discounts being oversized, noting that the rest of the fixed-income market has not seen discounts get that big. O'Neill notes that if interest rates are peaking, the turning of the trend should help closed-end funds -- and particularly muni funds -- narrow the discount and generate bigger gains moving forward.

Bryce Doty, senior portfolio manager at Sit Investment Associates says that the problem at the heart of the current banking crisis is not a default problem, but rather is a logical outcome from how quickly the Federal Reserve raised interest rates. He expects it to keep impacting the value of fixed-income securities until things stabilize; that, in turn, will create more opportunities for closed-end fund investors who should benefit from good yields now and additional returns when widening discounts narrow once the banking industry and investors are less worried about insolvency.

John Cole Scott, president of Closed-End Fund Advisors says that -- despite a rough outing for business development companies this week -- BDCs have had a strong quarter from a total return perspective, and that prospects remain strong as BDCs have been raising their distributions but the dividend-coverage percentages have remained roughly steady, a sign that they're not only positioned well now but that they are ready to deal with rising interest rates and inflation. Scott, who is also chairman of the Active Investment Company Alliance, compares two BDCs -- one trading at a premium, the other at a discount -- and discusses how there is room for both in a portfolio despite the different way they are viewed by the market.

Jay Rhame, chief executive officer at Reaves Asset Management -- president of the Reaves Utility Income Fund -- says that the dividend-growth potential for utility companies makes them a viable investment option in today's high interest-rate high inflation market. While those conditions typically are not ideal for utilities, Rhame says utility stocks are reasonably valued; he also discusses infrastructure stocks, again pointing out that their consistent dividend-paying strategy and potential to grow dividends makes them attractive in a market where yields on fixed-income have improved.

Steven Perry, vice president at XA Investments -- where he oversees product management on the XAI Octagon Floating Rate and Alternative Income Trust, -- discusses the benefits and risks associated with leverage in closed-end funds during a rising-rate environment, noting that for the closed-end fund market at the end of 2022, the levered market yield on net asset value was about 7.8 percent, compared to 6.4 percent on unlevered yield. Perry says it is important to watch how managers respond to what the Federal Reserve is doing, noting that managers who don't 'get creative with how the leverage is going to be structured might miss out on opportunities.'

Will Rhind, chief executive officer at GraniteShares -- which runs the GraniteShares US High Income ETF -- says that it appears to him that inflation has peaked and that interest rates are more stable, which has created a more favorable outlook for business-development companies and closed-end funds. Rhind notes that with economic conditions improving, the prospects for the businesses that are funded by BDCs has become more stable; he also cited the dollar's peak against foreign currencies as improving the prospects for emerging-markets closed-end funds.

Michael Beth, director of trading at WallachBeth Capital, says that for all of the growth in the closed-end fund space, the amount of trading done each day is relatively small compared to other investment vehicles, which creates challenges for investors to get efficient execution on trades. Beth notes that conditions can make it so that an investor trying to buy a fund at a 10 percent discount could see as much as one-tenth of that benefit wiped out if 'the implicit cost of execution' meets with poor execution.