The NAVigator

John Cole Scott, president of Closed-End Fund Advisors and the chairman of the Active Investment Company Alliance, returns to The NAVigator to discuss how closed-end funds responded to the year-end rally and then the sharply bullish January, examining which sectors and fund types came out ahead and where the opportunities appear to lie now. He's got details -- and fund picks -- across various sectors and asset classes on where to look for continued growth and income as the rally continues to take shape and play out.

Eric Purington, portfolio manager and infrastructure specialist at abrdn, says that middle-market private investments are a path to profitability and outperformance now due to a supply-demand imbalance that has large-cap operators -- working with an 'ocean of capital' looking to do more acquisitions and pay a premium for them. Purington, who is responsible for private-market investments for the abrdn Global Infrastructure Income Fund, says that while infrastructure provides services and assets for the community and predictable cash flows for investors, the premiums being paid for middle-market assets could generate roughly '200 basis points of outsized returns' moving forward.

Nate Jones, head of fund finance and Treasury at Nuveen, says that conditions and 'market nuances' from late in 2022 have carried into the new year, noting that the yield curve for municipal bonds is sloping upward even more than the plot on taxable bonds, which is creating opportunities for investors to benefit from using leverage to make closed-end muni returns attractive now. Jones also explains the December supply-demand imbalance in muni bonds, and why it might reoccur come tax time, and discusses how rising rates have raised default concerns but haven't led to a significant increase in bond failures.

Axel Merk, chief investment officer of the ASA Gold and Precious Metals fund, says that the market is pricing in a recession and the start of rate cuts down the road, and the gold market is already reacting because it tends to lead in these cycles. Merk makes the case for owning both precious metals and the mining companies now, though he notes their different risk profile and uses; he points out that both are being embraced now because the miners would be lumped in with all equities and poised for a takeoff if a recession is shallow, while the metal will be a diversifier in the event that a downturn is more severe and protracted.

Cheryl Pate, senior portfolio manager for Angel Oak Capital -- manager of the Angel Oak Financial Strategies Income Term Trust -- says that it's late in the cycle for rate hikes, mid-cycle for banks in terms of margin expansion and early in the cycle for credit, and she noted that the financial services sector typically goes through a profit-margin expansion that's a 'lagged benefit' that should show up early in the year when the rate hikes stop. She expects that benefit to show up late in the year or into 2024, but she says fundamentals -- including credit quality and default risk -- will be moving in the right direction and that financial services companies will experience the benefits they historically get from operating in high-rate conditions.

John Cole Scott, chief investment officer at Closed-End Fund Advisors -- the chairman of the Active Investment Company Alliance -- says that investors looking for the top sector bets in the new year will want to look at some of 2022's weakest areas, most notably real estate investment trusts 'REITs' and real assets. He also expects international bonds and more to be in the sweet spot. Scott gave his look-ahead for the closed-end fund industry for 2023, and it's a year when he suggests investors take more duration risk, tilt their equity portfolios toward value, dividend and international funds and expect to see discounts narrow and yields to fall, though the latter will be driven by some capital appreciation later in the year as the economy and market continue to digest inflation and more.

John Cole Scott, chief investment officer at Closed-End Fund Advisors -- the chairman of the Active Investment Company Alliance -- takes a look back at the challenging times experienced by the closed-end fund industry this year, noting that all the news wasn't bad despite slower-than-expected growth for the industry and bigger-than-anticipated losses on the market. His basket of five funds for 2022 came out ahead of the market and, like many parts of the industry, is poised to rebound in the new year.

Stacey Morris, head of energy research at VettaFi -- part of the team involved in the Alerian Energy Infrastructure Index suite -- says that energy markets are likely to remain tight and keep dealing with inflation in 2023, both of which can be tailwinds to energy companies and especially midstream companies, but she notes that the midstream/pipeline companies have cash-flow stability that makes them the more-defensive options in the energy space, and particularly attractive in a recessionary environment.

Steve O'Neill, who co-manages the closed-end fund trading strategies and oversees the closed-end fund analysts at RiverNorth, says the timing is right for closed-end fund investors looking for big discounts that will likely be shrinking right after the turn of the year as the tax harvesting process plays out. O'Neill discusses how the big discounts amount to extra gravy for investors hungry for better yields.

Chris Oberbeck, chairman and chief executive officer at Saratoga Investment Corp. -- one of the industry's largest publicly traded business-development companies -- says that BDCs have been a relative sweet spot during this year's troubled times largely because they benefited from being on the front end of rate hikes and turning them quickly into cash on the bottom line. While the companies must also deal with higher costs, he expects the trend to continue for at least as long as the Federal Reserve keeps projecting higher rates, which he thinks will be well into 2023.