The NAVigator

Rob Shaker, portfolio manager at Shaker Financial Services, says that the closed-end fund market showed signs of a "sympathy widening" in mid-June, an event when there is "excessive liquidation selling based on fear," leading to a bad day on the stock markets and bond closed-end fund discounts widening at the same time. Shaker says it can be a sign of a market bottom, which can lead to a bounce-back; still, he says, markets remain fragile and there could be more excessive selling again, though it hasn't happened since June 16. Shaker also noted that the first half of the year saw trouble for closed-end funds, but the behavior of discounts was very different for equity and bond funds, with fixed-income issues seeing a much more dramatic widening than stock funds.

Ben McCulloch, managing director and general counsel at XA Investments, says that the last five years have seen over $40 billion in growth in interval funds and tender-offer funds, and that interest has attracted more fund sponsors -- including companies that have been heretofore more focused on ETFs -- and more new ideas. That has brought with it increased regulatory scrutiny, as the Securities and Exchange Commission is evaluating what kinds of alternatives -- particularly with private-equity and venture-capital investments -- are right for the interval fund structure, but McCulloch sees the growth and the expansion of interval offerings continuing, with more new and different funds on the horizon.

John Cole Scott, chief investment officer at Closed-End Fund Advisors and the chairman of the Active Investment Company Alliance, returns to The NAVigator to answer questions frmo listeners, including one on whether it makes sense to do tax-loss selling now rather than waiting for the traditional period for making swaps at the end of the year. Scott recommends closed-end fund investors tap their "tax assets" when they are valuable, and losses in today's market can be turned into a benefit easily. Scott also answers a question on the slow speed of recovery in the energy sector, and gives his take on how the across-the-board pullback is affecting different sectors of closed-end investments and how recovery has occurred after previous downturns.

Larry Holzenthaler, investment strategist and analyst for Nuveen, says that "floating rate loans actually look arguably cheap to us today," acknowledging that it's surprising that the asset class is trading at a discount "in the middle of one of the most brutal rate-hike campaigns we have ever seen." Holzenthaler -- who also covers the high-yield space -- says that senior loans have been one of the few places where investors have avoided much of the pain in the fixed-income markets, making them feel like a safer haven and a relatively good value.

In this bonus episode of The NAvigator, Jonathan Browne, director of research at Robinson Capital and portfolio manager of the Robinson Funds talks about how balancing closed-end fund investments with pre-market SPACs [special-purpose acquisition companies] creates opportunities for higher yields with diversification that helps to balance out risks.

Sam Brothwell, director of research at Energy Income Partners, says that the current cycle of under-investment in capital spending has made it harder for energy producers to respond to the current global supply-demand imbalance; that has pushed energy prices -- for oil, natural gains, electricity and alternatives -- dramatically higher, where they are likely to stay, even as energy companies work to increase capacity and respond to market conditions. Brothwell says that investors should respond to current conditions by diversifying their energy holdings as legislators and corporate executives wrestle with economic issues while searching for solutions.

With the volatility and downward pressure in the market pushing many investors to specialty funds, sector offerings and alternatives, John Cole Scott, chief investment officer at Closed-End Fund Advisors and chairman of the Active Investment Company Alliance returns to the NAVigator this week to talk about some funds that are more basic in strategy, core holdings by nature, and highlights five that represent good values and opportunities now.

Nicholas Marshi, editor of the BDC Reporter, says that business-development companies had a good first-quarter across the board, despite troubles across the broad market. After seven quarters of BDC's generally increasing net asset value per share, and while that growth decelerated during the first three months of 2022, Marshi says it was a "hinge quarter," where inflation, higher interest rates and more started to creep into results. He notes that business-development companies are poised to benefit from higher interest rates without suffering significantly higher credit losses in the process; as a result, he's bullish on BDCs now, even in the face of an economic slowdown.

Duncan Farley, portfolio manager for BlueBay Asset Management and co-manager of the Destra International Event Driven Credit Fund, says that today's headlines are driving more companies to distraction and creating the types of problems that he sees as investment opportunities. His fund has taken advantage, posting double-digit gains while most of the market has moved in the opposite direction, and he believes that investors willing to buy discounted credits will be rewarded if they can ride through the macro headlines to hold onto bargain credits until economic conditions improve.

Bill Kelly, president of the CAIA Association, discusses the importance -- which he believes is mostly misplaced -- that many investors place on having daily liquidity in their investments, even though they have no intention of touching the money in the short term. The result of these mis-aligned time frames is that investors pay a real price for liquidity they neither want and need; the offshoot of this thinking is helping to drive the expansion of new issues for closed-end and interval funds, Kelly says.