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Closed-End Funds
As of July 31, 2010
We would like to share with you our review and outlook for the closed-end fund market as of July 31, 2010. For the month, the market price total return of the Fund Data U.S. All Taxable ex-Foreign Equity Closed-End Fund Index was +5.7%, while its return on net asset value (NAV) was +5.2%. Year to date, the index had a market price total return of +5.8% and a return on NAV of +4.9%. By comparison, the S&P 500 Index and the Barclays Capital U.S. Aggregate Bond Index had total returns of +7.0% and +1.1% for the month and -0.1% and +6.5% for the year to date, respectively.
INVESTMENT REVIEW
Closed-end funds rallied in July along with the broad stock market, which was lifted by better-than-expected second-quarter corporate earnings, passage of financial reform legislation and signs of stability in Europe. The U.S. economy, however, slowed in the second quarter as gross domestic product (GDP) grew at a more moderate pace than in the first quarter and the final three months of 2009.
The overall discount on closed-end funds continued to narrow, declining from 1.4% at the start of July to 0.9% at the end of the month. There was a divergence in trends within the fixed income and equity categories, however. The average equity fund discount rose 40 basis points (to 3.4%), while fixed income funds went from having a narrow discount (0.4%) to trade at a premium (+0.9%) by month end. Fixed income funds actually underperformed equity funds on both a market price and NAV basis in the month. The category’s premium appeared to reflect investors’ view that leveraged fixed income funds will be the primary beneficiaries of continued accommodative monetary policy by the Federal Reserve.
From a sector standpoint, utilities funds (which had a return of +12.2% based on market price) 1 had the best performance across the equity and fixed income categories. The group benefited from some sector rotation amid a slowing economy. Although certain other defensive sectors underperformed the index, investors found appeal in utilities stability and above-average yield component.
Real estate funds (+10.5%) also performed well. Real estate companies for the most part met earnings expectations, with the best news coming from apartment and hotel owners. The global equity group (+11.1%) was another standout. The largest fund in the sector had a sharp technical rebound, after falling in June in response to a reduction in its dividend. Commodities (-4.0%) was the only sector to decline within the index. Its performance reflected a 5% pullback in the price of gold.
In news, there was a closed-end fund initial public offering. The Tortoise MLP Fund launched in July; it was the second closed-end fund IPO this summer to raise more than $1 billion. As with the ClearBridge offering in June, it focuses on master limited partnerships, which have relatively high yields, and a significant percentage of their annual distribution is typically tax deferred.
INVESTMENT OUTLOOK
We continue to overweight fixed income funds, including high yield funds, and remain underweight equity funds, which we expect to face a choppier road ahead. And we expect discounts to NAV to remain fairly narrow, or even shift to premiums for the overall market. Recent developments, including downward revisions in economic growth and a strong rally in Treasurys, suggest that the period of low interest rates will be protracted. In this environment, investors should continue to find appeal in the attractive monthly cash flows that closed-end funds provide.
The $1 billion-plus closed-end fund IPOs in June and July suggest that the new issuance market could gain further traction. This has raised our level of concern that IPOs could begin to weigh on secondary market prices in late 2010 or in the first half of 2011. We will monitor developments closely, while seeking to take advantage of opportunities this trend could create.
1 Sector constituents as per Fund Data U.S. All Taxable Ex-Foreign Equity Index; constituent returns as per Bloomberg L.P.
Past performance is no guarantee of future results.
The performance information in the preceding commentary does not reflect the performance of any Cohen & Steers Fund.
Please consider the investment objectives, risks, charges and expenses of any Cohen & Steers fund carefully before investing. A prospectus containing this and other information can be viewed by clicking here or may be obtained by calling 800-330-7348. Please read the prospectus carefully before investing. Cohen & Steers open-end funds are distributed by Cohen & Steers Securities, LLC.
The views and opinions in the preceding commentary are as of the date of publication and are subject to change. This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment.
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