CEF 2010 Outlook: Modest Gains; Equity-Orientation
Wednesday, January 6th, 2010Joe Eqcome submits:
Conclusion: Closed-end fund (CEF) share price performance was spectacular for calendar year 2009. The average of the fund type averages was 40.9%; almost twice that of the S&P 500’s 23.5%. However, this increase wasn’t enough to compensate for the previous year’s decline of 43.9%. This is on top of the previous year’s decline of 9.9%. So, despite our desire to run a “victory lap”, CEFs are still 21.0% below year-end 2007.
Piling On: An additional element of concern regarding this market segment’s outlook for 2010 is the compression of the discount from 11.6% at the end of 2008 to a relatively modest discount of 4.9% at the end of 2009. This places the 2009 year-end discount above the 20 year average discount of 6.9%. So, in order for the CEF market segment to advance much depends on the underlying growth of the NAV.
Tale of Two Asset Classes: Approximately 60% of the CEF market segment is considered fixed-income. With concern over when—and not if—the Fed begins the process of tightening credit, the fixed-income fund types could “roll over” in 2010. Munis (national and single state), make up more than a third of the CEF assets, and may struggle as states face staggering deficits and systematic ratings downgrades. Ultimately, this may provide a great buying opportunity after California is driven to the brink of default on some of its municipal paper.
