Income investors: if you’re not familiar with closed-end funds (CEFs), it’s time to become acquainted with this misunderstood and often overlooked class of mutual funds. Many CEFs are income-focused and pay distributions on a monthly or quarterly basis. There are 444 CEFs in existence today that trade on major public exchanges like the NYSE (as of quarter-end 6/30/22). Here is a good primer on CEFs that you can read from the U.S. Securities and Exchange Commission: see Closed-End Funds. As an investor, you can consider adding individual CEFs to your existing income portfolio, or even create an entire portfolio of CEFs to potentially satisfy your income needs.
Further, some professional investment management firms (like us) run specialized investment strategies and products that focus on buying and selling CEFs.
So, if you’re looking for (1) higher yield potential and (2) alternatives to plain-vanilla fixed income products, you should at least consider CEFs (and focused CEF strategies) for your income allocation.
Key Points
- CEFs are publicly traded investments that can be bought and sold in your personal investment accounts (both retirement and taxable).
- Many CEFs pay monthly or quarterly dividends; with an average indicated cash distribution yield of 7.74% (as of 6/30/22).
- There are CEFs for both the equity and fixed income markets; some focus on generating taxable income while others seek tax-free income (here is a current list of CEFs available today).
- CEFs are professionally managed and run by issuers that many investors are probably familiar with (BlackRock, Nuveen, and Morgan Stanley to name a few).
- Like stocks, CEFs trade on the open market with their share price being influenced by supply and demand.
- A CEF’s price can trade at less than its Net Asset Value (we call this a discount); and a CEF’s price can also trade at more than its Net Asset Value (we call this a premium).
- Many CEFs use leverage, which can magnify returns both positively and negatively.
- The investor base for the CEF market is predominantly comprised of retail investors, with the current breakdown being about 71% retail / 29% institutional.
- Sophisticated investors might consider professionally managed CEF strategies, like the Matisse Discounted Closed-End Fund Strategy (MDCEX) and Matisse Discounted Bond CEF Strategy (MDFIX) for their income needs.
How We Look at Closed-End Funds
Our investment team has focused and specialized in the CEF space for more than two decades, and subsequently brought two mutual funds (MDCEX & MDFIX) to market that give investors public access to our discounted CEF strategies. All our research suggests that the CEF market is highly inefficient, and our strategies seek to exploit pricing inefficiencies in a very systematic and structured way.
The core of our investment thesis is simple: CEF discounts fluctuate around a long-term average discount level, and statistically favorable investment opportunities are created when a CEF’s discount is trading wider than (or below) its historical average. Our published research on CEF discounts indicates that historically for U.S. CEFs, discounts to NAV have been highly correlated with subsequent total returns. Purchasing discounted CEFs can also effectively increase your income potential, as any CEF distributions are paid out at-NAV (but your experienced yield depends on your purchase price).
Our investment process first and foremost focuses on CEF discounts – we firmly believe it’s the single most important factor in forecasting the future value of any CEF issue. But to determine the overall attractiveness of a CEF investment opportunity, we also closely look at:
- Distribution Yield
- Underlying Security Portfolio
- Absolute Discount/Premium
- Discount Volatility
- Historical NAV Relationship
- Management Quality
- Fund Expense
- Dividend Security
- Fund Size and Liquidity
- Major Owners of Security
- Insider Buying
- Portfolio Construction
- Shareholder Activism
- Tax-Loss Selling Elimination
Using all these factors as inputs, we’ve built a quantitative trading model that helps us quickly identify and act on potential CEF investment opportunities, while also guiding our buy and sell decisions. We tactically enter CEF positions where we have a high conviction that the CEF’s discount will narrow in the future, while also trimming or selling out of CEFs that we now view as less attractive.
Consider Matisse Funds for your Income Allocation
Both MDCEX & MDFIX collect cash distributions from the underlying CEFs they invest into, and in turn pay this income out to our shareholders. Our funds pay out anticipated quarterly dividends and annual capital gains distributions.
| Yield as of 3/31/2026 | MDFIX | MDCEX |
|---|---|---|
| Distribution Rate | 7.27% | 7.18% |
| Estimated Return of Capital | 39.50% | 0.00% |
| 30-Day SEC Yield | 4.51% | 4.63% |
Subsidized yield reflects fee waivers and/or expense reimbursements during the period. Without waivers and/or reimbursements, yields would be reduced. Unsubsidized yield does not adjust for any fee waivers and/or expense reimbursements in effect.
Growth of a Hypothetical $1 Million Investment
Matisse Discounted Bond CEF Strategy (MDFIX)
- With dividend reinvestment: a $1,000,000 investment in MDFIX on its inception 4/30/2020 would be worth $1,171,264 today (as of 6/30/2022).
- Without dividend reinvestment: a $1,000,000 investment in MDFIX on its inception 4/30/2020 would be worth $999,000 today, and an investor would have received $188,672 in cash distributions throughout the lifetime of this investment (as of 6/30/2022) – for a grand total of $1,187,672.
Matisse Discounted Closed-End Fund Strategy (MDCEX)
- With dividend reinvestment: a $1,000,000 investment in MDCEX on its inception 10/31/2012 would be worth $1,869,134 today (as of 6/30/2022).
- Without dividend reinvestment: a $1,000,000 investment in MDCEX on its inception 10/31/2012 would be worth $608,000 today, and an investor would have received $1,000,772 in cash distributions throughout the lifetime of this investment (as of 6/30/2022) – for a grand total of $1,608,772.
| Performance as of 3/31/2026 | MDFIX | MDCEX |
|---|---|---|
| 1-Month Total | -0.76% | -5.19% |
| QTD Total | -1.42% | -2.76% |
| YTD Total | -1.42% | -2.76% |
| 1-Year Total | 4.31% | 20.73% |
| 3-Year Annualized | 8.72% | 18.86% |
| 5-Year Annualized | 3.58% | 13.08% |
| 10-Year Annualized | N/A | 11.39% |
| Since Inception Annualized | 7.87% | 9.33% |
| Since Inception Total | 56.58% | 231.05% |
The inception date of MDFIX is 4/30/2020. The inception date of MDCEX is 10/31/2012.
The performance information quoted represents past performance, which is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. An investor may obtain performance data current to the most recent month-end by calling 1-800-773-3863. Total return measures net investment income and capital gain or loss from portfolio investments. All performance shown assumes reinvestment of dividends and capital gains distributions.
MDFIX
The Total Annual Fund Operating Expense for the Fund as disclosed in the prospectus is 3.10% dated August 1, 2022. The Net Operating Expense for the Fund is 2.71%. The Total Annual Fund Operating Expense is required to include expenses incurred indirectly by the Fund through its investments in closed-end funds and other investment companies. The Advisor has entered into an expense limitation agreement with the Fund under which it has agreed to waive or reduce its management fees and assume other expenses of the Fund in an amount that limits the Fund’s Total Annual Fund Operating Expenses (exclusive of (i) any front-end or contingent deferred loads; (ii) brokerage fees and commissions, (iii) acquired fund fees and expenses; (iv) fees and expenses associated with investments in other collective investment vehicles or derivative instruments (including, for example, option and swap fees and expenses); (v) borrowing costs (such as interest and dividend expense on securities sold short); (vi) taxes; and (vii) extraordinary expenses, such as litigation expenses (which may include indemnification of Fund officers and Trustees and contractual indemnification of Fund service providers (other than the Advisor)) to not more than 0.99% of the average daily net assets of the Fund. This contractual arrangement is in effect through July 31, 2023, unless earlier terminated by the Board of Trustees of the Fund (the “Board” or the “Trustees”) at any time. “Acquired Fund Fees and Expenses” include expenses incurred indirectly by the Fund through its investments in closed-end funds and other investment companies, do not affect a Fund’s actual operating costs, and therefore are not included in the Fund’s financial statements, which provide a clearer picture of a Fund’s actual operating costs. The Advisor cannot recoup from the Fund any amounts paid by the Advisor under the Expense Limitation Agreement.
MDCEX
The Total Annual Fund Operating Expense for the Fund as disclosed in the prospectus is 2.48% dated August 1, 2022. The Total Annual Fund Operating Expense is required to include expenses incurred indirectly by the Fund through its investments in closed-end funds and other investment companies. The Advisor has entered into an expense limitation agreement with the Fund under which it has agreed to waive or reduce its fees and to assume other expenses of the Fund, if necessary, in an amount that limits the Fund’s annual operating expenses (exclusive of (i) any 12b-1 fees; (ii) any front-end or contingent deferred loads; (iii) brokerage fees and commissions, (iv) acquired fund fees and expenses; (v) fees and expenses associated with investments in other collective investment vehicles or derivative instruments (including, for example, option and swap fees and expenses); (vi) borrowing costs (such as interest and dividend expense on securities sold short); (vii) taxes; and (viii) extraordinary expenses, such as litigation expenses (which may include indemnification of Fund officers and Trustees and contractual indemnification of Fund service providers (other than the Advisor)) to not more than 1.25% of the average daily net assets of the Fund. The Expense Limitation Agreement runs through July 31, 2023 and may be terminated by the Board of Trustees of the Fund at any time. “Acquired Fund Fees and Expenses” include expenses incurred indirectly by the Fund through its investments in closed-end funds and other investment companies, do not affect a Fund’s actual operating costs, and therefore are not included in the Fund’s financial statements, which provide a clearer picture of a Fund’s actual operating costs. The Advisor cannot recoup from the fund any amounts paid to the Advisor under the expense limitation agreement. However, net annual operating expenses for the Fund may exceed those contemplated by the waiver due to expenses that are not waived under the Expense Limitation Agreement.
The Net Expense Ratio for the Fund as disclosed in the prospectus is 2.48% dated August 1, 2022 and is required to include expenses incurred indirectly by the Fund through its investments in closed-end funds and other investment companies. The Net Expense Ratio for the Fund as disclosed in the annual report is 1.19% dated March 31, 2022 and only includes the direct expenses paid by shareholders from their investment.
Important Disclosures
An investment in the Funds is subject to investment risks, including the possible loss of some or all of the principal amount invested. There can be no assurance that the Funds will be successful in meeting their investment objectives. Generally, the Funds will be subject to the following additional risks: Closed-End Fund Risk, Control of Closed-End Funds Risk, Convertible Securities Risk, COVID-19 and Other Infectious Illnesses Risk, Credit Risk, Cybersecurity Risk, Derivatives Risk, Equity Securities Risk, Preferred Stock Risk, Fixed-Income Securities Risk, Foreign Securities Risk, ADR Risk, Fund of Funds Risk, General Investment Risks, Interest Rate Risk, Investment Advisor Risk, Junk Bond Risk, Leverage Risk, Limited History of Operations Risk, Loans Risk, Management Style Risk, Market Risk, Money Market Mutual Fund Risk, Portfolio Turnover Risk, Prepayment Risk, and Quantitative Model Risk. More information about these risks and other risks can be found in the Funds’ prospectus.
Distributor: Capital Investment Group, Inc., Member FINRA/SIPC. There is no affiliation between Matisse Capital, including its principals, and Capital Investment Group, Inc. Serial #RCMAT0822001.
An investor should consider the investment objectives, risks, and charges and expenses of the Funds carefully before investing. The prospectus contains this and other information about the Funds. A copy of the prospectus is available at www.ncfunds.com or by calling Shareholder Services at 1-800-773-3863. The prospectus should be read carefully before investing. Current and future holdings are subject to change and risk.