Closed-end funds can provide both individual investors and portfolio managers with an opportunity to expose their portfolios to a much larger range of assets than they might when trading individual stocks and bonds. In addition, CEFs can be an excellent source of potential income.
One might assume that publicly traded investments like CEFs would be well-researched and that strategies for investing in them would be widely known and accepted, but unlike more traditional investment vehicles, CEFs don’t have an abundance of historical research and studies focusing on them.
Do Large Discounts Consistently Lead to Higher Returns?
In the mid 2000’s, our fund managers believed that finding an answer to this question would help us build our own core investment philosophy in closed-end funds. But acquiring the data necessary for such a project would mean creating our own indexes of CEFs, which were relatively scarce at the time.
This led our fund managers to work with the University of Oregon’s Lundquist College of Business (Cameron Center for Finance and Securities Analysis) and engage in a first-of-its-kind study on the long-term relationship between high discounts and strong future returns in CEF investing. With over 600 funds, this study eclipsed the next largest index of its kind by a factor of 20.
Shaping Income Investing Strategies
With high return potential and a relatively unsaturated landscape, CEFs were perfectly positioned to bring our investing strategy into alignment with the income-driven financial goals of many of our clients. Finding a way to give them an advantage using equity and fixed-income CEFs would allow our fund managers to create a new niche in the mutual fund market.
This niche had the potential to not only diversify portfolios, giving investors exposure to a range of assets that might otherwise be unavailable or overlooked, but to potentially produce lucrative income streams and total returns.
What the Study Found
According to the study, a simple investment strategy based on CEF discounts that our fund managers proposed would have resulted in an annualized return of 20% over the time period studied (February 1988 to March 2011). This is significantly higher than investments made in the S&P 500 or in bonds, which returned 10% and 7% respectively over the same time period.
The strategy we identified appeared to make a compelling argument and would become the foundation of our approach with Matisse Funds. Since the conclusion of the study, our firm has continued to collect, aggregate, and combine new CEF data points with the existing 20+ years of research compiled in the study, resulting in a research database today of over 500 closed-end funds and over 1 million data points. With this data, we believe we can deliver a CEF investing strategy that prioritizes sustainable, stable income for our clients.
To learn more about our closed-end fund research, visit our full selection of research and studies.