CLOSED-END FUND

RESEARCH AND PORTFOLIO MANAGEMENT

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THIRD QUARTER 2020

COMMENTARY

WHAT ARE CLOSED-END FUNDS?

Closed-End Funds (CEFs) are mutual funds that trade on an exchange, similar to a stock. They are regulated by the Investment Company Act of 1940, similar to Traditional Open-End Mutual Funds and Exchange Traded Funds. However, there are a number of key differences that make CEFs unique:

The CEF market is inefficient. Generally speaking, proponents of an efficient market believe that all publicly available information about an asset is reflected in the asset's price. In contrast, an inefficient market is one where all publicly available information about an asset is not necessarily reflected in the asset's price, suggesting bargains are available.

WHY THE CEF MARKET IS INEFFICIENT:

CEFs often trade at a price that is below (discount)

or above (premium) their Net Asset Value (NAV)

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There are hundreds of CEFs in many asset classes, but relatively few covering analysts, limiting information and efficiency

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Historical data on CEFs is limited and often incomplete

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Overall investor breakdown in

the CEF Market is approximately

80% Retail / 20% Institutional:

RETAIL INVESTORS DOMINATE MARKET

Incredibly important to point out, as retail investors (as a whole) typically make investment decisions driven by emotion

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Research indicates retail investors often chase performance: Purchase a fund after recent great performance; and

Sell a fund after what is perceived as poor performance

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"Emotional" fund flows often move a CEF's price more so than its underlying NAV, which creates trading opportunities

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See: Profit by Trading Against the Average Investor

THE CONNECTION BETWEEN CURRENT DISCOUNTS AND FUTURE RETURNS

Based on the success of various accounts we managed during 2000-2005 that focused on discounted CEFs, we began managing a partnership to capitalize on what appeared to be a steady relationship between large discounts and high subsequent total returns. The results were almost entirely satisfactory.

In 2008, we decided to investigate whether this relationship had historically persisted over time. Surprisingly, we found no evidence that anyone had ever engaged in such an investigation before. The only CEF index we found, in fact, was a 30-fund index calculated by Herzfeld Advisors in Miami, and provided weekly in Barron’s.

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Academic studies were scarce, and we found none dedicated to answering the simple question:

Do large discounts lead consistently to higher total returns?

So in conjunction with the Cameron Center for Finance and Securities Analysis (Lundquist College of Business; University of Oregon), we set about constructing our own indexes of CEFs. We quickly found that nearly all the databases with information about CEFs threw out the data when funds went out of existence (either through liquidation, merger, or conversion into an open-end fund). And so we decided to do the best we could by taking all 600+ CEFs in existence in 2008, and collecting all relevant data on these funds back as far as we could.

STUDY RESULTS SUMMARY

Historically, for U.S. CEFs, discounts to NAV have been highly correlated with subsequent total returns.

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Results are statistically significant across time, and across different CEF types.

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A simple investment strategy based on discounts demonstrates impressive long-term results:

• 20% Annualized Return

• 0.7 Beta to the S&P 500

• 13% Annualized Alpha to the S&P 500

MATISSE PRIVATE RESEARCH DATABASE

The University of Oregon study laid the foundation for what (to our knowledge) is now the longest known proprietary research database on CEF discounts

Source: Matisse Capital

This graphic is a basic representation of Closed-End Fund returns and should be used for illustrative purposes only. There are other factors that can increase or decrease the total return of a Closed-End Fund.

Matisse Discounted CEF Strategy

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S&P 500 Total Return

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S-Network Composite CEF Index

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MSCI ACWI

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S&P Target Risk Growth Index*

167.6%

​

266.5%

​

135.6%

​

147.4%

​

133.6%

6.9%

​

9.2%

​

6.0%

​

6.3%

​

5.9%

5.6%

​

13.7%

​

6.0%

​

8.5%

​

7.6%

6.2%

​

14.1%

​

7.7%

​

10.3%

​

7.9%

-1.7%

​

12.3%

​

2.3%

​

7.1%

​

6.1%

-14.9%

​

15.1%

​

-2.3%

​

10.4%

​

7.9%

​

​

0.83

​

1.03

​

0.80

​

1.28

​

​

-0.37%

​

0.91%

​

1.97%

​

-0.12%

​

​

0.66

​

0.87

​

0.70

​

0.71

Our since-inception risk stats vs. these indexes

*A multi-asset class globally balanced index with fixed allocation of 60% equity, 40% bonds

Returns are presented after a presumed 1% annual fee. All returns longer than 1 year are annualized unless noted.

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

-1.40%

10.16%

3.33%

3.66%

-6.08%

0.50%

-1.50%

5.54%

6.68%

-0.03%

0.38%

3.52%

0.28%

-0.25%

3.18%

-9.52%

2.83%

-3.49%

2.72%

1.08%

2.56%

5.55%

-0.55%

3.39%

1.97%

2.29%

-9.90%

-1.26%

0.63%

1.63%

-27.70%

1.77%

-1.17%

1.45%

9.35%

0.04%

0.24%

1.70%

0.81%

0.56%

3.77%

4.65%

-2.63%

1.24%

0.23%

11.52%

1.17%

0.14%

2.18%

3.16%

1.06%

2.21%

0.83%

-0.49%

2.04%

2.46%

9.17%

4.91%

2.78%

-0.96%

5.40%

-4.21%

-0.54%

0.99%

0.35%

-0.48%

3.19%

-1.27%

-5.80%

0.76%

-6.50%

9.49%

3.56%

1.33%

-0.80%

2.04%

4.27%

-0.44%

1.38%

2.06%

-3.83%

2.25%

-3.12%

3.68%

-0.26%

-1.50%

3.87%

-4.90%

-1.61%

2.11%

3.25%

0.60%

1.47%

2.46%

4.40%

-1.62%

-1.39%

0.17%

2.24%

-2.00%

6.12%

7.62%

-3.30%

-2.91%

3.32%

4.39%

-1.25%

0.11%

0.27%

1.00%

-5.95%

1.58%

-2.12%

1.78%

-3.91%

-0.28%

3.82%

-0.98%

0.04%

4.05%

-3.28%

3.05%

-1.13%

1.16%

0.17%

-2.95%

-3.63%

3.04%

2.70%

-6.63%

8.13%

6.19%

-14.93%

2.69%

1.87%

-0.89%

-5.56%

0.82%

-3.13%

7.34%

0.27%

2.23%

-0.12%

5.95%

3.00%

-1.84%

-8.90%

1.20%

3.36%

1.20%

2.38%

0.42%

1.28%

-2.12%

0.75%

-1.18%

-1.03%

-1.15%

0.49%

3.87%

-15.03%

-1.96%

2.04%

5.17%

-4.21%

1.81%

2.09%

-0.73%

-0.06%

2.50%

1.52%

0.43%

3.46%

3.55%

9.09%

1.23%

2.24%

Performance cited represents a composite of all Matisse Capital-advised accounts employing our discounted closed-end fund strategy, including our publicly traded mutual fund, net of all commissions, and separate accounts with a presumed 1% management fee. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. For details of the performance calculation method, please download our separate audited report. All performance figures for the strategy (except cash distribution yield) are total returns net of actual commissions incurred, and net of a presumed 1% annual management fee. Benchmark returns, by contrast, do not reflect a deduction for fees. You cannot invest directly in an index. Performance comparisons are for illustrative purposes only and are not a forecast of future returns. Alpha, beta and R2 are annualized since inception.

The benchmarks referenced are included to reflect the general trend of the markets during the periods indicated and are not intended to imply that the underlying returns were comparable to the market indices either in composition or element of risk. There are significant differences between client accounts and the indices herein including, but not limited to, risk profile, liquidity, volatility, and asset composition. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks chosen for market size, liquidity and broad industry group representation within the U.S. economy. Index returns represent gross returns, and are provided to represent the investment environment during the time periods shown and are not covered by the report of the independent verifiers.

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Closed-end funds involve investment risks different from those associated with other investment companies. First, the shares of closed-end funds frequently trade at a premium or discount relative to their net asset value. When one purchases shares of a closed-end fund at a discount to its net asset value, there can be no assurance that the discount will decrease, and it is possible that the discount may increase and affect whether one will realize a gain or loss on the investment. Second, many closed-end funds use leverage, or borrowed money, to try to increase returns. Leverage is a speculative technique and its use by a closed-end fund entails greater risk and leads to a more volatile share price. If a closed-end fund uses leverage, increases and decreases in the value of its share price will be magnified. The closed-end fund will also have to pay interest or dividends on its leverage, reducing the closed-end fund’s return. Third, many closed-end funds have a policy of distributing a fixed percentage of net assets regardless of the fund’s actual interest income and capital gains. Consequently, distributions by a closed-end fund may include a return of capital, which would reduce the fund’s net asset value and its earnings capacity. Finally, closed-end funds are allowed to invest in a greater amount of illiquid securities than open-end mutual funds. Investments in illiquid securities pose risks related to uncertainty in valuations, volatile market prices, and limitations on resale that may have an adverse effect on the ability of the fund to dispose of the securities promptly or at reasonable prices.

Download our Most Recent Managed Account Performance Tear Sheet

AUDITED CEF STRATEGY PERFORMANCE

Independent Performance Certification Report June 30, 2020

Performance cited represents a composite of all Matisse Capital-advised accounts employing our discounted closed-end fund strategy, including our publicly traded mutual fund, net of all commissions, and separate accounts with a presumed 1% management fee. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. For details of the performance calculation method, please download our separate audited report. All performance figures for the strategy (except cash distribution yield) are total returns net of actual commissions incurred, and net of a presumed 1% annual management fee. Benchmark returns, by contrast, do not reflect a deduction for fees. You cannot invest directly in an index. Performance comparisons are for illustrative purposes only and are not a forecast of future returns. Alpha, beta and R2 are annualized since inception.

​

Closed-end funds involve investment risks different from those associated with other investment companies. First, the shares of closed-end funds frequently trade at a premium or discount relative to their net asset value. When one purchases shares of a closed-end fund at a discount to its net asset value, there can be no assurance that the discount will decrease, and it is possible that the discount may increase and affect whether one will realize a gain or loss on the investment. Second, many closed-end funds use leverage, or borrowed money, to try to increase returns. Leverage is a speculative technique and its use by a closed-end fund entails greater risk and leads to a more volatile share price. If a closed-end fund uses leverage, increases and decreases in the value of its share price will be magnified. The closed-end fund will also have to pay interest or dividends on its leverage, reducing the closed-end fund’s return. Third, many closed-end funds have a policy of distributing a fixed percentage of net assets regardless of the fund’s actual interest income and capital gains. Consequently, distributions by a closed-end fund may include a return of capital, which would reduce the fund’s net asset value and its earnings capacity. Finally, closed-end funds are allowed to invest in a greater amount of illiquid securities than open-end mutual funds. Investments in illiquid securities pose risks related to uncertainty in valuations, volatile market prices, and limitations on resale that may have an adverse effect on the ability of the fund to dispose of the securities promptly or at reasonable prices.

NEWSLETTER ARCHIVE

October 2020

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October 2014

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July 2014

EDUCATION CENTER

The Education Center is a collection of external research and articles that we have found to be important, interesting, or helpful in understanding closed-end funds.

Links

Closed-End Fund Asset Class Performance
 

Closed-End Fund Key Concepts
 

Closed-End Fund Types and Strategies
 

Considerations and Risks of Leverage
 

Discounts and Premiums
 

Funds with Managed Distribution Policies
 

Historical Closed-End Fund IPOs
 

Historical Rights Offerings
 

Key Considerations for Closed-End Funds
 

Leveraged Funds
 

Understanding Leverage

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What is a Closed-End Fund?

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External White Paper on Closed-End Fund Discounts

Matisse Capital is not affiliated or endorsed by Closed-End Fund Association, Inc., Nuveen Investments, Inc., or Social Science Electronic Publishing, Inc. Matisse Capital is not responsible for the content of external websites. The content contained in the above links is not the property of Matisse Capital.