The first three months of this year have seen a fair amount of activity in the closed-end sector.
Corporate Activity
We’ve had the C share issue from Fidelity China Special Situations (FCSS), the issue of loan stock from Standard Life UK Smaller Companies (SLS), the launch of Duet Real Estate Finance and a raft of VCT issues, to name a few. In total, we’ve seen nearly £441 million in new money flow into the sector over the quarter.
That’s only one side of the story, though. We’ve also seen outflows of £350 million, through a variety of streams. Indian property company Trinity Capital has distributed nearly £84 million to shareholders as it gradually realises its portfolio. Gartmore Irish has been wound up, following Gartmore’s takeover by Henderson; not surprisingly, most investors took cash as the OEIC option was a European smaller companies fund--hardly a similar match from an investment standpoint.
Then there are two funds of hedge funds that struggled to recover from 2008 losses and are now winding up: FRM Credit Alpha and Tapestry. Also, the euro shares of Dexion Absolute didn’t survive their continuation vote.
A number of names have disappeared through mergers, including Anglo & Overseas (into EP Global Opps (EPG)), M&G Equity (into OEICs or cash), Asset Management (into Greenwich Loan Income (GLIF)) and Eclectic (into Utilico (UTL)).
Then there are tender offers which themselves account for 40% of the outflows. Here we’ve seen a number of names operate tender offers, including JPMorgan Asian (JAI) and Schroder Asia Pacific (SDP).
So how does this compare with the first quarter of 2010? Surprisingly well, it turns out. Last year saw a larger amount of both inflows and outflows in total monetary terms, but the overall split was identical to 2011--55% of the total movement of money was in and 45% left the sector. This in itself isn’t that remarkable a fact, but it’s a notable shift from the behaviour we saw in 2009. Much of the inflows themselves came from funds allotting new shares, rather than any prominent launches--those came in the second quarter.
The first quarter of 2009 was one I’m sure most of us would like to forget. The last couple of weeks saw a pronounced shift in sentiment as the market rally got underway but until then, things had looked grim, to say the least. We saw nearly £770 million in outflows from the CEF sector, some 69% of total fund flows over that three-month period. So I’m encouraged by what we’ve seen so far in 2011.
Discounts
So far this year we’ve seen the discount on the Morningstar Investment Trust All ex VCT unweighted index narrow, but only by a handful of basis points, from 12.13% to 11.98%. The NAV of that index, on a total return basis, has edged up 0.8%.
If we break this down into individual sectors, then the picture is somewhat different. In Asia and emerging markets, we’ve seen the Morningstar Investment Trust indices’ discount widen, whereas in Japan, it’s actually tightened a little. We discussed this recently in a panel debate on emerging markets as one would expect, given the appalling situation in Japan, that discounts on Japanese CEFs would widen as market sentiment on the country fell.
I think this shows one of the strengths of the closed-end fund structure in action. The fixed share capital means shareholders are protected from rapid outflows as investors panic, although they are, of course, prone to seeing share prices fall in the same way. But what encourages me is the resilience of the Japanese funds’ NAVs relative to the TOPIX. That doesn’t mean it’s been pleasant reading--gearing has without doubt hurt short-term performance and gearing is in use in all but two Japanese equity CEFs right now.
Elsewhere, in emerging-market equity funds, things were looking good relative to their open-end peers until mid-March when we saw a rebound in the markets. That said, we don’t pay too much attention to such short-term performance, beyond checking the funds are behaving in the way we expect them to, given their processes. The discount on the Morningstar Investment Trust Global Emerging unweighted index has widened over the quarter, by more than three percentage points, but the MSCI EM index is also down, so this doesn’t surprise us. Gearing isn’t a factor here, though, as most EM equity fund managers think their funds carry sufficient risk without the burden of gearing, too.
We recently hosted a webinar on gearing--click here to listen to the recording if you need a refresher or want to understand it in more detail.
What Lies Ahead
Corporate activity is set to continue in the second quarter with the imminent launch of the Henderson International Income Trust, for starters, and a C share issue from both JPMorgan Global Emerging Markets Income (JEMI) and HarbourVest Senior Loans Europe (HSLE). Then there’s the global equity income fund planned for Paul Boyne at Invesco Perpetual.
These fund-raisings prove there’s life yet in the CEF sector and it’s great to see new funds coming to the market. Their low-cost structure places them firmly on the map in a post-RDR world.
