Investius
Closed-end fund discounts have trended higher this year. Has this affected other aspects of the closed-end fund market, for example, IPOs?
Cara Esser, Morningstar
It absolutely has affected the IPO market. We’ve seen very few fund launches this year. And in fact there were a few that were on deck in the beginning of the summer, and since all of the discounts have widened so significantly we haven’t seen those actually launch.
Investius
What other developments do you see that may be related to the persistent high discounts that we’re seeing?
Esser
We’ve had a lot of market complaints about the IPO process in general… about funds launching at premiums and then they get to discounts. And particularly now, there’s wide discounts in the market for some of the funds that launched very recently. So some of the fund providers have started do some things that are more shareholder friendly. For example, launch a fund with a term limit, which means after a certain period of time, let’s say 10 years, the fund dissolves. And that in theory should make the discount go away, and should help keep the discount pretty narrow over the life of the fund, because everybody knows that they’re going to get the NAV (net asset value) back at the term date. Other things we’ve seen are secondary price support. The fund companies are going into the market and they’re buying up shares for a certain period of time after the launch of the fund, to help support the secondary share price. This hasn’t worked all that well, because as we’ve seen this summer, the share prices have just dropped precipitously, compared to their NAV. So it hasn’t been particularly successful, but it’s nice to see that the fund providers are experimenting with things to sort of make the IPO process more investor friendly.
Investius
And what do you see as the impact for current investors in the closed-end fund market? How does it affect them, some of these trends?
Esser
I think the trends overall are positive. They haven’t worked out all that well yet. But I think the market sort of took a nosedive that nobody was expecting. But I think, overall, investors benefit when the asset managers try to do things in terms of IPOs that help support the secondary share price.
Investius
And as you look at the market right now, let’s think about the future for a second, and some of these trends. Can you make any forecast regarding the longer term shape of the closed-end fund market?
Esser
It’s interesting because the closed-end fund market tends to change as the overall market changes. We’ve seen in recent years a shrinking in the number of closed-end funds through mergers and some fund closures. There’s been some funds that have open-ended recently. We also see a change in the types of funds that are being launched. For a while we had a lot of MLP funds launching. Now we’re at about 25 MLP funds. We haven’t really seen too many this year. I think we’ll see fewer fixed income funds launching into the market. As interest rates are rising, people are less interested in getting into taxable fixed income closed-end funds. Perhaps we’ll see more equity funds. Maybe some more alternative funds as those markets sort of revive themselves.
Investius
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