An interesting lawsuit in the municipal bond market has uncovered exactly how and why many debt CEFs can crush their indexes, and why this fact is likely to remain true for a long while to come.
The story revolves around Nuveen Asset Management and its attempts to get all of the major investment banks in America to not do business with an upstart that was disrupting Nuveen’s business model as it functions in the muni bond world.
Understanding the details of this case is critical for understanding why CEFs are a much, much better vehicle for buying municipal bonds (as well as several other assets). But in addition, this case is really interesting, as it uncovers some of the tricks of the trade that asset managers use to win.
Nuveen’s Outsized Power
Of the 70 CEFs Nuveen manages, 40 are municipal bond funds with $25.3 billion in AUM in total. Include Nuveen’s other muni bond funds, and the firm manages a whopping $150 billion in muni bond assets. These funds vary from microscopic (the Nuveen Pennsylvania Municipal Value Fund (NPN) is less than $20 million in size) to the largest CEF on the market, the Nuveen AMT-Free Quality Municipal Income Fund (NYSE:NEA). Nuveen touts itself as the largest high yield municipal bond manager in the world, while also being one of the few firms to carry the torch for closed-end funds as an investment vehicle (the oft used, though oft erroneous cefconnect.com is sponsored by Nuveen).
The firm’s presence in the municipal bond market is significant, which is as important of a consideration as the metrics CEF investors often look at, such as discounts to NAV, yield, and dividend sustainability.
Size and market influence can be powerful determinants of fund performance in debt markets for two reasons. First, a manager’s size can
