Statistics Do Not Support Widely Held Closed-End Fund Misconceptions

by: Tim Plaehn

I have developed a database of high-yield, closed-end funds with the goals of discovering the best return potential of the group and to get an idea what makes the - at times - strange world of closed-end funds tick.

Analysis Baseline Data

For this discussion, I am using the following data. All of what will be discussed here relates back to these limitations. If what I discuss here goes against what you believe about closed-end funds, go find some data which supports your point of view.

  • My database includes 102 closed end funds. The selection criteria were total assets of $250 million or greater, current distribution yield greater than 6% and no muni-bond funds.
  • The fund types include leveraged and high-yield bond funds plus the funds working with the host of different strategies to squeeze high yields out of stocks.
  • This article looks at total returns for the last two years or the time a fund has existed, whichever is longer. Returns were calculated from the share price adjusted for distributions as published on Yahoo Finance.
  • Price to NAV premiums and discounts are the 52-week average as published on CEF Connect.

Closed-End Performance Results

I was surprised by the two-year total return numbers from the list of closed-end funds. My belief was that the majority of high-yield CEFs paid high distributions and the investors ended up with declining share prices. For the time frame used here, about 70% of the high-yield closed end funds have returned at least the dividend rate to investors over the last two years. Also, outside of the dog, money-losing, bottom of the list, closed-end funds, the current market share price of 75% of the funds is equal to or higher than the value two years ago. Ten of the funds in the database have negative total returns and 8 of those funds have been in existence for less than two years.

The high-yield fund managers have done a pretty decent job of earning the relatively high expense ratios charged by closed-end funds. One-quarter of the funds exceeded the total return of the S&P 500 as measured by the SPDR S&P 500 (NYSEARCA:SPY) using the same calculation method. Over half of the high-yield, closed-end funds outperformed the largest high yield ETF, the iShares iBoxx $ High Yield Corporate Bond Fund (NYSEARCA:HYG).

The share price premium or discount to NAV appears to not be a factor concerning closed-end fund returns. The median discount for the data base was 3.6%, so more than half of the closed-end funds trade at a discount. The biggest discount was 13% with several funds at that level. From my research, it became apparent that funds at a discount tend to stay at a discount and funds trading at a premium tend to stay at a premium. In the top third of closed-end funds by performance ranking, just under half have traded at a premium over the last year. The bottom third was loaded up with discount funds. The low performance group was skewed by the newer funds which have moved to a discount since being launched. For investors who like to watch for entry points, the market share price of closed-end funds tend to be much more volatile than the NAV value. Using the high and low premium/discount for the last year to pick entries could give a boost to individual investor total returns.

The PIMCO Premium Phenomenon

A special note concerning the two PIMCO high-yield, high premium funds. The PIMCO High Income Fund (NYSE:PHK) and the PIMCO Global StocksPLUS & Income Fund (NYSE:PGP) exist on their own planet with average premiums of 63% and 71%, respectively. Over the last two years, the two funds have not brought financial harm to investors. PHK put up the 16th highest return in the data base and PGP ranked at number 28. With the two funds, market share prices were up over the time frame as well as paying double-digit yields. My reading on these funds is that as long as the funds maintain the monthly distribution rates, the market will keep the share prices at a level to yield around 11%. The discussion on these funds should revolve around if and when the PIMCO managers will be forced to reduce the dividends. Both funds have been paying the monthly rates for close to a decade.


With the criteria used for this article, I was pleasantly surprised about the results produced by high-yield closed end funds. Still to be researched and discussed are the composition of distributions - does return of capital make a difference? And to take a look at longer term performance. I am in the process of putting together a database with 5-year results.

To conclude here are the three best and three worst performing high-yield, closed-end funds over the last two years. Funds are from the database criteria listed above:

The best:

  • H&Q Healthcare Investors (NYSE:HQH)
  • Kayne Anderson Energy Development Company (NYSE:KED)
  • Reaves Utility Income Fund (NYSEMKT:UTG)

The Worst (short timer funds not included):

  • ING Risk Managed Natural Resources Fund (NYSE:IRR)
  • Nuveen Global Value Opportunities Fund (NYSE:JGV)
  • Pyxis Credit Strategies Fund (HCF)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.