2016 Overview

2016 was a very solid year for diversified closed-end fund (CEF) investors with the average fund up 8.59% on a share price total return basis according to Morningstar. Unlike 2015 when most of the gains were limited to municipal CEFs, the gains in 2016 were broad—with many categories posting meaningful total return gains. All equity CEFs were up on average 9.78% and all taxable fixed-income CEFs were up on average 16.68%. Municipal CEFs were only up on average 0.64%. As both LIBOR (London Interbank Offered Rate) and long-term interest rates trended higher the last six months of the year, municipal CEFs struggled and were lower by 10.19% during the last half of 2016 (Morningstar). After lagging in 2015, shorter-duration, credit-sensitive categories really shined in 2016. Indeed, senior loan CEFs were up on average 23.92%, high-yield CEFs were up on average 18.79% and limited duration CEFs were up on average 15.87% on a share price total return basis (Morningstar). As 2017 commences, the good news from my perspective is that even after a very solid year for many categories of the CEF marketplace, there remain several pockets of opportunities and value that I think CEF investors should focus on (see below). Average discounts to net asset value (NAV) remain wide by historical standards. Indeed, according to Morningstar the average fund was trading at a 6.34% discount to its NAV as of 12/31/2016 and only narrowed slightly from the average discount of 7.86% on 12/31/15.

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