Karpus Management Inc. is returning to battle a group it has largely avoided fighting for around three years: closed-end fund managers.

The activist investor is launching campaigns against asset managers including BlackRock Inc., Nuveen, and Eaton Vance. Like other activist investors, it’s focusing on funds that trade at steep discounts to the value of their assets, and is pushing money managers to take steps like buying back shares to boost valuations for investors.

Closed-end funds account for more than 60% of Karpus’s roughly $3.7 billion of assets under management, and it has used activist tactics to press for changes at the funds since the 1990s. It took a hiatus from these campaigns from 2020 through late 2023 because it thought the funds were trading at reasonable prices.

Now, it’s returning to the fight because the fund’s shares are trading at such low values relative to their assets, discounts that are “unprecedented,” said Karpus Chief Investment Officer Dan Lippincott. These valuations started dropping in 2022, as the Federal Reserve began hiking rates to help tame inflation.   

“When discounts remain wide for extended periods of time, we believe the board of directors and fund management companies have an obligation to take action to reduce or eliminate the discount,” Lippincott said. “So far they have failed to take action.” 

Karpus, along with Boaz Weinstein’s Saba Capital Management and Phillip Goldstein’s Bulldog Investors, have historically accounted for most of the activist campaigns in the $240 billion closed-end fund industry. The trio held positions in almost half of all existing funds as of June 2023, according to the Investment Company Institute, a trade group.

Closed-end funds are listed on stock exchanges and are backed by portfolios of income-bearing assets, like junk bonds and municipal debt. They can trade at premiums or discounts to the net value of their assets. Many of them use leverage to boost the distributions they can pay — and make more fees. But when the Fed’s aggressive tightening campaign battered bond prices, borrowing became more expensive, and investors scrambled to pull out their money and buy other securities. So closed-end fund prices dropped.

The four muni closed-end funds that Karpus has targeted — BlackRock Municipal Income Fund, Nuveen New York AMT-Free Quality Muni Income Fund, Nuveen AMT-Free Quality Muni Income Fund and Eaton Vance Municipal Bond Fund — trade at discounts of 10% or more. Karpus is now the biggest shareholder in these funds, according to filings. Representatives for Blackrock, Nuveen and Eaton Vance declined to comment.

These aren’t the only funds trading below the values of their underlying assets. The weighted average discount for muni bond funds reached 15% in October, and even after some slight narrowing, is still near historically wide levels. The average discount over the last 40 years has been closer to 3%. Muni closed-end funds were trading at weighted average premiums just three years ago, according to Thomas J. Herzfeld Advisors’ data that tracks over 100 products in the space.

The discounts in closed-end funds are drawing other investors too. Last month, Calamos Investments launched an actively-managed ETF targeting close-end funds that trade at “attractive” discounts.

The Calamos CEF Income & Arbitrage ETF (ticker CCEF) invests in around 40 closed-end funds across asset classes including fixed income, equities and options-based funds with no one position being over 4% of their portfolio. Calamos, an investment firm with more than $35.5 billion in assets under management, said it will not buy its own closed-end funds and emphasized that it will not engage in activism.

The last two years have been “very painful” for shareholders of muni closed-end funds, according to Karpus’s Lippincott, who’s been working in the industry for 21 years. “It is the longest period — 25 months now — I remember of discounts widening and remaining at historically wide levels.” 

This article was provided by Bloomberg News.