Managers’ Choice
Nuveen (which has 68 closed-end funds with approximately $56.8 billion in managed assets) has been de-risking and looking for opportunities, says Dave Lamb, managing director in Nuveen’s closed-end funds group. Two of its MLP funds eliminated leverage and later announced plans to liquidate.

“Munis are one asset class that has held up pretty well throughout this,” says Lamb, who notes the majority of Nuveen’s muni closed-end funds that employ leverage haven’t had to take leverage off. Some managers used the dislocation to match embedded yields and upgrade the quality of fund holdings, he says.

Many munis are backed by revenue from essential services (such as water and sewer usage rates) that are unlikely to see a material change during the Covid-19 crisis, he says.

Considering the way closed-end funds recovered after 2008 and 2009 and the premium tightening underway this spring, closed-end funds should be able to continue to help retirees and soon-to-be retirees find income and cash flow to “supplement and potentially replace a paycheck that is lost,” Lamb says.

If “market dislocations persist and we see opportunities there, we would like to raise capital and put money to work in those spaces,” he adds. But he says it could be harder for the industry’s closed-end funds to raise capital in the near term. Firms are pushing back potential closed-end fund offers until at least later this year.

The big question, says Chris Larsen, director of closed-end funds at Legg Mason (which has 27 closed-end funds with just over $10 billion in assets under its umbrella), is whether the markets will retest their lows if it takes a long time for the economy to reopen and return to normal.

“Everyone wants it to just snap right back, and that would be excellent,” Larsen says, “but it feels like it’s going to be phased in.”

Regardless of how fast it happens, investing really comes down to the client, he says. The key questions for him are the client’s risk appetite, the client’s outlook on the market and what the client is trying to achieve.

Larsen suggests conservative investors first look at municipal closed-end funds with high-quality portfolios. The default rate on investment-grade munis has historically been below 1%, he says. “Even if that were to tick up a little bit, it still seems like a really attractive time to get in,” he says.

His next spot for conservative investors is investment-grade corporate bonds. More risk-tolerant investors with a longer time horizon may consider equities and equity income strategies, he says, which are still way off from their February levels. Investors with bigger risk appetites can also look at high-yield closed-end bond funds, he says.