Barron's Still Loves Closed End Funds

This week's Barron's had an article titled How To Squeeze More Yield From Muni Bonds. I thought to myself, "Oh? Go on..." It turns out it was mostly about closed end muni bond funds. Barron's writes about closed end funds (CEF) frequently and we touch on them here occasionally. It has been ages since I did anything with CEFs for clients or personally. Before ETFs, CEFs offered a lot of exposures that were otherwise difficult to access and frequently the yield is high because they use leverage.

CEFs though have a tendency to get absolutely murdered during certain market events. There was some sort of spike in interest rates in June/July 2003 that wrecked the space. Ten years later was the Taper Tantrum and then various other events including 2022. 

The above is a collection of random symbols off the top of my head in 2022. NUV, the best performer was down almost 14% and it is unleveraged. Like yesterday's post, there might be room for a small slice but a heavy exposure is a tough way to ride through a market cycle. 

As is sometimes the case with these articles, there was an interesting fund mentioned that invests in closed end muni bond funds, so it is a mutual fund of CEFs. The Robinson Tax Advantaged Income Fund (ROBNX) is a 5 star fund with around $250 million in AUM. Also mentioned was the Matisse Discounted Closed End Fund Strategy Fund (MDCEX) which is a 4 star fund and $40 million in AUM. Comparing them is not quite apples to apples because ROBNX owns muni CEFs and MDCEX can go anywhere in the CEF realm, most recently it was 33.7% in US equity, 29.7% in non-US equity and smaller exposures from there. 

I threw AGG in there for context versus plain vanilla fixed income. MDCEX looks nothing like AGG but ROBNX does. ROBNX is apparently quite a bit more volatile than AGG but the ride between the two seems very similar on a total return basis.

I'm surprised that MDCEX did the best in 2022. 

The year by year is sort of all over the place. MDCEX as more of an equity proxy should outperform more often than not and ROBNX outperformed AGG in five out of nine years so nothing noteworthy about that. It is difficult to get a handle on what the yield really is with these two. Morningstar says ROBNX' trailing 12 month yield is 2.7% and 8% for MDEX. According to Portfoliovisualizer, the "portfolio income" was 3.32% for ROBNX and over 15% for MDCEX. I assume that includes capital gains. It appears that MDCEX has paid a couple of huge capital gains over the years. 

Capital gains from ROBNX is less clear. The website has the distribution history, it's a monthly pay, with no outsized dividends that are clearly capital gains. This raises an interesting point. The ROBNX investment objective includes "emphasis on providing income, a substantial portion of which will be exempt from federal taxes." It would be unusual to put a fund like this into any sort of IRA, the tax advantage would be wasted. But due to the mechanics of the mutual fund wrapper, there could be a capital gain which would be taxable, offsetting the benefit of the tax free income. I'll try to dig into this with the fund company to see if I am missing something. 

These funds are interesting on some level and fun to explore but I am unlikely to use them.

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