The Fed's latest rate hike and the budding global trade war took a toll last month on the returns of closed-end funds, many of which invest in now newly vulnerable sectors like emerging markets and bond funds.

Closed-end funds focusing on equities and CEFs on the fixed-income side, with bond portfolios, both saw their first decline in net asset value in months, according to a survey by Tom Roseen, head of research services at Lipper.

Closed-end equity funds saw a .41% decline in net asset value in September, the first in six months, while CEFs on the fixed-income side recorded a .07% drop, the first in five months, according to Roseen's Fundmarket Insight Report.

The amount investors were willing to pay for shares in CEF equity posted a somewhat larger decline of .69%, while closed-end municipal bond funds saw a 1.3% drop in demand.

Roseen noted the negative returns in the closed end sector, whose less liquid capital structure and active management often promotes a greater degree of risk taking, came even as the The Dow Jones Industrial Average hit record heights again in September.

"The market was pretty good in September," Roseen noted. "Maybe it's a case of throwing the baby out with the bathwater."

Still, the Fed's decision to raise rates, the trade battle with China, and recent tech stock struggles had an even more pronounced impact on closed-end funds given the sector is heavily invested in rate-increase wary bonds, technology stocks and overseas markets.

Closed-end funds that focus on the municipal bond market took a hit in September as the Fed raised rates a quarter point to 2.25%, while predicting three more hikes in 2019.

Closed-end municipal bond funds often make use of leverage, or borrowing, to make money, using less expensive short-term debt to buy long. As rates have risen, margins have shrunk.

CEFs focused on municipal debt posted a .89% decline in net asset value in September, the first in five months, according to Roseen's report.

As investors cooled, closed-end municipal bond funds also saw the biggest increase in the discounts in September among all the fund groups tracked by Lipper.

Discounts on CEF muni bond funds jumped 185 basis points to 9.51% in September, meaning investors could buy a $1 worth of municipal bonds for $90.49.

Discounts are a unique feature of closed-end funds, with the number of shares remaining the same, regardless of supply and demand, even as they trade throughout the day.

This can lead to greater variability and even volatility in the share price of closed-end funds. As investor interest waxes, or in the case of discounts, wanes, gaps open up between the trading price and the value of the underlying portfolio of assets.

The Trump Administration's decision to levy an additional $267 billion in tariffs on Chinese goods - atop $200 billion in already announced tariffs - also injected some additional volatility into the world of closed-end funds.

Some CEFs with big holdings in China and India saw investors shy away or eye the exits.

A pair of closed-end equity funds with a focus on India posted the two worst performances in September.

Morgan Stanley India Investment Fund, Inc. saw its net asset value or NAV price, fall 13.4% in September, while India Fund Inc. posted a 10.3% decline. Discounts also widened on both funds. The funds were trading at an 11.1% and 12.1% discount, respectively, at the end of September. 

Investors in CEFs focused on India and China have been "spooked by the increasing rhetoric by the Trump Administration and their willingness to put tariffs in place," Roseen said.

Other emerging market funds, especially focused on countries with commodity-based economies, actually enjoyed an uptick. The Latin American Discovery Fund, Inc. rose more than 3% in September, while trading at a comparatively modest 1.67% discount, according to Roseen's report.

The beating some of the big tech stocks have taken in recent months has also had an impact on the closed-end fund sector, with CEF growth funds often bulking up on tech stocks.

Top performers in September included CEFs focused on options arbitrage/options strategies, which provide a way for investors to grind out gains in what is essentially a flat market. Helped by a bump up in oil prices, CEFs focused on natural resources managed to break even in September, Roseen noted.

With a .33% rise in net asset value, CEFs focused on options arbitrage/options strategies sector posted the most significant gains of closed-end funds

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