Funds that specialize in developed markets overseas and core U.S. investments have racked up some of the biggest gains in net asset value over the past few years in the complex but lucrative closed-end sector, statistics show.
Core funds have posted the strongest performance numbers in the closed-end sector over the past three years, with average annual NAV growth of more than 12 percent, according to a survey by Thomson Reuters Lipper.
In fact, the only possible exception is the closed-end growth fund sector, which technically has posted higher returns, but which now consists of just one fund after a series of mergers and closings.
Not far behind have been funds specializing in developed markets overseas, from Australia to Europe, with average annual growth of 9.2 percent over the past three years, the survey finds.
One factor that has thrust core and developed market funds to the front of the closed-end pack has been the nature of their holdings, which tend to reflect the overall market at a time when all boats are rising.
But the quirky nature of closed-end funds, in which investors can often buy a basket of stocks at a discount, is also likely to have contributed to the sizeable asset growth numbers posted by fund managers overseeing core and developed market funds.
"The market has been extraordinarily strong," says Greg Neer, partner and portfolio manager at Relative Value Partners, a Northbrook, Ill., wealth management firm, in an email. "The more U.S. equities you have had over the past three years the better you have done. That's a big part of it."
Value, arbitrage convertible security funds have also done well over the past three years, with average returns in the 9-10 percent range, Thomson Reuters Lipper reports.
Strong earnings growth has helped buoy stocks in closed-end core funds, designed for stability by capturing a wide array of solid but unsexy U.S. stocks.
Just under 80% of the companies on the S&P 500 have posted earnings that have exceeded analyst expectations, said Tom Roseen, head of research services at Thomson Reuters Lipper.
The federal tax law passed late last year and the Trump Administration's focus on regulatory reform have also helped, he notes.
"I think in all honesty these (core funds) are funds that have been around forever and a day that are buying the big, huge companies of America and they are going up with them," says Ken Nuttall, director of financial planning BlackDiamond Wealth Management in New York.
Developed market funds, which focus on countries like Japan, Ireland, Australia, Canada and Germany, have been bolstered in part by the fact they are not as vulnerable, for the most part, to trade war fallout as China, Roseen notes.
"The reason people are looking towards the developed market funds is that they are not as impacted by the trade issues," Roseen says. "You have less fluctuations going in the trade arguments. Right now it's just rhetoric. You see what Mexico did, and Canada came running to the door."
Low rates in Europe are another attraction, with the European Central Bank with no plans to raise rates until at least well into 2019, he notes.
Still, there's another, even more basic reason closed-end funds focusing on core markets and developed markets overseas are attractive to investors right now, and that's the propensity of most closed-end funds to sell at a discount.
Essentially, that means their share prices are lower than the value of the portfolio of assets in the fund.
There are a couple factors that help create discounts in the closed-end fund world.
After a closed-end fund issues shares through an IPO, the number of shares remains fixed and does not expand or contract based on market activity like it does with an ETF.
This fixed-share structure means the price a closed-end fund trades at each day and the net asset value of its underlying portfolio float independently of each other.
And while this can sometimes result in closed-end share prices that trade at a premium, or higher than their net asset value, or NAV, more frequently it results in a discount situation.
This can create opportunities to buy more with less, or, in dollar terms, the ability to buy a dollar's worth of stocks for 90 cents.
When it comes to stocks in stable U.S. companies and in developed, overseas markets like Europe, Japan and Australia, the lure of a discount, or deal, is even more compelling. And it's not just that closed-end funds often trade at a discount -- stock values themselves are trading lower in overseas developed markets, BlackDiamond's Nuttall says.
"International is much cheaper -- it's cheaper than the U.S.," says Nuttall.
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