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Morningstar is back in the business of providing CEF research and commentary, said Mike Taggart, a Director of Closed-end Fund Research at Morningstar, as he took the MIC 2011 stage. Indeed, he highlighted in his presentation the need to have more education about this often overlooked—unduly in Taggart’s view—investment vehicle.
The key to managing a portfolio is getting the asset allocation right, Taggart said, but then comes the question of what vehicle will you choose? While CEFs are less popular than OEICs, the key players in that market are very well known and manage a significant pool of assets, Taggart is adamant: both advisers and investors need to become better aware of the features and benefits of closed-end funds. He pointed to trends on the US advisory market where he is already seeing financial planners investing their clients’ money purely in CEFs. A show of hands in the conference room reveals that many UK-based advisers also deal with closed-end funds but apparently to a lesser extent than their US counterparts. One reason for this scenario Taggart identifies is that UK advisers might hold on to bad memories from investing in CEFs in the past, namely to split capital scandal.
The uptake in ETFs could have a positive knock-on effect on the popularity of CEFs, suggests Taggart, as the concept of investing in exchange-traded funds becomes more familiar to both planners and investors. But CEFs have plenty of merits of their own, Taggart points out. “I could spend all day talking about it,” he said, but refrained from doing so due to time constraints and instead highlighted just a couple. Firstly, the closed-end structure means no money inflows in a bull market and no share redemptions in a downturn. In addition, CEFs’ access to gearing allows investors to meet the income challenge. Leveraged funds usually outperform in periods over five years, Taggart explains, but warns that below that time frame “it’s a mixed bag.” CEF discounts, a feature which may seem incomprehensible or scare investors away, actually allow you to buy a portion of the fund’s underlying assets below their net asset value. But one should not get carried away with discounts, Taggart points out, as there is no guarantee that a CEF share price will go up though it may currently be trading at a discount.
One feature of CEFs that Taggart would want to see changed, however, is their lack of transparency. It may happen that a CEF discloses its underlying holdings as rarely as once a year, which is clearly not ideal for increasing investor confidence, he notes. When answering a question from the audience, Taggart expressed a disbelief that CEFs are getting away with being so intransparent after the split-capital scandal.
So what is the potential role of a CEF in a portfolio? CEFs can be used as an alternative to OEICs, he says, pointing out that many open-ended fund managers actually manage CEFs as well, three of them are even presenting today at the Morningstar Investment Conference.
One of his last points was that while RDR is a minefield when it comes to CEFs, it does highlight the need for more adviser education. And as one might expect, Taggart took this opportunity to point out that Morningstar.co.uk not only has a CEF Centre, containing a huge amount of closed-end fund data and commentary, but will also be launching CEF Research for the UK market soon.
