The year has proven to be quite prosperous for closed-end funds (CEFs), particularly those yielding over 8%. This is primarily because many CEFs are heavily involved in stock and bond investments, and as stocks have shown a strong performance, CEFs have similarly benefited. The proprietary indexes used by my CEF Insider service illustrate this, emphasizing that equity sub-indices have yielded a staggering 21% total return, with corporate bonds not far behind at 14.3%. Even municipal bonds, which are generally seen as safer, have provided respectable gains. Consequently, investors in CEFs have experienced an average yield of around 8.2%, enhancing the attractiveness of these investment vehicles amid a generally robust stock market environment.
Despite this broad success, there are still isolated instances of underperformance among certain CEFs, prompting an analysis of their struggles within an otherwise profitable year. Scrutinizing these weaker funds not only helps investors avoid poor choices in the future but also assesses whether these underperformers might represent buying opportunities down the line. The first highlighted fund, the Mexico Fund (MXF), has offered a nominally appealing 6.5% dividend, but its market price has plummeted dramatically, resulting in a significant decline in overall return. A series of factors, including Mexico’s projected decline in economic growth and potential trade challenges, have contributed to MXF’s troubling trajectory, marking it clearly as an investment to avoid.
Another example is the Highland Opportunities and Income Fund (HFRO), which has exhibited a notable 19.5% decline in market price year-to-date. While its net asset value (NAV) has remained relatively stable and positive, the market price has not reflected this, raising concerns about the management’s ability to optimize returns. Moreover, HFRO’s heavy investment in NexPoint properties has not yielded the expected results, underscoring the risks of concentration in fund management decisions. With a staggering discount that has escalated from 40% to over 50%, investors must weigh whether HFRO’s strong yield could offset any further declines or whether it’s best to wait for management to shift strategies before investing.
Similarly, the Morgan Stanley China A Share Fund (CAF) has encountered its set of challenges, registering a decrease of 2.7% this year. Despite investing in a growing Chinese market, the fund has struggled with ineffectual management choices that have resulted in a more pronounced discount on its shares compared to its net asset value. The fund’s initial market price surge earlier in the year creates a cautionary tale about speculative investment behavior. The unrealistic pricing highs were not sustainable, and as market dynamics shifted, CAF’s losses became evident and have not healed since the significant correction that occurred shortly after its initial rise.
In conclusion, while certain CEFs have showcased resilience and growth potential in 2024, a critical examination reveals that the mentioned funds faced tangible challenges that investors should recognize and heed. While seeking growth through diversified American markets has generally proven beneficial, caution is necessary, as illustrated by the struggles of MXF, HFRO, and CAF. Investors are presented with a wealth of options, but identifying and understanding the underlying risks and management practices of CEFs remains essential to smart investing. The overall market performance highlighted earlier acts as a stark reminder of where to focus investment efforts for optimal returns versus those pitfalls that have been easily avoidable.