John Cole Scott, CEF Advisors:
The national muni market is about 100 funds and right now they’re trading at about an average 8 discount, based on last Friday’s data. And what we think about that, it’s only really been wider than that in the last couple of years, in the fourth quarter of 2013, when there was a lot of tax-loss selling and a lot of fear in the sector. So I’d say it’s a really good cheap access point to these funds. Right now yields are just over 6% on a federally tax free basis, based on the policies set by the boards. And durations right now have been trending down over the years to about an 8. But that includes the leverage impact, which is typically about a third of the assets for these funds, historically speaking.
Investius:
What perspective can you share with investors who might be concerned about rising rates because they own municipal closed-end funds?
Scott:
Well, there’s a couple of things you can do. So first off, you have to decide, do you think rates are actually going to go up. Personally, in my opinion, I think they will, sooner than later, but I’m not sure exactly when. But if that’s your belief, then you care more about things like that the leverage the fund is using is fixed versus variable... Because if it’s variable, you can have a bigger crimp in the income passing through to your portfolio, if rates are going up faster. And also you don’t care as much about the call risk. Remember all bonds mature or get called, or default, but that’s very low in the muni space. And if you don’t worry about the call risk, you can actually lean to funds that have a high call risk exposure, because you think rates are going up.
Now let’s backtrack. If you’re the other investor, who thinks rates are going to stay down for a longer period of time, and who knows what that will be. What you do is you look for things that have more variable leverage, because variable leverage for obvious reasons is cheaper, so it’d give you more yield now. And you do focus on the call risk, because if the rates stay low longer, there’ll be more replacement of future bonds at generally lower prices, based on having that call risk in the portfolio, in my opinion.
Investius:
What if you’re sitting on the fence and you are baffled and you have no idea what to do, because you’re not sure whether rates are going to go up, down, or stay the same?
Scott:
So if you’re not sure if rates are going to go up, down, or stay the same, I’d say what I think you need to do is I’d think about blending to a portfolio with a couple of different options in it… What we love thinking about is pick a diversified portfolio, different managers, different data points that can give you a more diversified outcome. So if you don’t know the answer, pick the middle. The middle is better than cash right now, in my opinion.
Investius:
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