Management fees on closed-end funds (CEFs) are starting to fall, and some funds are increasing their dividends as well. This is seen as a positive development for investors looking for high-yield opportunities. Many investors have avoided CEFs due to high fees, but it is important to consider the overall returns of these funds rather than just focusing on fees. Some CEFs outperform ETFs even with higher fees, especially when investing in assets beyond stocks such as corporate bonds, REITs, and municipal bonds.
One example is the Western Asset High Income Fund II (HIX), which outperforms the bond benchmark SPDR Bloomberg High Yield Bond ETF (JNK) in terms of total return and dividend yield. While HIX has higher fees compared to JNK, its performance justifies the cost. Personal connections play a significant role in the bond market, giving well-connected managers an edge in accessing the best opportunities. This advantage is worth paying for, as algorithm-run ETFs cannot match the same level of performance.
BlackRock, the largest CEF manager, is leading the trend of fee reductions and dividend increases. The firm is cutting fees on municipal-bond CEFs, which could pave the way for other managers to follow suit. While the initial impact on fund prices was minimal, funds that saw increased payouts did experience a temporary rise. Investors mainly look to CEFs for current income, which is reflected in the stable performance of these assets even when fees are reduced.
Lowering fees on CEFs is not only about improving returns for investors but also responding to shareholder activism and increasing pressure on fund managers. CEF managers are now facing challenges to lower discounts to net asset value and enhance overall performance. As more managers join BlackRock in reducing fees and improving returns, investors could benefit from a more competitive market for high-yield investments. This shift in the CEF landscape signals a new reality for managers who must address investor demands for better performance.
While CEF managers may find their roles more challenging, for investors, it means access to potentially discounted CEFs with managers working harder to eliminate discounts. This could lead to better returns for investors in the long run. As the fee-slashing trend continues in the CEF market, investors can expect more opportunities for high-yield investments with improved performance. Overall, the focus on reducing fees and increasing dividends in CEFs marks a positive shift in the market, benefiting income-seeking investors looking for stable returns.
