By Amey Stone

It wasn't quite the shot heard round the world, but it nonetheless came as a shock to the close-knit world of closed-end funds when Pioneer Investments announced this month that it had decided to shutter its entire lineup of the quirky investment vehicles.

"I've been investing for over 35 years, and I've never seen a fund company exit the closed-end fund business en masse," says David Tepper of Tepper Capital Management.

It's another sign of how marginalized this century-old investment structure has become when exchange-traded funds, high-tech separately managed accounts, and interval funds holding private investments are all the rage among asset managers. There have been just one or two new closed-end funds issued in recent years, with many more being merged together or turned into open-end funds or ETFs.

But the more overlooked and underfollowed the funds become, the more opportunity there is for investors. Closed-end funds are issued with a fixed number of shares and can then trade at a discount or premium to the fund's net asset value, depending on investor demand.

Most investors buy the funds for income, which can be boosted by leverage or when the fund decides to return some capital to shareholders. They're illiquid, so they can be more volatile than other fixed-income investments.

Many investors aim to purchase them when the discount is wide. Tepper currently likes some preferred-stock closed-end funds, which have discounts in the 8% to 10% range as well as tax advantages. Flaherty & Crumrine Preferred Income Opportunity (ticker: PFO) is one.

Eric Boughton, portfolio manager of Matisse Discounted Bond CEF Strategy (MDFIX), an open-end fund that invests in closed-end funds, finds municipal bond funds appealing now. "They are much more attractively discounted than taxable-bond funds," he says. "They also sport average cash distribution yields of 6.1%, tax-free."

So, what happened at Pioneer? "I think this is more of a 'special case' rather than indicative of a broader trend in the closed-end fund industry," says Boughton. Pioneer was sold to Victory Capital, and its six closed-end funds required new investment management agreements that had to be approved by shareholders. When the votes didn't come in, Victory decided to recommend liquidating the funds.

Activist investors, such as Saba Capital Management, that had stakes in the funds and opposed the vote may have been a factor in Pioneer's decision. Activist investors often buy closed-end funds hoping to force management to take steps to narrow the discount.

To be sure, there are other ways that fund companies deal with activists that don't involve liquidation. They can hold a tender offer to buy back a closed-end fund's shares, or turn it into an ETF or open-end fund. Some investors, like Tepper, were surprised that Victory didn't pursue those options in order to hold on to the funds' roughly $1 billion in assets.

But Victory, which is retaining Pioneer's other funds and now has about $300 billion in assets, has no other closed-end funds, says Andrew Daniels, a director of fund manager research at Morningstar. "This gives them a little bit of a clean slate to make various decisions across the complex," he says.

Smaller players could exit the business, but it's unlikely that the largest closed-end players would follow Pioneer's lead. BlackRock, which has dozens of closed-end funds and recently resolved a dispute with Saba, declined to comment. But Dave Lamb, head of closed-end funds at Nuveen -- which manages 45 of the funds with $53 billion in assets -- says the firm is "committed" to the structure, which offers "higher levels of income and the potential for incremental returns."

Investors are breathing a sigh of relief that the latest version of President Donald Trump's tax bill doesn't touch the tax-exempt status of municipal bonds. Eliminating their tax exemption to pay for tax cuts was floated earlier this year, but none of the proposals have stuck -- so far.

"No one wants to call all-clear prematurely," says John Miller, who heads municipal credit at First Eagle, but it seems to be off the table. He adds: "I think those proposals were never good ideas in the first place."

Write to Amey Stone at amey.stone@barrons.com

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May 15, 2025 12:21 ET (16:21 GMT)

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