abrdn Closed-End Funds
FOR US INVESTORS ONLY
Important Information:
Closed-end funds are traded on the secondary market through one of the stock exchanges. The Fund’s investment return and principal value will fluctuate so that an investor’s shares may be worth more or less than the original cost. Shares of closed-end funds may trade above (a premium) or below (a discount) the net asset value (NAV) of the fund’s portfolio. There is no assurance that the Fund will achieve its investment objective. Past performance does not guarantee future results.International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments.Concentrating investments in the specific regions subjects the Fund to more volatility and greater risk of loss than geographically diverse funds.Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).The Fund’s use of leverage exposes the Fund to additional risks, including the risk that the costs of leverage could exceed the income earned by the Fund on the proceeds of such leverage. Additionally, in the event of a general market decline in the value of the Fund’s assets, the effect of that decline will be magnified in the Fund because of the additional assets purchased with the proceeds of the leverage.Your portfolio may not have the same asset class weightings. Asset class weightings are subject to change.Diversification does not ensure a profit or protect against a loss in a declining market.Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document, and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment.Any opinion or estimate contained in this recording is made on a general basis and is not to be relied on by the reader as advice. Neither ABRDNnor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document.
abrdn Closed-End Funds
VFL Fund Update- May 16th, 2023
In this episode we are focusing on municipal bonds investing with Jon Mondillo of the abrdn National Municipal Income Fund - ticker VFL
Dan Buchanan: Welcome to the latest in our Aberdeen closed and fun podcast series, where we catch up with our portfolio managers to gain some perspectives on these complex market conditions. Today we are focusing on municipal bonds with the manager of the abrdn national municipal income fund - ticker VFL - Jonathan Mondillo - morning, Jonathan.
Jonathan: Good morning, Dan. Thanks for having me.
Dan: Jon, thank you for joining us from New York. Jon, can you take us through 2022 and then the state of the municipal bond market as it stands today?
Jon: Yeah, sure. I mean, 2022 was a historically bad year for really, across many markets, fixed income markets, but municipal markets as well. I think when investors looked at their annual financial statements, the end of 2022, in an asset class that they're not used to seeing red, they saw a lot of red. What was that driven by? Really two factors driving municipal markets and the negative performance that we saw in 2022. One was being Fed policy right, so we saw over 300 basis points of interest rate hikes in 2022 alone, which contributed to the sell off and negative returns, also, I think, the historically bad year for flows in municipal mutual funds. So, we saw north of 100 billion in outflows in the asset class, which really contributed to the underperformance within the asset class and 2022. Now, where does that take us to, as we're now sort of halfway through 2023? I think it's important for investors to remember that, despite the underperformance in 2022, really, municipal fundamentals have remained strong, look extremely attractive at the moment. And then given that sell off that we'd seen and yields being higher than where they were certainly a year ago today, or even 18 months ago. Yeah, it's an attractive opportunity, I think. So municipal market, sort of painful last year, but certainly looks rather healthy and in a really attractive position right now.
Dan: And Jon, abrdn has recently taken over portfolio management of the national municipal income fund ticker VFL. John, can you share with us a little of the backstory and, more importantly, the new management team that you lead and its philosophy?
Jon: Yeah, sure. So, by way of backstory, we've taken over the management contract from Delaware McQuarrie and we’ll take over the day-to-day portfolio management of this strategy on June 12. I think the team is extremely excited to add to our current offerings of which are open ended fund mutual funds, as well as separately managed accounts, and segregated institutional accounts. Now with this closed and fund offering, the team at abrdn is comprised of seven portfolio managers and analysts that focus on our municipal debt strategies. I'd say that the closed end fund vehicle probably lends itself well to our portfolio management style, as our philosophy and our style has always been more focused on income, as opposed to total return. And I think that that bodes well for closed end fund portfolio management where I think income is, is really what investors expect to see. So we're excited to take on this closed end fund strategy. And, you know, I think it certainly our specialty, which is income focused strategies, lends itself well to the closed end fund space.
Dan: And John, how do you assess risk when you're constructing and managing a municipal bond portfolio, particularly like VFL?
Jon: Yeah, I mean, you've got obviously, interest rate risk, you've got default risk, and you've got credit risk. I think interest rate risk within a closed end fund vehicle in VFL, is, is probably less concerning, I would say relative to our open ended funds, we don't have to worry about liquidity, although we have to worry about leverage and leverage costs within the closed end fund vehicle. But I think for the purposes of management of the closed end fund, we're really focused on credit risk and default risk. So, we've always paid a particular focus on bottoms up fundamentals of the individual credits that we buy, and to really across all of our different, all of our different strategies. And I think that that's something that will certainly translate into our management of this closed end fund, is focusing on the individual credits that provide the most relative value, the highest amount of income, and then diversified income to. So when we look at a portfolio, we're not only looking to pick sort of the higher yielding securities, but what offers the most diversified yield within that particular portfolio.
Dan: Jon, I'm gonna switch gears for a moment. And you touched on it a bit earlier, but as a portfolio manager, from your perspective, how does the closed end fund structure itself help you to effectively manage a portfolio of municipal bonds? I'm thinking some of the attributes or the characteristics of the close down like leverage, like cash drag, etc.
Jon: Yeah, I mean, we've talked about this in the past Dan, right, and we touched upon it little bit earlier is leverage and liquidity - the big L’s right. So leverage allows us to increase our yield at times and, and add issuers to the portfolio to, again, increase that distribution rate that investors have made, which I think is a great opportunity for closed end fund structure. I think the second part liquidity or illiquidity is really a benefit to the closed end fund structure as well. We have the ability to buy A: more names, B: smaller issuance, which tends to be a little bit of extra alpha, a little bit of extra yield to a portfolio like a closed end fund, which is great – it adds diversification, it adds yield and income and overall improves the quality of the underlying portfolio mix.
Dan: And finally, John, as we come to the end of our podcast, what would you say to clients today to give them comfort that they should invest in municipal bonds?
Jon: Yeah, we touched upon this in the beginning, right. So 2022 was a bad year, certainly. But when we look at municipal fundamentals today, broadly speaking, they're as strong as they've been in 20 plus years. So they've taken on record tax revenues over the last two years. We're now at near record - if not, near record - rainy day balances that municipalities are, are sitting on. And through the five months through the year, we're now looking at significantly more upgrades to date, then we're seeing in downgrades. So, I think fundamentals look extremely attractive. We've seen interest rates tick up over the last year and a half, which benefits investors too, and headed into what we view is a bit of an economic slowdown if not a recessionary environment on the horizon. This is a strong asset class, and one that insulates investors in our eyes to some of the credit concerns that that certainly an economic downturn or recessionary environment would bring for outside of fixed income asset classes, but also within fixed income in the corporate bond landscape.
Dan: Thank you, Jon Mondello for those insights today. And thank you in particular to our listeners for tuning in. You can find out more about the fund@www.abrdnvfl.com.I'm Dan Buchanan with abrdn do look out for future episodes.