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
abrdn VFL Fund Update - January 2024
In this episode, we sit down with Jon Mondillo, a manager on VFL for an update on the abrdn National Municipal Income Fund and the municipal market.
00:00:00:00 - 00:00:36:01
Mike
Welcome to the latest podcast for Aberdeen National Municipal Income Fund, ticker symbol VFL. I might Taggart Aberdeen's US closed end funds Specialist. Today we have John MONDELLO, head of US fixed income at Aberdeen and DFS lead portfolio Manager. Jonathan, thanks for joining us today.
Jon
Mike Thanks for having me.
Mike
Of course. Always a pleasure. You took over management of this municipal fund in mid-July of last year after Aberdeen acquired it from another Fund family that you've been a municipal manager for many years.
00:00:36:03 - 00:01:10:12
Mike
Could you elaborate on that a little?
Jon
Yeah, sure. I mean, despite having just taken over Vflw and the management of this close in fund in July, as you pointed out, we have really deep history at Aberdeen in general and the portfolio management team that manages the strategy in managing municipal assets. Me personally, I've been involved in managing municipal funds, separate accounts, institutional accounts within the asset class, going back almost 18 years.
00:01:10:14 - 00:01:45:13
Jon
If we expand that out into the broader municipal portfolio management team, we've got an average portfolio manager tenure of over 20 years. So certainly a deep history of managing municipal assets within Aberdeen as well as this municipal debt portfolio management team managing this strategy. Maybe just to add to that as well, the style and the types of strategies that we manage is fairly broad as well.
00:01:45:15 - 00:02:11:16
Jon
So we have six distinct municipal strategies that run the gamut in terms of duration, everything from an ultra short to a to a long duration strategy as well as credit quality, high grade strategies, as well as high yield strategies.
Mike
Yes. So this is your only closed end fund that you manage, but deep experience and a deep team that you can rely on.
00:02:11:18 - 00:02:34:03
Mike
And then since July, you and your team have repositioned the portfolio for VFL, keeping an investment grade, of course, with an eye toward improving earnings yield and the distribution as a result of the work, earnings have improved and the board announced an increase to the fund's distribution in December. Can you give us an update on the repositioning work that you've done in the portfolio?
00:02:34:05 - 00:03:04:18
Jon
Yeah, sure. I think there's a consistency in our approach at Aberdeen in managing municipal assets and you could certainly extend that into the open ended mutual funds that we run, the segregated accounts that we run for high net worth as well as institutional investors. And that consistency is that our focus tends to be more so on yield and distributable income to our investors.
00:03:04:19 - 00:03:39:02
Jon
So to your point as taking over this fund, our main objective was to increase the distributable income that we're able to give to investors on a monthly basis. So in doing so, we have made shifts in the portfolio that I think certainly have been good for investors thus far. You pointed out the fact that we've recently raised our dividend and a lot of those portfolio changes have contributed to our ability to do so on a go forward basis.
00:03:39:03 - 00:04:08:20
Jon
I think we'll continue to be able to do so as we shift the portfolio around some of the changes that we've made. Having taken over this portfolio have to do with really three key areas, the first being the state breakdown. So where we're investing the assets in the strategy. The second being the sector breakdown, where in terms of municipal sectors we find better relative value.
00:04:08:22 - 00:04:57:17
Jon
And then the third being duration. Where along the curve are we investing that we think makes the most sense from a total return perspective, but also probably more so from an income perspective? How do we maximize income in really risk aware way? So in terms of that first area that we talked about, state breakdown in taking over the strategy, you know, for for a number of different reasons, one of which has to do with the history, the strategy being a combination of state specific funds, the strategy was overweight in our estimation, and in really high grade, lower yielding states such as Minnesota and Colorado, Oregon, you can sort of lump in there as well.
00:04:57:18 - 00:05:28:21
Jon
So we've been decreasing our allocations to those high grade states that didn't offer much relative value from a yield perspective and reinvesting the proceeds of that into what we view as as higher value states such as New York, Texas, certainly as well as California. I think with respect to the second area where we've changed the portfolio, it has to do with sector breakdown.
00:05:28:23 - 00:06:07:18
Jon
So we've been increasing our exposure to the infrastructure space for a number of different reasons. There is higher yielding opportunities there as well as sort of fundamental tailwinds. These are supported by legislation and over the last several years. So mainly the Infrastructure Investment and Jobs Act, but also the Inflation Reduction Act, which is by and large an infrastructure bill that's going to go and support those infrastructure projects that we've reinvested into airports, toll roads and workforce housing, housing, just to say the least.
00:06:07:20 - 00:06:42:01
Jon
And then the third, in terms of duration positioning, we've moved some of the belly of the portfolios from the belly in the duration of the portfolio into where we see more opportunities to increase the distributable income. Where is that been? It's been really more of a barbell strategy over the last 3 to 4 months. As we've made those changes, we've been reinvesting what we've sold out of the belly into the front end and the long end, which we think…
Mike
when you say the belly, you mean the middle of the yield curve is what you're talking about, is that correct?
00:06:42:02 - 00:07:04:15
Jon
Correct. I'm talking about sort of that 5 to 12 year band of maturity is the portfolio, and that's where you haven't seen value. And so you're moving it into the shorter end of the yield curve and the longer
Mike
and that's where you have been seeing more value.
Jon
Yeah, absolutely. I mean, a lot of times investors ask us like, well, why is the belly of the yield curve so suppressed?
00:07:04:15 - 00:07:31:03
Jon
And I think it has to do with really one key factor in the municipal bond space, and that has to do with separately managed accounts, a tradition or separately manage the count, buys bonds in a latter fashion, anywhere from one year maturity to 10, 11 years at maturity. So it tends to suppress yields, especially in that sort of, let's say, five to to 11 year band.
00:07:31:08 - 00:07:52:16
Jon
And it certainly, you know, when you take a step back and look at the yield curve, it's extremely inverted at the front end as a result of those buyers.
Mike
And so with you looking for value in yield, that's not a good place to be. So VFR uses leverage and that has an influence obviously, on the fund's earnings potential.
00:07:52:16 - 00:08:27:18
Jon
And it also affects the fund's sensitivity to interest rate movements, as you're saying, duration. How do you manage the portfolio around that, around these effects of leverage?
Jon
When we look at the leverage that the fund has maintained, we haven't tended to move that around to a material degree. And I think when we look at leverage currently in the strategy, given where we are in this macroeconomic cycle, it's not something that I think we'd be looking to take down in the coming months.
00:08:27:20 - 00:09:07:18
Jon
And I think, you know, there's a couple different reasons why. Number one is that while leverage cost has been high as it's tied to the front end of the municipal debt curve and Fed funds, we expect those yields to be coming down. So whereas it might have been a bit of a drag on how we're able to distribute income on a go forward basis, as those yields come down, we expect that it should actually contribute to being able to continue to increase the distributable yield of this of this strategy.
00:09:07:18 - 00:09:38:17
Jon
So that's point one. Point two has to do with where we are in this economic cycle and expectations that we see yields along that curve, especially on the long end potentially coming down as well. So leverage within the strategy should contribute to total return in that instance. So it's twofold. One, we think on a go forward basis, the leverage and maintaining that leverage should continue to allow us to increase the yield.
00:09:38:19 - 00:10:12:16
Jon
And then two, from a total return perspective, we have the expectations of this really benefiting the fund's total return over the coming years as well.
Mike
Excellent. Thank you for that. And then the last question, big picture, why should investors consider investing in municipals today?
Jon
I think it's for a couple of different reasons. We have a yield environment that's extremely attractive relative to where it's been over the last, let's say, 10 to 15 years.
00:10:12:16 - 00:10:36:13
Jon
Right. You can get I wouldn't say equity like returns, but close to equity like returns on a taxable equivalent basis in a much lower risk asset class within municipals. But that could be said across fixed income as well. So why munis, Right. So I think when we look at where we are in the cycle, we've got inflation that's coming in.
00:10:36:15 - 00:11:08:03
Jon
We've got a consumer that we think is, you know, near exhaust fan at this point. And we've got an economy that, while relatively resilient certainly over the last 18 months, is getting sort of late cycle dynamics in the overall economy. So when we start to see the economy falter, slow down and get into a potential recessionary environment as we get through 2024, we think the asset class sort of lends itself to that landscape.
00:11:08:04 - 00:11:41:11
Jon
Right. So municipal bonds tend to be insulated a bit more than our corporate counterparts in a recessionary environment. And then fundamentals headed into that economic slowdown, we think, actually benefits the asset class as well. Fundamentals within municipal bond market are at or near record levels, albeit come off the highs that we saw. We're looking at tax receipts over the last several months that maybe are trending down a bit lower, but are still at or near record levels.
00:11:41:11 - 00:12:07:05
Jon
When you're talking about income tax receipts, when you're talking about sales tax receipts. And then also to a degree, property tax receipts on the heels of still near high valuations for property values across the United States. So we think that, you know, it's a yield opportunity, but also a defensive play as well, just given where we are in the economic cycle.
00:12:07:07 - 00:12:36:11
Mike
Well, thank you, Jonathan, for that update on GFL, the Aberdeen National Municipal Income Fund. It's always a pleasure talking to you.
Jon
Mike Thanks for having me.
Mike
And thank you, everyone for listening to this podcast. There are three convenient ways to learn more about VFL on the internet. Visit. A. B. R. D. N. VFL.com. Email us at Investor Relations at A, B, r, D, n.com.
00:12:36:13 - 00:13:03:22
Unknown
Or give us a call at one 800 5225465. I'm Mike Taggert of Aberdeen. Thank you for listening.
00:13:03:24 - 00:13:31:00
Unknown
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen.
00:13:31:02 - 00:13:57:18
Unknown
The companies discussed in this podcast have been selected for illustrative purposes only or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates, and provide no guarantee of future results.