Recently, a closed-end fund called the BlackRock Municipal Income Fund (MUI) experienced a significant increase in its market price, leading to substantial gains for investors. Despite its seemingly boring nature, MUI offers investors a high dividend yield of 5.5%, which has remained stable over the years. Additionally, as a municipal-bond fund, MUI’s dividends are tax-free for most Americans, providing further advantages for investors. Another benefit of investing in MUI is its closing discount to net asset value, allowing investors to benefit from potential price increases as these discounts disappear.
Municipal-bond CEFs like MUI have long been favored by wealthy investors for their tax advantages and low volatility. MUI, in particular, has exhibited less volatility compared to the S&P 500, making it an attractive option for income investors. Despite occasional periods of increased volatility, these moments can present opportunities for investors to capitalize on discounted prices and enhance their investment positions in MUI. By understanding the potential fluctuations in MUI’s income stream and market price, investors can strategically position themselves for higher returns.
The recent surge in MUI’s market price was triggered by BlackRock’s announcement to convert the fund into a private unlisted fund. This conversion plan included a tender offer, allowing BlackRock to purchase half of MUI’s shares at a 2% discount, resulting in an instant capital gain for existing shareholders. The offer has helped narrow MUI’s discount from 16% to 7.6%, providing investors with an opportunity to sell their shares closer to market value. While the offer may not be attractive for new investors, existing investors are advised to hold onto their positions unless they need immediate cash.
The conversion of MUI into an unlisted CEF will further reduce its volatility, as its market price will no longer fluctuate daily. While this may make selling the fund more challenging, it also minimizes the risk of eternal discounts that some CEFs experience. This move by BlackRock aims to create a more stable investment environment for MUI shareholders, ensuring fair pricing and potential rights offerings in the future. Although the risk of future discounts remains, investors can take advantage of ongoing opportunities for attractive gains and high dividends from other CEFs in the market.
Not all CEFs offer the same potential for gains as MUI, with some funds experiencing persistent discounts that do not easily disappear. The SRH Total Return Fund (STEW), for example, maintains a long-term average discount of 17.6%, indicating a lack of investor enthusiasm for the fund’s value-investing strategy. However, there are numerous other CEFs available that regularly narrow their discounts, providing investors with alternative opportunities for generating income and capital appreciation. With an average CEF yield of 8.1% and the possibility of monthly payouts, investors can explore a diverse range of CEF options to achieve a similar setup to MUI, delivering high dividends and potential gains.
For income investors seeking steady returns, understanding the dynamics of CEFs like MUI can lead to lucrative investment opportunities. By leveraging the tax advantages, stability, and potential for discounts in municipal-bond CEFs, investors can position themselves for stock-like gains in the income investing space. With careful analysis and strategic decision-making, investors can navigate the complexities of CEFs and capitalize on unique setups like the one demonstrated by MUI’s recent market price increase.
