Leveraging Closed-End Funds in a World Without Macro Anchors

As policy uncertainty and structural shifts redefine global markets, traditional macroeconomic signals—such as stable inflation expectations or fiscal discipline—are fading. In this environment, closed-end funds (CEFs) emerge as a strategic tool for investors seeking asymmetric returns through sector-specific alpha and discounted valuations. By capitalizing on dislocations driven by AI, energy transition, and geopolitical fragmentation, CEFs offer a path to navigate volatility while adhering to BlackRock's “mega-force” framework and Nuveen's leverage-driven strategies.

The Vanishing Macro Anchors: Why Traditional Signals Fail

BlackRock's 2025 midyear outlook underscores a world where long-term macroeconomic stability is replaced by near-term unpredictability. Policy shifts—such as U.S. tariffs, fiscal deficits, and geopolitical fragmentation—are reshaping economies faster than traditional metrics can capture. Meanwhile, the energy transition and AI's rapid capital expenditure (capex) are creating structural winners and losers. In this environment, CEFs thrive due to their ability to exploit valuation gaps and sector-specific trends, unburdened by the noise of short-term macro swings.

Fixed-Income CEFs: Durable Income Amid Chaos

The search for stable income has never been more critical. Fixed-income CEFs, particularly those tied to utilities and infrastructure, offer a hedge against policy volatility while aligning with BlackRock's emphasis on mega-force-driven themes.

Utilities & AI Infrastructure: A Symbiotic Relationship

Utilities are foundational to AI's energy demands, as hyperscalers like Amazon and Microsoft invest billions in data centers. CEFs such as the BlackRock Taxable Municipal Bond Trust (BBN) ($0.0929 monthly distribution) and BlackRock Municipal Income Quality Trust (BYM) ($0.0555 monthly) provide tax-advantaged income streams while benefiting from infrastructure modernization. Their discount to net asset value (NAV)—currently around 3-5%—offers a margin of safety.

Why Utilities?

Utilities' stable cash flows and low correlation to equities make them a defensive play. Additionally, AI's power-hungry infrastructure creates demand for grid upgrades, directly benefiting utility providers.

Equity CEFs: Exploiting Discounts in AI/Hardware Sectors

Equity CEFs with persistent discounts to NAV in AI-linked sectors present a compelling risk-reward trade. Consider the BlackRock Science and Technology Term Trust (BSTZ), which focuses on AI software and hardware. Despite a 13.91% distribution rate, BSTZ trades at a 14% discount to NAV—a gap widened by near-term uncertainty around AI monetization.

The Discount Opportunity

CEFs often trade at discounts due to liquidity constraints or market pessimism. In sectors like AI hardware, where long-term growth is certain but near-term profitability is uncertain, discounts can be a buyer's advantage. Funds like BSTZ allow investors to participate in sector-specific alpha while paying less than NAV.

Caution: Return of Capital Risks

Not all discounts are safe. Funds such as the BlackRock Health Sciences Term Trust (BMEZ), which derives 98% of its distributions from return of capital (ROC), risk eroding NAV over time. Investors must prioritize funds with earnings-driven distributions, such as those in utilities or infrastructure.

The Role of Leverage: Amplifying Returns, Managing Risks

CEFs' use of leverage—via preferred shares, debt, or derivatives—can enhance returns but demands scrutiny. Nuveen's regulatory disclosures highlight that leverage is a double-edged sword: it magnifies gains in rising markets but increases volatility during downturns.

Strategic Leverage Examples

• Preferred shares: Funds like the BlackRock Floating Rate Income Trust (BGT) use debt to amplify yields, offering a 6.2% distribution rate. Their floating-rate structure mitigates interest rate risk.
• Infrastructure-focused CEFs: The BlackRock Global Resources Trust (BGOR) leverages debt to invest in energy transition plays (e.g., copper, lithium), benefiting from geopolitical shifts toward decarbonization.

Key Considerations

• Regulatory limits: Preferred shares cannot exceed 50% of assets, while debt is capped at 33⅓%.
• Cost management: Funds with low leverage costs (via interest rate swaps) outperform peers during rate hikes.

Tactical Advantages of CEFs in a Volatile Regime

1. Discount Capture: Buying CEFs at discounts to NAV creates a “floor” of potential returns if the discount narrows.
2. Sector Precision: CEFs allow targeted exposure to AI, utilities, or infrastructure—sectors too niche for broad ETFs.
3. Liquidity vs. Illiquidity: While private markets (e.g., infrastructure debt) offer alpha, CEFs provide liquidity without sacrificing exposure to mega-force themes.

Investment Recommendations

• Fixed-Income Focus: Prioritize tax-advantaged municipal CEFs like BBN and BYM for stable income. Monitor their NAV trends to avoid prolonged discounts.
• Equity Opportunities: Select AI/hardware CEFs trading at >10% discounts to NAV, such as BSTZ, but avoid those reliant on ROC (e.g., BMEZ).
• Leverage Caution: Opt for funds with low leverage costs and conservative debt ratios, such as BGT or BGOR.

Final Thoughts: Capitalize on Structural Shifts

In a world of vanishing macro anchors, CEFs are not just a defensive tool—they are a strategic lever to exploit valuation dislocations and sector-specific growth. By aligning with BlackRock's mega-forces and Nuveen's disciplined leverage strategies, investors can position themselves to thrive in uncertainty.

The next chapter of growth lies not in chasing macro signals but in anchoring portfolios to the structural trends reshaping the global economy.