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Closed-end funds

Understanding Nuveen’s CEF distribution management

Abstract pattern

Understanding Nuveen’s CEF distribution management

Nuveen uses three different distribution approaches or programs, based on a fund’s investment strategy and expected sources of total return. All of our CEFs’ distributions, however, are managed according to five guiding principles.

5 guiding principles

1. Preference for stable distributions

Nuveen believes that its shareholders generally prefer stable, relatively consistent distributions over less predictable, volatile distributions with large (greater than 10%) increases or decreases. Based on our thirty years of experience managing CEFs and speaking with advisors and investors, we believe distribution consistency is particularly important for income-oriented funds, which have historically had returns primarily composed of relatively predictable interest and dividends. Our analysis also shows that consistency in the distribution amount is an important factor in secondary market valuation and performance.

A notable exception is for funds that invest in floating rate securities. For these funds, we have sought to keep distribution increases or decreases relatively small, as we do for all funds. However, since many floating rate securities adjust their coupon rates (earnings) quickly after a reference rate change, our preference is to adjust distributions for these funds rapidly as well.

2. Distributions should reflect fund performance over time 

Nuveen’s goal is to match a fund’s overall distribution amounts to its overall return on NAV, seeking (but not guaranteeing) to preserve shareholders’ original principal while distributing all of the fund’s earnings and appreciation.
Extended Annual return on NAV Chart (image)
Fund distribution amounts should, in our opinion, bear a reasonable relationship to the main components of the fund’s expected economic return over the long run–interest income for a fixed-income fund, and dividends/realized gains/unrealized appreciation for an equity-oriented fund. There may be short-term differences between distribution levels and a fund’s earnings or return; over the long term, our goal is that they be approximately equal.2

3. Compliance with regulatory distribution requirements

While this may seem obvious, adhering to regulatory requirements for fund distributions is a key element of distribution management.

90% RIC requirement
Most CEFs are organized as regulated investment companies (RICs) to allow their distributions to receive “pass through” tax treatment and to avoid being taxed at the fund level. To maintain RIC status, a fund must distribute 90% of its investment company income, which includes net investment income and short-term capital gains, in its taxable year.

Excise tax
In each calendar year, a fund must distribute at least 98% of the sum of its ordinary income and capital gain income to avoid a 4% excise tax on the under-distributed amount.

Section 19(a) Notice requirement
Any distribution that includes realized capital gains or a return of fund capital, in addition to or instead of net investment income, must be accompanied by a written statement that discloses the estimated sources of the distribution, along with other important performance information.

4. Minimizing current taxes

Nuveen fund product managers work closely with fund portfolio managers to make distribution and portfolio decisions that align with the principles above as well as minimize current taxes, when possible. These decisions may include appropriate use of prior year losses and choosing to make a non-taxable return of capital to shareholders instead of realizing a capital gain.1

5. Clear and full disclosure

Nuveen’s website offers extensive distribution information for each CEF, including current distribution amounts, sources, rates, earnings, and other performance and portfolio information that’s relevant to distributions. Individual fund distribution information also is found in shareholder reports, press releases, fact sheets, and quarterly commentaries.

3 distribution management approaches

Using these guiding principles, Nuveen employs three different distribution management approaches based on a fund’s investment strategy and investment portfolio.

1. Income-only distributions

Funds using this approach pay regular monthly distributions only from net investment income, which consists of regular interest and dividends. Capital appreciation has not historically been a meaningful part of the total return for these funds; if realized capital gains occur they are paid once a year in a special distribution. Nuveen uses this approach for all municipal bond CEFs, including those invested in taxable municipal bonds, as well as taxable debt funds, floating rate loan funds, and most preferred securities funds.

2. Managed distributions

Managed distribution programs are used for fund strategies that historically have derived a meaningful portion of their total return from capital appreciation, rather than from dividends or interest. Most Nuveen funds using this approach pay quarterly distributions.

The goal for funds using this approach is to provide shareholders relatively consistent and predictable cash flow by systematically converting the fund’s projected long-term return potential into regular distributions. As a result, each regular distribution throughout the year is likely to include a portion of expected long-term and/or short-term gains (both realized and unrealized), along with net investment income. Return of capital, also termed a non-taxable distribution, may be used; the fund’s capital includes both its original invested principal and any portfolio appreciation that has not been realized.

Managed Distribution graphic CEF (image)

In keeping with our goal of matching a fund’s overall distribution amounts to its overall return over time, a team of professionals works to forecast returns and manage distributions as accurately as possible throughout the year. However, actual returns will likely differ from projected long-term returns, particularly over shorter time periods. Funds using a manged distribution approach include domestic and global equity strategies, covered call strategies, and certain strategies that invest in real estate investment trusts (REITs).

3. Cash-flow based distributions

With this approach, fund distributions generally represent only the net cash flow received from portfolio investments. Nuveen does not forecast or seek to include projected capital appreciation in regular fund distributions, which is the same process we use for funds paying income-only distributions. However, funds using this distribution approach invest in securities which have cash flow that, at least in part, has historically been characterized, or re-characterized, for tax purposes as something other than net investment income. The final tax characterization of distributions from these funds, as reflected on Form 1099-DIV, will likely include realized capital gains and/or return of capital as well as net investment income, once the characterization of cash flow from the fund’s underlying investments is known after the end of the tax year. Nuveen funds that employ this distribution approach include those investing in MLPs (master limited partnerships), mortgage-backed securities, and real assets.

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Why invest with Nuveen?

Market leadership
A pioneer in long-term income solutions
Focused expertise
Active management from Nuveen and its independent investment specialists
Deep commitment
Pursuing long-term, lasting value for advisors and investors

1 Nuveen is not a tax advisor, and investors should consult their own tax advisors for appropriate guidance specific to their situation.

2 Closed-end fund historical distribution sources have included net investment income, realized gains, and return of capital.

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or investment strategy and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with his or her advisors.

Important notes and risk considerations

Fund shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation. Shares of closed-end funds are subject to investment risks, including the possible loss of principal invested, and frequently trade at prices higher or lower than their net asset value. The value of any closed-end fund may at any point in time be worth less than the original investment. Past performance is no guarantee of future results. Closed-end fund historical distribution sources have included net investment income, realized gains, and return of capital. You should not draw any conclusions about a fund’s past or future investment performance from its current distribution rate. Nuveen Securities, LLC, member FINRA and SIPC.

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