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Understanding managed distributions
Managed distribution programs provide the potential for:
- Higher and smoother distribution levels vs. traditional fixed income strategies2
- Attractive regular distributions from equity and alternative investment strategies which may offer higher total return opportunities
Managed distribution programs are typically used for closed-end funds that expect capital appreciation to comprise a meaningful portion of the fund’s return, such as those with equity or alternative investment strategies. These programs seek to convert a fund’s expected long-term total return into attractive regular distributions.
Closed-end fund managed distribution programs are designed to facilitate regular, relatively consistent distributions to shareholders, typically by:
- Estimating a fund’s long-term total return (both income and long-term appreciation, net of expenses)
- Setting a regular monthly or quarterly distribution amount intended to match the fund’s total distributions to its total return over time
The hypothetical example below shows how this may work over a one-year period.1
What is the source of each regular distribution?
Each regular distribution is typically set based on the portfolio’s historical and expected long-term return (appreciation and investment income net of expenses), and may include any or all of the following sources:
- Net investment income (dividends and interest, net of certain expenses)
- Realized capital gains (long- or short-term)
- A return of fund capital, which may consist of shareholders’ initial principal plus portfolio appreciation that has not yet been realized as a capital gain, if any
Any time a distribution includes realized gains or fund capital, a fund must give shareholders a written notice (called a 19a notice) of estimated distribution sources.
At the end of the fund’s tax year, the actual distribution sources are calculated and sent to shareholders via 1099-DIV tax forms.
The goal: attractive regular distributions from a variety of investment strategies
What else is important to know about managed distribution programs?
Shareholders should compare a fund’s distribution rate on net asset value (NAV) with its total return on NAV, over various time periods.
- If total return equals or exceeds the distribution rate on NAV, the program has successfully preserved the fund’s capital while paying out fund income and appreciation via regular distributions. Any return of capital represents fund appreciation that has not yet been realized as a capital gain.
- If total return is less than the distribution rate on NAV, some or all of the distribution represents return of capital that includes part of the shareholders’ principal.
- It is likely that a fund will experience both cases (distributions both greater than, and less than, fund return) during an extended time period. The goal is typically to have the overall distributions roughly correspond to returns. If they do not, fund managers may change the distribution amount to better align fund distributions with the fund’s actual return.
Why invest with Nuveen?
1 Hypothetical examples are shown for illustrative purposes only and do not represent any Nuveen fund. Net realized losses may offset net realized gains throughout the year. Managed distributions may also be paid quarterly rather than monthly.
2 Versus using an income-only approach that pays a large capital gain once per year.
Important notes and risk considerations
Past performance is no guarantee of future results. Closed-end fund shares are subject to investment risk, including the possible loss of the entire principal amount that you invest, and there is no assurance that an investment will provide positive performance over any period of time. Common shares frequently trade at a discount to their NAV. At any point in time, your common shares may be worth less than you paid, or the net asset value, even after considering the reinvestment of fund distributions. Certain products and services may not be available to all entities or persons. There is no guarantee that the Fund's investment objectives will be achieved.
Closed-end fund historical distribution sources have included net investment income, realized gains, and return of capital. It is important to understand these sources, and also the fund’s distribution rate relative to its NAV performance. You should not draw any conclusions about a fund’s past or future investment performance from its current distribution rate.
Distributions may be subject to federal and/or state and local taxes, as well as the federal alternative minimum tax, and may be re-characterized as ordinary income. Capital gains, if any, are subject to capital gains tax.
The goal of the fund’s managed distribution policy is to provide shareholders relatively consistent and predictable cash flow by systematically converting expected long-term return potential into regular distributions. Distribution sources may include net investment income, realized gains and return of capital. To the extent that a distribution includes a return of capital the NAV per share may erode. If a distribution includes anything other than net investment income, the fund provides a notice of the best estimate of its distribution sources at that time which may be viewed at https://www.nuveen.com/CEFdistributions. These estimates may not match the final tax characterization contained in shareholders’ 1099-DIV forms after the end of the year. You should not draw any conclusions about the Fund’s investment performance from the amount of the distribution. A distribution including return of capital does not necessarily reflect a Fund’s investment performance and should not be confused with “yield” or “income.