Closed-End Funds - Capital Link

August 2 , 2 0 1 3

Closed-End Funds

W. Jeffrey Lee, Analyst Mariana F. Bush, CFA, Senior Analyst Daniel Brown, CFA, Analyst

Close d- End Funds w it h Finit e Live s

A prim er on t arget- price t erm trusts and term trusts

Most invest m ent funds, including closed- end funds ( CEFs) , are st ruct ured so t hat t hey have perpet ual lives. I n other words, there is no m aturity date and the investor will need to liquidate his/ her holdings if exposure to a particular fund is no longer desired. Ther e are a few CEFs, however, t hat do have m at urit ies. The purpose of t his report is t o serve as a pr im er on t wo st ruct ures of such CEFs, the target- price term trust s and the term trusts, and to discuss what we view as the pros and cons of each.

Target- Price Term Trusts Target - price t erm t rust s are t he first generat ion of t erm t rust s. This t ype of CEF not only has a finit e life; it also at t em pt s t o ret urn t he I PO price at m at urit y. For exam ple, if a CEF is launched at a price of $25 it would be the goal of the sponsor to return a price of at least $25 per share at its m aturity. Note that while the sponsor st rives to ret urn t he I PO price, t he ending dist ribut ion is not guarant eed t o equal or exceed t he I PO price, nor is the sponsor obligat ed to pay the shareholders an am ount equal to any potential shortfall. At this point , BlackRock is t he only CEF sponsor t hat continues to use the first generation of term trust, of which t here are t hree. Ot her sponsors have launched second- generation term trusts, which will be discussed shortly.

H ow doe s it w or k ? Because CEFs, m ore or less, have a fixed num ber of shares ( excluding the effects of som e form s of distribution reinvestm ent or other corporate actions) , the task of returning a specific price is som ewhat sim pler than it would be for an investm ent product that has share creat ions/ redem pt ions. Moreover, hist orically m ost of these target- price term trusts, and all of the exist ing ones, have invest ed in m unis because they can retain som e of the m uni interest to enhance t heir abilit y t o ret urn t he original I PO

price ( without any taxation at the fund level). However, creating target- price term trusts is not without com plications and the track record for this t ype of CEF is not perfect as a few have failed t o ret urn t he full I PO price and ot hers have sacrificed incom e towards the latter years of their lives in order t o ret urn t he I PO pr ice. Som e of t he challenges t hat such CEFs m ay face are discussed in the following sections.

One should realize t hat when a CEF is launched at a price of say, $25 per share, it does not have a net asset value ( NAV) of $25 per share at com m encem ent . There are fees t hat are associat ed wit h launching a CEF t hat are t aken out of t he init ial NAV. For exam ple, if launched at $25 per share, it s initial NAV would likely be in t he neighborhood of $23.85 ( if a typical offering with t ypical selling concessions, et c.) . Thus, t he CEF, which holds $23.85 of m unicipal bonds net of leverage, is already in the position of needing to add an extra $1.15 per share (or $25.00 m inus $23.85) to achieve its goal of returning $25 per share. This is oft en accom plished by invest ing a sm all portion of the portfolio in zero- coupon bonds with the sam e m aturity as that of the target- price term trust, which, once they appreciate to par, should cover t hat initial NAV deficit. So, a sm all portion of the portfolio has to be invested in securities to m ake the investors " whole," rather than earning an increm ental return.

Another possible com plication is that the bonds held in the portfolio will likely com e due at different tim es, and few, if any, will have due dates that correspond exactly with the m aturity date of t he CEF it self. As such, som e of t hese bondredem ption proceeds will need to be reinvested several years before the t erm trust's m aturity. Additionally, if a bond com es due or is called, for exam ple, seven years before the term trust

Please see pages 4 - 5 of this report for I m portant Disclosures, Disclaim ers and Ana lyst Ce r t ifica t ion.

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m atures, chances are that the sponsor is not going to invest the proceeds in longer term bonds given that it is striving to return a specific price seven years later. With a norm al yield curve, short- term bonds have lower yields than do long-term bonds and t his problem can be exacerbat ed if t he CEF is reinvesting the proceeds from redeem ed bonds in a relatively lower interest- rate environm ent. Because of t his, t he CEF's incom e m ay decline as its m aturity nears, depending on the interest- rat e environm ent at the tim e and other factors.

Ot her fact ors t hat m ay com plicat e a t arget - price t erm t rust 's abilit y t o pay t he I PO price at it s m aturity is leverage that it m ay em ploy or possible defaults on the part of som e of the bond issuers to which it is exposed.

I s m y principal in a better position in a t a r ge t - t e r m t r ust r e la t ive t o a pe r pe t ua l CEF? The answer t o t his quest ion depends on, am ong other things, the holding period of the investor as well as t he charact erist ics of t he bonds held by t he CEFs. I t is im perat ive t o rem em ber t hat t he underlying bonds, even when held in a target- price term trust, will fluctuate in value. As one recent exam ple, the BlackRock Municipal Target Term Trust ( BTT, $ 1 8 .1 8 ) was launched on August 29, 2012. This leveraged product has a som ewhat long maturity, with a planned m aturity date on or around Decem ber 31, 2030. Because of the long m at urit y, t he CEF can, and has, invest ed in bonds wit h quit e long m at urit ies. I t s leverage- adj ust ed duration is about 17.6 years (longer than that of m ost ot her fixed- incom e CEFs) , which indicat es significant interest- rat e sensitivity.1 As a result, BTT was im pact ed som ewhat harshly in t he recent m uni- bond CEF selloff, post ing an NAV t ot al ret urn of - 20.1% from t he end of April 2013 t hrough July 26 and a m arket- price- based total return over the sam e period of -16.2% , m ore severe than that of m ost leveraged m uni CEFs, including m any of t hose wit h perpet ual lives. This period of t im e was chosen as it roughly encom passes the tim e period during which the aforem entioned selloff occurred. I nvest ors should not e t hat BTT has had a lim it ed life and the recent perform ance m ay not be indicative of future results.

Also, not e t hat t here are ot her t arget - t erm CEFs wit h short er durat ions t han t hat of BTT ( however, there are factors in addition to duration that should be considered in an investm ent decision) .

Term Trusts A m ore recent developm ent is t he t erm t rust . Like t he t arget - price t erm t rust s, t his t ype of CEF also has a finit e life; however, t he CEF's sponsor does not necessarily strive to return a specific price at m aturity. We realize that on the surface the term trusts m ay sound less appealing than the targetprice term trusts. However, m ost of these products are structured so that the m aturities of the underlying bonds are in close proxim ity to the m at urit y of t he CEF it self ( it is doubt ful t hat m any sponsors of these types of trusts would place them selves in a situation of having to term inate a trust at m aturity while still holding bonds that have several years t o m at urit y left in an uncert ain interest- rate environm ent) . Also, because they don't have to focus so m uch on ending at a certain price, the incom e stream m ay be less j eopardized over the life of the trust.

Another advantage of a term trust ( and also a target- price term trust) relative to a perpetual t rust is t hat m uch of t he t im e m any CEFs t rade at discounts to NAV. At tim es an investor m ay have thought: " I t is nice to be able to buy a fund at a discount to NAV, but it would also be nice if the discount subsequent ly narrows." Given t hat shareholders will receive NAV at term ination, the discount ( or prem ium ) should narrow and disappear as the term ination date approaches. I n other words, the m arket price will converge t owards NAV as t he CEF approaches m at urit y.

As with the target- t erm trusts there is a wide range of durations/ m aturities from which to choose. As such, som e m ay be considerably m ore volatile than others.

A list of both target- price term trusts and term trusts that are in our coverage universe follows. Note that this list is provided for inform ational purposes only and does not necessarily constitute a " recom m ended list."

I n general, as t he CEF approaches m at urit y and the bonds' lives shorten, its volatility should be reduced, all other factors held constant.

______________

1 Durat ion at t em pt s t o m easure int erest - rat e sensit ivit y. Generally, t he great er t he num ber ( usually expressed as " years" ) , the greater the interest- rat e sensitivity.

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August 2 , 2 0 1 3

Data as of July 2 6 , 2 0 1 3

Liste d in Or de r of Ex pe cte d Ter m in a tion D a te s

( Discount) Total

/ Premium Lev

Advisory Services Group

on Last

Ra t io

Fund Name

Ticker Maturity*

Type

Cla ssif ica t ion

NAV Date ( % )

Bla ckRo ck De fin e d Op p s Cre d it

BHL 1 2 / 3 1 / 2 0 1 7

Te rm

Co rp o ra t e Lo a n s - Ma j o rit y

-4.35

27.0

Bla ckRo ck Mu n i 2 0 1 8 Te rm Tru st

BPK 1 2 / 3 1 / 2 0 1 8 Ta rg e t -Price Na t io n a l Mu n i

1.28

22.2

Nu ve e n Mo rt g a g e Op p Te rm Tru st JLS 1 1 / 3 0 / 2 0 1 9

Te rm

St ru ct u re d Fin a n ce

-5.62

26.3

Nu ve e n Mo rt Op p Te rm Fu n d 2

JMT 2 / 2 8 / 2 0 2 0

Te rm St ru ct u re d Fin a n ce

-6.14

26.5

Bla ckRo ck Mu n icip a l 2 0 2 0

BKK 1 2 / 3 1 / 2 0 2 0 Ta rg e t -Price Na t io n a l Mu n i

0.29

35.5

W e st e rn Asse t Mu n i De fin e d Op p MTT 4 / 3 0 / 2 0 2 1

Te rm Na t io n a l Mu n i

-5.96

0.0

W e st e rn Asse t Mo rt g a g e De f Op p DMO 3 / 1 / 2 0 2 2

Te rm St ru ct u re d Fin a n ce

-6.55

10.8

Nu ve e n I n t e rme d ia t e Du r Mu n i

NI D 3/ 31/ 2023

Te rm Na t io n a l Mu n i - No n I G

-8.53

36.3

Nu ve e n I n t e r Du r Qu a lit y Mu n i

NI Q 6/ 30/ 2023

Te rm Na t io n a l Mu n i

-7.33

25.5

Nu ve e n Pre fe rre d & I n co me Te rm JPI 8 / 3 1 / 2 0 2 4

Te rm Pre fe rre d s Le ve ra g e d

-6.37

28.3

W e st e rn Asse t Glb Co rp De f Op p GDO 1 2 / 2 / 2 0 2 4

Te rm

Mu lt i-Se ct o r De b t - Le ve ra g e d

-10.18

13.9

Ma in st a y De fTe rm Mu n i Op p s

MMD 1 2 / 3 1 / 2 0 2 4

Te rm

Na t io n a l Mu n i

-3.97

34.6

W e st e rn Asse t Hig h Yld De f Op p

HYI 9 / 3 0 / 2 0 2 5

Te rm Hig h Yie ld No n -Le ve ra g e d

-5.88

0.0

Bla ckst o n e / GSO St ra t e g ic Cre d

BGB 9 / 1 5 / 2 0 2 7

Te rm Co rp o ra t e Lo a n s - Ma j o rit y

-4.53

33.3* *

EV Mu n icip a l I n co me Te rm Tru st

ETX 6 / 3 0 / 2 0 2 8

Te rm Na t io n a l Mu n i - No n I G

-8.53

39.9* * *

Bla ckRo ck Mu n i Ta rg e t Te rm Tr

BTT 1 2 / 3 1 / 2 0 3 0 Ta rg e t -Price Na t io n a l Mu n i

0.64

42.2

* I n ma n y ca se s, in ve st o rs sh o u ld vie w t h e ma t u rit y d a t e s a s a ppr ox im a te d a t e s a t w h ich t h e CEFs w ill t e rmin a t e .

* * Th e t a rg e t e d a mo u n t a s in d ica t e d b y t h e sp o n so r

* * * Ou r e st ima t e b a se d o n re ce n t ly re p o rt e d le ve ra g e d a n d n o n -le ve ra g e d d u ra t io n s

So u rce s: Mo rn in g t a r Tra d e d -Fu n d s Ce n t e r a n d W e lls Fa rg o Ad viso rs

Net Asse t s

Mils USD 130.9 248.8 415.6 128.5 323.9 261.9 247.2 599.7 160.4 571.6 311.6 423.7 427.4 802.6 158.5 1163.0

Av e r a ge Daily

Volume Mils USD 0.494 0.664 1.859 0.526 0.692 0.836 1.274 2.236 0.573 2.065 1.141 1.919 1.89 2.939 0.788 5.857

La st Closing

P r ice 13.86 15.83 24.68 24.75 16.05 20.53 22.27 11.69 11.89 23.52 18.08 16.44 18.08 18.35 14.37 18.87

An n u a lize d Re t u rn s (% )

Asse t s

1 year

5 Ye a rs Sin ce I n ce p t io n

Exp e n se

CEF Bla ckRo ck De fin e d Op p o rt u n it y Cre d it Tru st

Ticke r BHL

Pr ice 9.5

NAV 9.5

Price NAV Price

7.0

6.6

6.1

NAV I n ce p t io n

Ra t io

6.2 1/28/2008 1.61%

Bla ckRo ck Mu n icip a l 2 0 1 8 Te rm Tru st Nu ve e n Mo rt g a g e Op p o rt u n it y Te rm Fu n d Nu ve e n Mo rt g a g e Op p o rt u n it y Te rm Fu n d 2

BPK JLS JMT

0.3 12.5 13.7

3.0 21.0 21.8

7.4 8.5

6.5

6.7 10/26/2001 0.85%

N.A. N.A. 8 .8 1 1 .2 1 1 / 2 4 / 2 0 0 9 1 .4 5 %

N.A. N.A. 9 .0 1 1 .5 2 / 2 4 / 2 0 1 0 1 .6 1 %

Bla ckRo ck Mu n icip a l 2 0 2 0 Te rm Tru st

BKK

5.3

3.4

9.0 8.6

6.4

6.9 9/25/2003 0.93%

W e st e rn Asse t Mu n icip a l De fin e d

Op p o rt u n it y Tru st I n c W e st e rn Asse t Mo rt g a g e De fin e d Op p o rt u n it y Fu n d I n c

MTT -5 .1 DMO 2 2 .7

1.9 32.0

N.A. N.A.

N.A. N.A.

6.9 15.9

8.5 3/26/2009 17.2 2/23/2010

0.68% 1.89%

W e st e rn Asse t Glo b a l Co rp o ra t e

De fin e d Op p o rt u n it y Fu n d I n c

GDO 1 .9

9.5

N.A. N.A. 5 .3

9.1 11/24/2009 1.34%

W e st e rn Asse t Hig h Yie ld De fin e d

Op p o rt u n it y Fu n d I n c

HYI

3.0

16.0

N.A. N.A. 4 .4

9.2 10/27/2010 0.89%

All d a t a a s o f Ju ly 2 6 , 2 0 1 3 , e xce p t fo r re t u rn d a t a , w h ich a re a s o f Ju n e 3 0 , 2 0 1 3 .

Fu n d s t h a t h a d n o t b e e n in e xist e n ce fo r a t le a st o n e ye a r a s o f Ju n e 3 0 , 2 0 1 3 w e re e xclu d e d fro m t h e t a b le a b o ve .

So u rce : Blo o mb e rg , W e lls Fa rg o Ad viso rs, a n d t h e fu n d s' w e b sit e s.

I n a d d it io n t o t h e fu n d s' e xp e n se ra t io s list e d a b o ve , t h e fu n d s a re su b j e ct t o b ro ke ra g e fe e s.

Un d e r Mg mt (mils)

$131 $249

$416

$129 $324

$264

$248

$308

$436

Ma rke t Pr ice

$13.85 $16.04

$24.37

$24.50 $15.99

$20.54

$22.22

$17.84

$17.60

Past perform ance does not guarant ee fut ure result s. I nvest m ent ret urns, price, and NAV fluct uat e wit h changes in m arket conditions.

Addit ional inform at ion can be obt ained at t he respect ive CEFs' websit es:

For BHL, BPK, BKK, and BTT: ht t ps: / / w ww2. / us/ financial- professionals/ product sperform ance/ closed- end- funds For BGB: ht t p: / / blackst one- / bgb- index.php For JLS, JMT, NI D, NI Q, JPI : ht t p: / / / cef/ ?gclid= CJej 9ai71bgCFdBcMgoddxwAt g For MTT, DMO, GDO, and HYI : ht t p: / / w ww.west ernasset .com / us/ en/ For MMD: ht t p: / / nylinvest m ent / port al/ sit e/ MainSt ayClosedEndFund For ETX: ht t p: / / funds.eat / Municipal- I ncom e- Term - Tr ust - ETX.php

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I M PORTAN T D I SCLOSURES

D isclosu r e I n for m a t ion . For im port ant disclosure inform at ion, please cont act : Wells Fargo Advisors Attn: Advisory Services ( Disclosure I nform ation) One Nort h Jefferson St . Louis, MO 63103

Or call by phone: ( 888) 410- 9203

Please rem em ber t o specify t he issuer( s) wit h respect t o which you would like t o receive disclosur e infor m at ion.

AN ALYST CERTI FI CATI ON : The Analyst who prepared t his report hereby cert ifies t hat t he views expressed in this report accurately reflect his/ her personal views about the subj ect com panies and t heir securit ies. The Analyst also cert ifies t hat he/ she has not been, is not , and will not be receiving direct or indirect com pensation for expressing the specific recom m endation( s) or view( s) in this r epor t .

Disclaim ers

All prices are as of August 1, 2013, unless indicated otherwise.

A closed- end fund has both a net asset value ( NAV) and a price, and these two values m ay differ. A closed- end fund's NAV is the total value of the securities in the portfolio m inus any liabilities, divided by t he CEF's num ber of com m on shares out st anding. The CEFs' price is t he m arket value at which t he CEF t rades on an exchange. Changes in invest or dem and for a part icular closed- end fund m ay cause t he CEF t o t rade at a price t hat is great er ( lower) t han t he NAV; in t hat case t he CEF is t rading at a prem ium ( discount ) t o it s NAV. Since a CEFs' prem ium or discount t o it s NAV m ay narrow or widen, a closed- end funds' price return m ay differ from its NAV return.

There can be no assurance t hat a fund's invest m ent obj ect ives, including a ret urn of it s I PO price at m at urit y, will be achieved or t hat t he fund's invest m ent program will be successful. The funds m ay be subj ect to som e or all the following risks:

Fix e d I ncom e : Bond prices fluct uat e inversely t o changes in int erest rat es. Therefore, a general rise in interest rates can result in the decline of the value of your investm ent. I nvesting in fixed incom e securit ies involves cert ain risks such as m arket risk if sold prior t o m at urit y and credit risk especially if investing in high yield bonds, which have lower ratings and are subj ect to greater volatility. All fixed incom e investm ents m ay be worth less than original cost upon redem ption or m aturity. Municipal: I ncom e from m unicipal securities is generally free from federal t axes and st at e t axes for resident s of t he issuing st at e. While t he interest incom e is t ax- free, capit al gains, if any, will be subj ect t o t axes. I ncom e for som e invest ors m ay be subj ect t o t he federal Alt ernat ive Minim um Tax ( AMT) . M or t ga ge - Ba ck e d Se cur it ie s: The yield, average life and t he expect ed m at urit y of m ort gage- backed securit ies are based on prepaym ent assum pt ions t hat m ay or m ay not be m et . Changes in prepay m ent s m ay significant ly affect yield, average life and expect ed m aturity. Foreign: I nvesting in foreign securities presents certain risks not associated with dom estic investm ents, such as currency fluctuation, political and econom ic inst abilit y, and different account ing st andards. This m ay result in great er share price volat ilit y. These risks are height ened in em erging m arket s. Le ve r a ge : Leverage is a speculat ive t echnique t hat exposes a portfolio to increased risk of loss, m ay cause fluctuations in the m arket value of the fund's port folio which could have a disproport ionat ely large effect on t he fund's NAV or cause t he NAV of t he fund generally t o decline fast er t han it would ot herwise. D er iva t ive s: The use of derivat ives m ay reduce ret urns and/ or increase volat ility. I nvest ing in derivat ives carries t he risk of t he underlying inst rum ent as well as t he derivat ive it self.

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This com m unicat ion is not an offer t o sell or solicit at ion of offers t o buy any securit ies m ent ioned herein. This report is not a com plet e analysis of every m at erial fact in respect t o any CEF or CEF t ype. The opinions expressed here reflect the j udgm ent of the author as of the date of the report and are subj ect to change without notice. Statistical inform ation has been obtained from sources believed to be reliable but it s accuracy is not guarant eed. Wells Fargo Advisors does not render legal, account ing or t ax advice. Please consult your t ax or legal advisors before t aking any act ion t hat m ay have t ax consequences.

In ve s tm e n t an d In s u ran ce Pro du cts : N OT FD IC In s u re d N O Ban k Gu aran te e MAY Lo s e Valu e

Wells Fargo Advisors is the trade nam e used by two separate registered broker-dealers: Wells Fargo Advisors, LLC, and Wells Fargo Advisors Financial Network, LLC, Mem bers SIPC, non-bank affiliates of Wells Fargo & Com pan y. CAR 0 713-0 5634

? 20 13 Wells Fargo Advisors, LLC. All rights reserved. CAR # 0 713-0 5634

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