We discussed the firm’s investment approach, sector and funds we currently see as attractive, as well as, commentary on some of Chuck’s listeners CEFs of interest for his well-known “Hold It or Fold It” segment.
NOTE: We referenced Eaton Vance Tax Advantaged Dividend fund (EVT) as a fund we saw as attractive, but spoke “ETV”, Eaton Vance Tax Managed Buy-Write Fund which is more of a option premium / covered call fund. We apologize for any confusion.
You can listen to the show by clicking this link: [Click Here]
Or, copy and past the following link: https://www.cefadvisors.com/Download/140416-MarketCall-with-JohnColeScott.mp3
MoneyLife host Chuck Jaffe is senior columnist for MarketWatch. His three weekly columns are syndicated nationally, and his “Your Funds” column is the most widely read feature on mutual fund investing in America. In 2009, Chuck was named to MutualFundWire’s list of the 40 Most Influential People in Fund Distribution, the only journalist ever to make the list. Learn more on their website: http://www.moneylifeshow.com/
For those that were not able to attend our Quarterly Research Call on Wednesday April 9th at 4:30pm EST, in which we covered The Closed-End Fund Universe, we have included the slides and replay file with the following summary article, which roughly follows the slide order in the slide deck.
According to our CEF Universe Service dated March 31, 2014, during the first quarter of 2014 the closed-end fund universe ended with 595 funds totaling $259B in total net assets, which reflects an asset growth of about 3% year-to-date. There were 227 total Equity funds and 368 total Bond funds. The average discount to NAV is -6.7% and the average market price yield is7.1%. In general, discounts have been fairly stable during this quarter vs. their previous 9 months of general discount widening.
CEF Yield, Volume and Liquidity: At current market prices and distribution policies, 89% of all CEFs yield over 5% and 53.1% of all CEFs yield between 6.5% and 10%, which we feel is the core income universe for CEFs. Yields for CEFs peaked last summer and while they are still at very attractive, they are off the year-end tax-loss selling highs. The one major sector with an increase to the income-only portion of the yield is US Equity funds which have shown nice increases in March 2014. Trade volumes are down in March vs. the first quarter by about -4%; this trend is most pronounced in National Muni CEFs, which are trading down -8% and Non US CEFs, which are trading down -10% on average. Liquidity for CEFs is trending down from the abnormally high levels during the tax-loss selling season of the fourth quarter of 2013. Currently about 63.7% of closed-end funds trade over $500K a day in average liquidity, with less than 3% of CEFs trading over $5M a day in liquidity . Read more…
John Cole Scott, Portfolio Manager and EVP at Closed-End Fund Advisors gave a guest lecture to the Capital Market Class at Virginia Commonwealth University on April 3, 2014. It covered an introduction to closed-end funds and how the firm has learned to understand and evaluate these funds over the years. We have provided both a link to the slides in PDF format and the audio file as a WMV file for your reference and convenience. We expect to post the transcription of the presentation early next week on this blog entry.
Virginia Commonwealth University’s
Capital Markets Class:
“Crash Course in Closed-End Fund’s: Inefficient Securities with Above Normal Yield”
In our experience, leverage for closed-end funds is often touted as either their salvation or an Achilles Heel. We believe the ability for funds to borrow at long-term rates and invest in the shorter-term is still a powerful benefit to closed-end fund investors. CEFA has been working hard this year to collect and organize data on the various types of CEF leverage as well as the average “cost” per fund for their use of leverage. In a few months we plan to include a CEF’s leverage cost trend in order to identify funds with rising costs for borrowing money vs. those funds whose costs have either stayed stable or lowered over time. In this article, we wanted to shed some light on the current cost of leverage for the main four groups of CEFs and have compiled the following data to help us do that.
CEFA tracks 594 current closed-end funds, as of our March 7, 2014 CEF Universe Report; 112 (19%) of these funds have no leverage employed while 49 (8.3%) have between 1% and 10% leverage employed. The remaining 434 funds have an average of 32% leverage. This is where we focused our review.
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How might using closed-end funds help you build a generally higher yielding tax-free municipal portfolio?
This 25 minute session will cover closed-end funds and how they work in general. Muni CEFs account for about 1/3 of 600 closed-end funds. CEFA will discuss what is “normal” across the muni sector, what benefits and risks investors should be made aware of before investing and where you can find free and paid help on the sector. We plan to record the session and will share the slides and replay links with all registered attendees, so please register even if you know you cannot attend and want to receive this information.
Time: March 4th, 2014 at 4:15PM EST
Register to attend Live or receive Replay Links: https://www2.gotomeeting.com/register/769545858
During The Session We Will Discuss:
+ Discounts: What is Normal, Now and Historically
+ Leverage: Types Used and Cost of Leverage for CEFs
+ Duration: The Difference Between Duration and Maturity
+ Credit Quality: When High Yield is Less Risky than Investment Grade
+ Total Return NAV Performance: Why it Matters & How to Judge Portfolio Managers and Expense Ratios.
+ Ways to Reduce The Risk of Dividend Cuts: When to “Buy-and-Hold” and When to be “Tactical”
Note: * The average market price yield on a National Municipal CEF is 6.4% according to CEFA’s Universe Data as of 2/14/14.
Closed-end funds (CEFs) are three things: Permanent Capital, Active Management and Investor Liquidity. The fixed capital feature is where the “closed” comes from as funds are created through an IPO and do not offer a daily exchange of shares at net asset value (NAV). CEFs have active management and offer investors daily liquidity on US exchanges. We see these characteristics as benefits because the fund manager doesn’t have to deal with redemption and in-flow pressures. CEFs are also able to offer preferred stock and employ other forms of leverage. These unique features have allowed CEFs, especially in the past 10 years, to focus on yield-oriented strategies without having to face the same pressures that open-end funds have. With past trend of falling interest rates, it has been a very favorable environment for CEFs.
According to our CEF Universe data, from December 31, 2003 through December 31, 2013, there have been 218 funds IPOed from 59 different fund sponsors, raising approximately $125 billion in investible assets at IPO. For perspective the CEF Universe is now about $250 billion in total net assets. The average IPOed fund had approximately $570M in assets. Presently, 159 or about 73% of the funds have some amount of leverage employed with 145 (67%) using more than 10% effective leverage. It is fair to say CEFs generally use their leverage capabilities.
Leverage has been broadly applied in almost every corner of the CEF universe except Covered Call Equity Funds, which by design have the goal of a less volatile NAV, for which leverage would be unlikely to facilitate. For the past decade yield and CEFs has almost been unanimous. For example, there are now only three equity funds currently showing a market yield under 5%. In the tables below we have summarized the last decade of CEF IPOs from December 31, 2003 through December 31, 2013.
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