John Cole Scott, CFS
Closed-end bond funds continue to gain a lot of attention as investors search for yield in a very low interest rate environment. At Closed-End Fund Advisors, we do our best to educate investors on how to avoid some of the big closed-end fund mistakes and this article is an effort to continue that endeavor.
We also are replying to Steven Pikelny’s article last week on the Morningstar “CEF Weekly” comparing Undistributed Net Investment Income (UNII) to body fat – essentially saying that: UNII balances for CEF bond funds are a tax liability, UNII is irrelevant for municipal funds and that the UNII trend “is a functionally useless metric, and muddles the overall point.” I have to whole heartily disagree with this statement. We suggest you read his article in order for ours to make sense. Read more…
“Crash Course in Closed-End Funds”
CFA Society of San Francisco
February 5, 2013 – 77 Minutes
Slides and Audio Reply for CFA San Francisco Keynote.
We are happy to share the information we presented last week. Please let us know if you have any questions.
By: John Cole Scott, CFS
Portfolio Manager, Executive Vice President
It was my pleasure to moderate the “Closed-End Fund Activism” panel January 22 in New York at the 4th Annual Activist Investment conference. The panelists were Andrew Dakos from Bulldog Investors and Art Lipson of Western Investment, both very well known in the world of closed-end fund activism. We were joined by Warren Antler, from AST Fund Solutions as Art was running late and we welcomed his addition as an expert in CEF activism from the proxy solicitation perspective.
Closed-end fund activism is similar to regular corporate activism except it is typically focused solely on both the short and long-term ways to close a significant discount to net asset value (NAV). This is usually done through tender offers, share buy-backs, management changes, adding or removing members of the board of directors, open-ending, or liquidation of the fund at NAV. The goal of the activist investor is to make the extra alpha gained from the narrowing of the discount or shares tendered close to NAV.
Andrew Dakos joined Bulldog in 1999 and co-manages the firm’s investment strategy. He has serves as a director for The Mexico Equity & Income Fund. He serves as a Principal of Brooklyn Capital Management, a Registered Investment Adviser and is President of Special Opportunities Fund (SPE).
Art Lipson is the Managing Director of Western Investments. He managed the fixed-income research departments at various Wall Street firms. He created the Lehman Brothers Bond indicies in 1973 and retired from Wall Street in 1985.
Warren Antler is Vice President, CEF Specialist at AST Fund Solutions. He has distributed a monthly dissident tracking and corporate action report on CEFs since 2003.
JCS: Good afternoon. I have some prepared questions. We also have planned plenty of time for your questions. Do you want to start Warren? Read more…
Closed-end funds continue to be a great place to find yield, with the average municipal bond CEF yielding 5.4%, taxable bond fund yielding 7.1% and equity fund yielding 6.6% on average as of January 25, 2013. While these yields are attractive, investors should learn how to reduce the risk of a dividend cut in a CEF.
Closed-End Fund Advisors started tracking two new data points we thought would help us select and compare dividend risk for a closed-end fund. They are Undistributed Net Investment Income Trend (UNII) and Earnings Trend. By taking the slope of the last three UNII and earnings figures for a fund, a trend is determined as “up”, “flat” or “down”.
When CEF collects dividend and bond income and pays a regular dividend to shareholders, it reports UNII as a line item on its balance sheet. If a CEF increases its UNII balance, it has more reserves on hand to possibly distribute as a dividend. Increases in earnings also gives the potential that a fund could be increasing its dividend level in the near future. When these figures are in line with each other (i.e. both earnings and UNII trends are positive or both negative), it makes a stronger case that either the fund is increasing or reducing its future income production. This, in our experience, makes it more likely that the Board may alter their dividend policy accordingly. Read more…
January 8th, 2013 – 65 minutes
Closed-End Fund Advisors, Inc.
This web based session will cover the current state of the Major CEF Groups: 1. US Equity, 2. Non-US Equity 3. Specialty Equity 4. Taxable Bond Funds 5. National Muni Bond Funds and highlights on many of the numerous sub-sectors in those groups.
We will cover:
- Discount Trends
- Over and Undervalued Groups of Funds
- Compare Net Asset Value Performance
- Changes in Dividends: UNII Coverage and Return of Capital
- Changes in Activist Positions and Fund We Anticipate Activist Activity
- Our Outlook for the Current Quarter
- Recent IPO Review and our CEF IPO Guidelines.
Register via: https://www2.gotomeeting.com/register/394738858
We will load the slides and replay about 48 hours after holding the session on our Webinar Archive Page. http://www.cefadvisors.com/webinars-on-demand.html
From our experience, if you are interested in closed-end funds then you typically fall into two groups of investors: Dividend Seekers or Contrarian Investors.
Regarding contrarian investing, can investors currently find value amongst the roughly 219 available equity closed end funds? For those not familiar with some of the data we collect and use, please review CEFA’s CEF Data Definitions. Data used in this article is from our weekly CEF data service, “CEFA’s Closed-End Fund Universe” dated December 28, 2012.
Research Criteria: 1) Less than 15% of assets invested in US stocks. 2) Current discount to NAV of more than -10%. 3) Relative discount wider than -1.5% (90 day average discount) 4) Comparable discount (vs. peer group average) wider than -2%. 5) 1-year Z-stat of less than -1.0. 6) Relative Z-stat of less than -0.5. 7) 1-Year discount range under 15%. 8) 52-Week relative market price under 33%. 9) 1 Year NAV total return performance above + 10% through December 28th 2012. 10) Trading more than 30,000 shares per day.