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Closed-End Fund Sponsors’ Investor Relations Practices and their Role in Secondary Market Support: (Article and Video)

This article is based-on the video we recorded last week and which can be found on our firm’s Vimeo channel. [Here] Full link:

The Article:

JCS IR Video-2014-08

How well we are able to analyze a fund depends a lot on what information the fund managers provide us with.  It is important for a fund to have a good reputation amongst retail and institutional investors and often how they handle investor relations determines that reputation.  There is a wide range of different types of investors.  Managers need to be able to understand how to communicate with all of them in order to compete with other structures, ETFs in particular.

Investor relations is the part of the fund sponsor’s work that shapes our ability, as advisors, to access the mangers outlook and positioning strategy in addition to in-depth details about a portfolio’s contents. As a firm, when we build and adjust clients’ accounts over time, this data helps us make our portfolio decisions. Without it, we would be flying blind, not knowing what to expect from a manager over various market cycles. Read more…

BDCs Attract Yield Seekers: “Who ‘Cousin’ BDC Is”

BDC-Video-CapLink-2014-04August 18th, 2014

Business Development Companies, a CEF “cousin,” are gaining attention from yield-seeking investors, says John Cole Scott of CEF Advisors.

More people are covering them and I think you’ll see a lot more from the Closed-End Fund Association, which now allows them as a member organization.  So I think investors and advisors will be hearing much more about BDCs going forward.

Business Development Companies are closed-ended management companies… Our firm was interested in them because of their fixed capital, active management and investment liquidity.  And they’re growing tremendously. We expect maybe 10 IPOs this year.  We’ve already had, I think, four or five. …

Watch the 2:37 minute Video:

Closed-End Funds: Rising Rates and the Impact on Performance and Yield

interest rate - bondsClosed-end fund (CEF) investors have been asking our firm over the past year how we expect the various groups of funds to handle the eventual rise of interest rates. We generally hear the same two questions.

1. How likely are we to lose money on a total return basis?
2. How will my cash flow change during a rise in interest rates?

To help prepare for this environment, we have spent time researching the cost and terms of leverage for closed-end funds as we believe these data points will be an important part of fund selection during a rising rate environment. We recently wrote an article on how Business Development Company’s (BDCs), a sub-set of the closed-end fund universe, did from the period March 1, 2004 to September 28, 2007 vs. High Yield and Senior Loan Taxable Bond CEFs as 30 day Libor rose from 1.0973% to 5.4927% (a 4.40% increase) over a period of 43 months. You can read the full article on our blog ( This is the most pronounced rise in rates in recent history, and one period of time that is potentially similar in nature to the increase in rates currently forecasted for 2015 or 2016.

This article is designed to give investors perspective on what they could expect to experience in terms of a total return perspective or for potential changes in their fund’s distribution yields. Of the 636 current closed-end funds (traditional and BDC), 381, or about 60% of the universe, existed on March 1, 2004 when Libor rates were at 1.0973%. Below is a summary on how the average fund performed both on a market price total return basis, as well as in terms of the average change to yield over the 43 month period.  Libor rates peaked at 5.4927% on September 28, 2007.

We also want to show which groups had the highest number of significant dividend changes and where investors could have experienced negative market price total returns over the period.  We show the total returns for the S&P 500 as well as a Barclays Taxable and Municipal Bond index for comparison. Read more…

“Why You Buy (or Sell): CEF Investing Tips” Investius Interview From 2014 Morningstar Investment Conference in Chicago

Investius-2014-07-2Closed-end funds are over 100 years old.  There are about $300 billion in assets.  There’s enough of them to make decisions, but there’s a few enough number to follow them actively.

Well, traditionally we talk to people, the first level of knowledge we hope they can learn is how to buy funds at a relative value at reasonable yields with good manager performance.

Once they’ve mastered that, the next level we feel is more on the portfolio management side, for step one… making sure they’ve got the right size allocation, not over-weighting or under-weighting what they’re doing.

Step two might be looking at why you would sell a fund and why you would buy a fund.  And if you look at a winner or a loser, we find some people … 

Watch two minute video:

Closed-End Fund Advisors: Second Quarter 2014 CEF Review and Outlook Summary and WEBINAR REPLAY Links

webinar-newFor those that were not able to attend our Quarterly Research Call this quarter in which we covered The Closed-End Fund Universe, we have included the slides and replay file.

We are excited to know offer coverage in this call on Business Development Company (BDC) CEFs alongside our coverage of Traditional CEFs. We will post the replay summary article on this blog post over the weekend. The article will roughly follow the slide order in the slide deck.

Link to Webinar replay slides:

Webinar Replay;

Overview Traditional CEFs: According to our CEF Universe Service dated June 30, 2014, during the second quarter of 2014 the traditional closed-end fund universe ended with 585 funds totaling $270B in Total Net Assets, which reflects an asset growth of about +7.4% year-to-date. There were 226 total Equity funds and 359 total Bond funds.  The average Discount to NAV is -6.1% and the average Market Price Yield is 6.8%; 7.3% for Taxable Bond funds and about 6% for Municipal Bond funds.  In general, discounts have been fairly stable during this quarter with about a +0.6% narrowing since last quarter-end and a +0.2% above the quarter’s average Discount per fund. We have not seen as tepid of discount movements in recent history since the 3rd quarter of 2012.

Overview Business Development Company (BDC) CEFs: According to our CEF Universe Service dated June 30, 2014, during the second quarter of 2014 the BDC closed-end fund universe ended with 50 funds totaling $32B in total net assets. The average Discount to NAV is -0.17% and the average Market Price Yield is 9.4%. There were 9 Equity Focused BDC CEF funds with an average Discount of -23.71% and a Yield of 4.6% and 41 Debt Focused BDC CEF funds with an average Premium of +5.13% and an average Yield of 9.9%. We want to note that as BDC CEFs are new to many investors, they only produce a NAV or “Book Value” quarterly as they typically own non-traded securities. Read more…

“Discount View” Investius Interview from Morningstar’s 26th Investment Conference

JCS-Investius-Disc-2014-06Discounts persist in several sectors that may be attractive to CEF investors, says John Cole Scott of CEF Advisors.

Investius: Everyone likes a bargain… including closed-end fund investors. Amid the action and excitement of the perennial Morningstar investment conference in Chicago, John Cole Scott of CEF Advisors shares his view on discount trends in the closed-end fund market.

John Cole Scott, CEF Advisors:

According to our universe data as of mid June, muni bond funds are just under 5% in average discount.  Taxable bond funds are just over 5%, sector equity are around 6%, and both non-US and US equity funds are around 8% discounts.  What’s interesting is if you look at current discounts versus the lows the past few months versus the peak from about a year or so ago, we’re about a third up from the bottom, which tells us that, while it’s not as cheap as it was recently, it’s still not over-expensive in our opinion.

Watch two minute video:

BDC CEFs Poised to Perform well in a Rising Rate Environment: Potential for Growing Income & Positive Total Return

rising-interest-ratesWe constantly hear from investors seeking ways to maintain yield or add to their portfolio’s income potential as well as develop an investment strategy for a future rising interest rate environment. We think Business Development Company Closed-Ended Management Companies (BDC CEFs) can be a key part of this strategy and CEF Advisors already employs 4% to 12% exposure in these funds for most client accounts. In the past few years many BDC CEFs have increased their portfolio exposure to floating rate investments and have generally used Fixed Leverage Cost to finance the investments. We see this as a very positive trend for retired investors looking to build and manage an income oriented portfolio that they should have trouble out-living. However, we find that BDC CEFs require more research to understand than their traditional CEF cousins and are not as homogeneous as traditional CEFs.

BDC CEFs are not new investment structures. They are regulated investment companies, created by Congress in 1980 to help spur investment in smaller companies and give investors access to strategies previously only available to accredited or high net worth investors. BDC CEFs generally make loans and or invest in smaller US companies and pass on the interest to shareholders as income in a similar fashion to REITs and MLPs. BDC CEFs are “flow through” vehicles for tax purposes and pay no corporate taxes as long as they distribute 90% of their annual income to shareholders. We follow them alongside our work in traditional CEFs as they meet our firm’s CEF definition: active portfolio management, fixed capital structure and investor liquidity through listing on exchanges. As the lending market from traditional banks has waned, BDC CEFs have increased lending to both growing and distressed companies. This can be a very profitable business when done well on a consistent basis. We started actively tracking BDC CEFs in our weekly CEF Universe data in March of 2014 and currently record 45 data points per fund. Read more…


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