Alpine Total Dynamic Dividend (AOD) trades at a 16.4% discount to its net asset value, or NAV, below its three-year average discount of 14.7%. John Cole Scott, chief investment officer at Closed-End Fund Advisors, does not expect that exaggerated discount to last.
“AOD’s management aggravated investors a few years ago due to its dividend policy, which it has since changed,” said Scott. “Management has improved, but investors are still punishing it unfairly.”
Tortoise Energy Independence (NDP) trades at a 12.6% discount to its NAV. The three-year average discount for the global equity fund is 10.1%. The pipeline MLP closed-end fund fell 35% in 2015 due to the drop in energy prices, but it is up 5% in 2016. Scott expects more gains ahead.
“Tortoise is a great manager, and even though NDP had a rough year in 2015, the fund was still better than its peers,” said Scott. “And it will do much better this year with oil stabilizing.”
Monroe Capital (MRCC ) is a business development company, or BDC, yielding 10%. Scott said it is a “shareholder-friendly” BDC with above-average first lien and variable loans. MRCC’s market cap is $175 million.
A BDC is a form of U.S. unregistered closed-end investment company that invests in small and mid-sized businesses, almost like a venture capital company.
“Monroe is a smaller market cap fund, yet it is part of a much bigger shop with great managers,” said Scott.
Finally, Scott is a fan of NexPoint Credit Strategies Fund (NHF) , which trades at a 14.1% discount to its NAV. The three-year average discount for the global equity fund is 13%.
“NHF is a balanced fund which gives investors a hedge fund experience without the hedge fund fees,” said Scott. “It has high insider ownership, and that aligns management with investors. That’s something we like in a fund.”
We had a nice discussion covering the firm’s experience and perspective on CEFs, but focused much of the time on Business Development Companies (BDCs).Listen to Interview [Click Here].
John Cole Scott, a previous guest about a year ago, provides an update on Closed End Funds and discusses Business Development Companies (BDC’s). He discusses the CEF world, about 600 funds managing about $300 Billion in total assets, and sell at a discount or premium to NAV.
BDC’s focus on venture loans to private companies for growth capital. There are about 50 BDC’s, many of which also have significant institutional investors in their institutional funds. Both of these investments generate significant yield. For example, many BDC’s pay double digit yields today, which is not often attainable in fixed income investments today. Investors and advisors will find this interview to be very interesting.
On January 14th we held our Quarterly Closed-End Fund and BDC Universe Update, Outlook, IPO Review & Outlook.
Please watch the replay or download the slides to see what trends we covered in the CEF industry including:
*Discounts & Discount Trends
*Yield and Yield Trends
*Last Quarter’s and Recent Peer-group performance (NAV and Market Price).
*UNII, Earnings and Return of Capital (RoC) Trends
* Recent CEF IPO’s
* Liquidity & Liquidity Trends
* Activist Updates & Trends
* CEF Deaths & Mergers
* NAV vs. Market Price Volatility
* New CEF Universe Data
* 2016 Outlook
* Pre-submitted & Live Q&A
We discussed the firm’s investment approach, sectors and funds we currently see as attractive Master Limited Partnership (MLPs), Municipal Bond, US Equity and Debt focused (BDCs), as well as, commentary on some of Chuck’s listeners CEFs of interest for his well-known “Hold It or Fold It” segment.
You can listen to the show by clicking this link: [Click Here] Or, copy and past the following link:
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/
CEFs / BDCs Discussed:
EMO, SPXX, PMO, MRCC; during “Hold It or Fold It:” FGB, TTP, CTR, NEA, CAF
Shares of TCP Capital (TCPC) are down over 13% thus far in 2015, but investors have not felt all that pain because the business development company pays a healthy 10% dividend. John Cole Scott, chief investment officer at Closed-End Fund Advisors, said this is the perfect time to step into the stock.
“We like that their manager is very shareholder friendly,” said Scott. “They have traded above net asset value (NAV) 94% of the time the last three years and they are currently at a 2% or 3% discount so it’s a good time to get in if you want the manager and the sector.
Scott added that TCP Capital, which owns the loans of 87 individual companies, maintains dividend coverage at a more-than-reasonable 150%, and it holds 97% first lien loans which are “generally the safest loans out there.”
Scott is also positive on shares of the Nuveen Investment Quality Municipal Fund (NQM) , which are down 1.5% year to date and sports a 6.7% yield. The closed end fund is currently trading at a 6% discount to its net asset value.
“It’s net asset value has beaten its peers on a one-year basis, so it’s doing well,” said Scott. “It’s discount is right in line with peers plus it has 100% of its dividend covered from earnings.”
The Tortoise MLP Fund (NTG) has seen its shares drop over 37% this year due to problems in the energy sector. Nevertheless, Scott said this is a good time to step in because the fund has been trading better than its peer group and will outperform once the sector turns.
“You don’t pay taxes on the yield until you sell the investment. It’s very tax beneficial,” said Scott. “And I don’t think energy will be this low forever.”
Finally, Scott is a fan of the BlackRock Global Opportunities Equity Trust (BOE) which has seen its net asset value drop almost 1% so far in 2015. The covered call closed end fund is trading at an 11% discount to its NAV and pays a 9% yield.
“You’ve got that option writing which takes the volatility out,” said Scott.
BDCs have had a rough 12 months with many investors wondering if the sector is broken. The 43 debt-focused BDCs ended October 7, 2015 at an average -13.9% discount, after healthy +7% average rebound from the -20%+ discount lows seen in recent weeks. This is still very far from their 10 year average discount of only -0.41%. Upon further review, over the last ten years BDCs ended each year at a premium five times with an average +12.4%; while they ended the year at discounts five times with an average of -11.8%. If you exclude the 2008 financial crisis (not a common event) the average discount is -6.6%. The debt BDC sector currently has an average yield of 11.2%, or almost 3% income a quarter.
When investors see BDC yields, many think the portfolio must just be “junk bond like” exposure. CEFA backs out discounts and accounts for leverage to get a sense of what the portfolio manager has to do to hit the board of director’s dividend policy. We call this Leverage Adjusted NAV Yield. For debt BDCs it is currently 6.8% and, for comparison, the average taxable bond CEF has a Lev Adj NAV yield of 5.8%; only 1% lower than BDCs. We think this shows BDC portfolios are not as risky as some fear. Read more…
John Cole Scott, CEF Advisors
We’ve had, I think, two maybe three IPOs so far in the sector. We have another one that comes out this week, for the closed-end fund sector… And what I see, one or two closed-end fund IPOs a month is a natural, healthy process, because this is something where you want to have fund sponsors and syndicate desks get together and get the best ideas, just not every idea, out there. And the market’s going to allow that to adapt over time.
So I can opine that someday in the future closed-end funds may not be sold on the IPO with a stated yield. It might just be a great manager with a great idea, and you want to be there, because of that, remember, the fixed capitalization of a closed-end fund and that daily investor liquidity that you don’t get with other fixed-capital products.
Do you see any changes ahead possibly in the IPO structure, in the way fund companies launch new funds?
Yes, so we’ve seen a couple of things in the last couple of months, some of the new funds. We saw last fall, the first equity closed-end fund with a term provision, which means it will liquidate at net asset value 15 years out unless shareholders vote not to have that happen. So that helps protect long-term investors of pervasive discounts.
View Interview: http://investius.com/2015/08/24/cef-ipo-perspective/