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CEFA’s First Quarter CEF/BDC Research Call and Outlook: (Webinar Replay, Slides and Transcription Links)

by on April 14, 2015

2015-0413-CEFOutlook ThumbnailFor those that were not able to attend our Quarterly Research Call on April 13, 2015, we have the replay link and slides in PDF format below. This quarter we covered The Closed-End Fund Universe, both traditional CEFs and Business Development Companies (BDCs).

We are excited to offer coverage of BDCs alongside our coverage of Traditional closed-end funds. We produce 165 data points on traditional CEFs and 100 on BDCs in our weekly CEF Universe data.

GotoWebinar has a new feature that allows us to load the replay to their website, it can be accessed though the following link (The audio starts about the 10 second point):

If you have any issue with this format, please let us know.

Slides from the presentation can be downloaded in PDF format using the following

If you have any questions about the session or replay links please email or call us (800) 356-3508.

The transcription follows with slide notations: A PDF version is available [Click Here] or

JCS:  Good afternoon, John Cole Scott with Closed-End Fund Advisors. You have logged into our quarterly closed-end fund and business development research call on April 13, 2015 covering 1Q15 for CEFs and BDCs with our 2015 Outlook.

Slide #2: This is the same disclosure slide reviews for many quarters in a row. It shouldn’t be a big surprise to anyone who is licensed and in our business. It is interesting, I check this stat out every single time that we run this presentation. We have folks who have registered from over 30 different states for this session, and over 40% of the people that registered for this session are first time attendees. I always like to go over this one slide to give you an idea of who we are and what we are in case you are a new business and you work in the closed-end fund or business development space.

Slide #3: We are a registered investment advisory firm that does investment management work through nine discretionary portfolio models. We do research in the closed-end fund space and we sell/produce data. We have had a data service for six years and we’ll cross the three year mark soon for internally collected data. We are an independent company and we’re a fee only. We’re not a broker dealer. There are no commissions involved in our work, and we’re a family owned business.

We’re best known going back into the late ‘80s for the Scott Letter Closed-End Fund Report. Brought it back to digital life in spring of 2001 when I joined the firm. It’s more of a journalistic style interview with closed-end fund managers. If you haven’t caught the most recent issue, you can sign up for the Scott Letter on our website. It was an interview with Nuveen’s real asset funds, both the JRI fund and DRA, it’s the same manager.

We also in the last six months have picked up a relationship with a UIT provider named Smart Trust up in New Jersey. I’ve been working with them on a BDC, Business Development Company, UIT that’s available through the Schwab, Fidelity, TD Ameritrade, and through many independent financial advisors. We have our closed-end fund and BDC news and SEC filing alert system that powers our CEF Universe data. It helps us do our job. At a conference, somebody asked if they could buy it. I thought up a price of $2 a week, so you can on our website, if you choose to, and there is a trial.

The main service we offer for people who don’t want to hire us, either for project work or for asset management, is our weekly data project that’s about 165 data points on regular closed-end funds, over 100 on BDCs, and there’s a list of all those data points on that page of our website. We do some periodic consulting with institutional investors and closed-end fund sponsors in the space. I was an early adopter of LinkedIn and have watched it grow tremendously through my career, and we started the closed-end fund network there back in the fourth quarter of 2008 when we were trying everything possible to grow our business and to support the sector. There’s our website.

Again, we’re 25 years old, almost 26, it actually just turned 26 last week. So the closed-end fund sector, again, we’re going to go a little faster through some of the data slides, leave a little more time for some comparative remarks on the sectors and how it looks because it does appear rates are going up this year and that is a very pressing concern as many of you, as I mentioned, are registered. So all the slides you’ve ever expected and a few new ones will be here but will be a little less work on some of the slides because you can catch them later, and feel free to email those questions, and we can always post comments or follow up with people as a group afterwards.

Slide #4: There are 567 traditional closed-end funds. 53 business development company funds which are very similar in structure to closed-end funds, a couple of differences, they leverage a little bit differently, obviously their investments are a little bit different, and of course they trade and file the SEC differently. We lost two US equity funds, one non US equity, one taxable bond and we gained two debt focused BDCs. Technically one was fourth quarter but it was a RIC that converted to a BDC that most people missed, we caught it this quarter as did some other data providers, and have added it to our universe.

The universe headed right under $296 billion dollars in assets, and again it’s just slightly lower than the year end but the break downs are here for those who like to have data on the topic. If you happen to look at the ICI stats, they predict stats well after we do. They do include preferred shares for traditional closed-end funds and they do not show data on BDCs. Otherwise their data is pretty similar.

Slide #5: This is a part of the overview page for the PDF version of our weekly universe file. I like it because it answers some of the simple questions of … for the major groups, where are our discounts? Where is yield, dividend changes, liquidity, institutional ownership? I’m not really going to cover a lot here because we’re going to go into the important pieces later on but this is just a nice snapshot of the universe of traditional closed-end funds and BDCs. It will be slide number 5 in the PDF file after this session.

Slide #6: When we look at this sector, and I had this last quarter, I really liked it, I think it was an idea I saw in some of RiverNorth’s presentations. Looking at the percentage of funds at discounts and premiums, I’ll tell you we’re going to be adding … it didn’t happen for this quarter but for next quarter, some perspective with this slide on the historical relationship of this data.  You can see the equity closed-end funds, almost 9 out of 10 were at discounts, and 7 out of 10 had a positive net asset value performance, and just under that had a positive market price total return performance through the first quarter. Now remember, when we do total return performance, we’re adding dividends back into the price of the funds. So some of the larger dividend paying funds, 8-10% plus for some of these funds, obviously you couldn’t have a market price that’s lower, even by a couple percent, and still have a positive total return for the sector.

When I look at this, what really speaks to me is that, again, there are still about a quarter BDCs at premiums. The highest of the groupings, there are still a good number of BDCs that we expect to continue to trade above book value or net asset value because of good loans, good performance, and shareholder friendly activity. Just reminding people that you can’t get the business development company or the venture debt focus anywhere else, and the structure allows permanent capital for the managers and yet trading liquidity for the investors and you don’t have to do a ton of paperwork. It’s literally a trade like any other stock through any other custodian.

So these numbers aren’t terribly off. All I can say is muni bonds and bonds general did better during this sector. A lot of equity sector funds like energy exposure just didn’t have amazing performance during the quarter. We’ll have actual performance numbers later. This just gives a sense of the trends of premiums, discounts and positive versus negative performance.

Slide #7: One of the most boring charts we’ve had for this and my entire use of it over the years. All the yieldy parts are trading in that five to six and a half range for discounts. So I just say that’s one of the most boring things we’ve seen, equity BDCs have narrowed a little bit but still are a structure that’s very well on the totem pole in valuations.

Slide #8: We were able to get some back data in this for the BDCs. If you saw last quarter’s slide, the BDC, only about half of this covered. To get a sense, we’ve added the pink line which gives you the BDC average over the life of this chart. This is effectively, when we started our traditional closed-end fund data work, the light grey line is for the average closed-end funds. We can see that we’re historically at discounts over that three year period.

I think BDCs have just been coming off some pressures of 2012 when this discharge started but we saw that they experienced on average over par value for 2013 and for most of 2014. We see a nice jump up. Basically it happened January 16th if you were watching, right before the earning season started for BDCs, and they’ve jumped up and they’ve drifted down a little bit but I think are looking to make their next leg up before the next round of earnings. The average discount right now is about 7% for a closed-end fund or BDC.

Slide #9: Sometimes the longer charts are harder to see the movement, so we always like to include a one year chart to have more sense of the data for you. But again, like I said, relatively boring outside of BDCs which got very cheap in December/January, have recovered mostly, and I think have a good chance to recover more later this year.

Slide #10: Liquidity – not a big change, 80% trade over $250,000 a day. It just reminds us to be more thoughtful when you’re trading and why billion dollar firms don’t easily do work in this space.

Slide #11: BDC’s liquidity is much higher. They tend to come out and just have more trading around them which is helpful to become a shareholder in them and also BDCs, we think that there are two kinds of BDC strategies in the BDC sector, one is just picking good management, good prices and experiencing the sector, and there’s also a planned venture of an activities when you have a good, good manager at a small to modest premium, does a secondary, drops two to four percent, a nice way to get in with a couple months’ worth of extra dividend and alpha.

Sometimes it’s because of bad news and the bad news is more of a temporary bad news than a permanent bad news. It’s a good chance when people get really annoyed with the BDC or they go to very wide discounts to ride that discount capture going forward. We have the commentary later on BDCs and how we recommend approaching them more philosophically.

Slide #12: Volume trends, again, a lot of data. The main thing here is that most trends were down first quarter 15 versus fourth quarter 2014. The only difference was that state muni bond funds, the lowest level as a whole, but they actually had small growth in the quarter, I think, as investors were thinking about tax time and they were typically in New York and California and kind of stuck in those neighborhoods of investment opportunities.

Slide #13: This is a slide we’ve shown. It doesn’t have anything new on it. It just reminds me to talk about closed-end fund trading a little bit. People say be very careful about market orders, and I would generally agree, most people should be very careful about market orders but we’re able to, between trading relationships we have, and there are different groups that are better for different style firms, we’re not a hedge fund, we don’t short, we don’t do prime brokerage. If those make any sense to you, then you may not use the same traders as we do. We found those work better for long only separately managed account and being focused at TD Ameritrade as our primary custodian that work well with what they require from outside traders.

We’ve been able to do days where we’ll be seven times the average trade volume and we’ll get 80-90% of the stock traded that day and we’ll get within half a cent of volume weighted average price. So when we talk about, “Oh, this thing only trades 20,000 shares a day or 50,000 shares a day. I can’t buy it.” There are options. If you’re in the need a referral to someone, I’d be happy … I’ve got a short list of four or five traders that are good in the space. I work with two of them currently on an active basis. So it’s easier to trade these things than you think based on some of the panels and conversations I hear in the sector that I would find is a little bit of a misconception. In this case, it’s to say this is PCI a well-known fund, not a recommendation. They bought 25% of the average daily volume on the offer between the bid and the ask. It’s a very normal think for them.

Slide #14: Closed-end funds are yieldy. This is hopefully not your first time in the neighborhood but it’s hard to yield under 5, which drives investors to the sector and then sometimes they make mistakes because they don’t understand distributions aren’t coupon payments from bonds. I’d argue there are scenarios where we’re in Virginia where there are two muni bond funds … one by BlackRock, one by Nuveen. The Nuveen one’s 10 times bigger. I would argue that they’re 90 plus percent the same type of leverage, cost, bond allocation, all kind of the pertinent fundamental data, and yet there’s an 18-19% spread between the two.

Again, in just chatting with someone from the industry, I was like, “I wonder if there are financial advisors out there who just don’t know there’s a net asset value and just buy it because they’ve heard of BlackRock and maybe they don’t know Nuveen as well.” That happens in this space, inefficiency in those sectors, but again if you’re not yielding five, unless you’re a muni bond fund and you’re not leverage, it’s a rare occurrence in the closed-end fund world.

Slide #15: BDCs, if you’re not yielding eight, it’s a rare occurrence. There are a couple of great BDCs that yield in the sevens that are debt focused but it’s very easy right now to blend. Sector average is about 9.7%. Blending to the high nines/low tens, it depends on what you’re doing in the sector as a reoccurring consistent dividend yield in the business development company neighborhood. Again, if you’re over 10, there are some good funds over 10. We probably should add a 12 or 15 because there are some funds yielding over 15. Some of those funds I think the market is anticipating a dividend reduction.

I’d say normal markets, and we’re still not in a normal market for BDCs, but the higher yielding BDCs yield between 11 in high change and 12 in high change. If a BDC is yielding more than that, people either are expecting a dividend cut or their just either very frustrated or annoyed with management, and they’re protecting themselves with discounts. So we don’t know where dividends are going to go in those cases. It could just be people selling out and acquiring more of a discount, to buy access to that portfolio, but anything over 13, I’d argue should not be here long term. It will either go away because of discount narrowing or dividend reductions.

Slide #16: The income only yield for closed-end funds, I like because it’s the hardest one to mess around with. You can take gains some years versus other years, short term, long term, return of capital which is common in many regular closed-end funds, especially in this sector equity funds. Sometimes it’s just part of the expectations. Sometimes it’s trying to force a dividend payment too high. You avoid all of that with this chart and really just get a sense of the trends there. Again, mostly very boring trends, you can tell that munis which is like the purple, have been coasting down as net asset values have performed well. There have been some dividend changes as well in that sector, some increases but more decreases than increases.

Taxable bond funds have drifted down and have been actually trading a little bit higher than usual historically because I think people are really fearful about rising interest rates. We’ll get into some of that data later. Then BDCs I’d say have come off their higher yielding periods of time earlier this quarter/end of last quarter but are still, I think … again, for the right fund, right portfolio, the right mix.

Slide #17: Relative UNII, we show it for taxable and for muni bond funds. It’s pure and it’s more … a bigger deal for tax free municipal bond funds. What I’d like to say here is we had a note we wrote over a year ago at this point, looking at dividend changes in the sector and how the uni balance and do dividend cuts actually hurt performance? We actually found that the funds that didn’t cut their dividends had better total return. It wasn’t just like, “Oh, we don’t have the yield, the net asset value, it will outperform if we don’t pay this out.”

We did find that drawing from muni balances, this is historically a risk factor. But what I’ll say is that UNII is undistributed net investment income. It’s kind of like the cushion or the reserve but it’s not perfect because there are from accounting regulations. So just by seeing 10 cents per share of UNII on a muni bond fund’s balance sheet doesn’t mean they actually have 10 cents they could pay you out. Normal levels are 15% or so or just below that now. We saw the funds, if you look at this chart, that big drop down middle of the chart, they actually pulled heavily from the uni balances in 2013 when the bond markets got clobbered. We saw them build back up their UNII going into just about a year ago. Then there’s been a very slow erosion of UNII.

What that tells me is that they’re not in big amounts but muni bond funds as a whole, and this is a hundred neighborhood, this is not a specific one sponsor, it’s a whole neighborhood, is an aggregate pulling from uni to make distribution payments, which is why as you’ll see later, I’m not surprised, there’s been a decent number of dividend cuts in the sector, there were some increases, and why I think this data point is important, because if you’re pulling from uni consistently, you’re not earning the dividend, or you wouldn’t need to pull from that uni consistently.

The UNII is there to be a cushion. It is meant to be used from time to time but I would argue that long pulls, like we saw, deep long pulls … not long but deep pulls in 2013 were more significant of a risk factor than they are in 2015 where it’s been a slow slide. If you can tell, this slide is actually slowing its pull back, and I’d argue that while this is not completely positive, it’s not unexpected and it’s typical for this environment.  What that means is that it’s more likely to continue to see dividend changes for funds when the earnings don’t meet the policy. This will go back to some “crazy thinking” in the closed-end fund world, that dividends should meet earnings over time, and most of the longer term sponsors have gotten very receptive to shareholders monitoring this data and making decisions that reward, which means narrow discounts or premiums, for funds that have good dividend policies, and penalizing funds with deeper discounts that there is uncertainty.

I did run some interesting stats on dividends. I wrote down, so it’s not actually in the slides, but 92% of closed-end funds pay monthly or quarterly. 65% of those funds, or 422 in the past year, have changed their dividend policy. It’s been increases and decreases as we’ll see later when I have that data but two thirds essentially changed in the year and almost half (46%) have changed their policy by either increasing or decreasing in the last six months.

As you think about closed-end funds, people often buy on discounts and yield. Those are important pieces of the puzzle but what I’d argue is the distributions or the board’s current policy with input from the portfolio management team or the analyst, is that they change over time. They change, so don’t expect dividends. Dividends are not coupon payments like bonds. Remember, every closed-end fund, whether it buys unleveraged municipal bonds or whether it buys equity in the Thai stock market, they’re all individual equities that trade on an exchange in the US, and that derive their value from either equities or bonds or sometimes a mix of the two. So they are not bonds themselves.

Slide #18: Traditional bond funds, it’s much harder to maintain the large UNII balance. Here I’d say that being a par is normal for this sector. While there are concerns with the discounts being wider here and investors are getting a higher distribution for access to this sector, having this as a stable line for the last six months or so, and was coming off an up-trend, I’d argue is actually very positive for the overall taxable bond closed-end fund sector.

All right, let’s do a poll. I know that while I’m doing the poll you can’t see it, so I’ll just spend about 10 seconds giving people a chance to click this. This will help me for anyone that didn’t … I haven’t had a chance to review all the information by people when they signed up. I’ll have another reminder of what you guys actually care about, so I’ll do my best to cover it during the session, and we’ll close the poll in 3 – 2 – 1, … I appreciate that.

Slide #19: Earnings coverage is not a new phenomenon for closed-end funds. It looks at the earnings per share and it looks at the dividend policy and it gives you that fractional relationship. Remember, earnings coverage can go up or down based on two things happening: earnings going up or down or the dividend level going up or down. When people call me up or shoot me an email and say, “Hey, it’s great. X, Y, Z sector, they’re earnings coverage is higher,” bond funds it’s more important than equity funds because equities are capital appreciation vehicles that often have a yield component and bond funds are yield vehicles that you try not to lose money on them.

What we try to do is look at that relationship and realize that if earnings coverage is going up, you hope it’s because earnings are going up and not yield going down, which is why it’s important to track both earnings for closed-end funds and for the distribution of the closed-end funds. What I like here is that Debt-BDCs have trended up recently. A slight pull back but have trended up as a whole. I like that munis have been pretty stable. There could have been a very boring line, like 96-99 is their normal range, because those managers of those funds typically align their distributions well and actively with their policy, which is why we don’t see a lot of changes in the sector.

Slide #20: Destructive return in capital, I’ll say it’s a really hard number when there’s been a one year of some sector having a really bad … like a year ago, this looked really bad for muni bond funds. Right now when we look at it, it looked really bad for MLP funds which have had a bad six months.

Slide #21: But our goal here with the data, when we worked with one of our institutional clients, was trying to size up NAV performance and NAV yield. If you don’t have the net asset value total return fueling the dividend and there’s return in capital, that return in capital couldn’t just be argued as pass through like it would be traditionally for part of an equity income as tax sensitive or a covered call option income fund or MLP fund. Actually truly detrimental and erosive and destructive return in capital, which usually would lead to eroding principle, either a dividend change or having to raise more capital, which happens in some sectors.

Slide #22: The data is here because we show it and I want to make sure it’s here for people to follow it but I give you a caveat that almost everything here is an MLP fund, that’s the 10 worst, and it’s not because I would say that most of them have wrong dividend policy though there were some non-midstream MLP funds this quarter or last quarter that cut the distributions by over 50% because they actually, their dividends were tied to the price of oil, versus mid-stream MLP funds, which are “toll collectors”. While there’s some exposure to it, it’s really … we’ve been seeing aggregate dividend increases for the majority of MLP funds this year, as you expect dividend increases to be between one and three percent a year for midstream MLP investment. So the data is here. I’m not going to dwell on it because it’s not as timely as it can be in some time periods.

Slide #23: The muni market is a third of all closed-end funds. About 40% of the people say that’s one of the reasons they’re here today, so definitely want to address that. They’re live on the call versus just registered. Right now discounts I’d argue are cheap. They’re not crazy cheap like fourth quarter 2013 or in summer of 2013 but they are also well below … and we only have rights to data for 2012 but if you were able to see like Morningstar data or other data that goes back for a decade, -3% is the average discount for municipal closed-end funds. Right now, the average for three years has been -4% and we’re actually at -6%. I would say that we’re about 3% wider than what’s normal. I think that that’s justified because these are generally duration focused funds and interest rates are looking to rise at some point this year.

But we have done some work. The discount is protective. The manager does have fixed capital. The leverage costs are getting really good. I mean we talked to Nuveen and BlackRock and other fund sponsors about their leverage and these groups have teams that focus on leverage daily, decide to make leverage adjustments whether it’s a type of leverage, fixed or variable, what makes sense for the different focus of the different types of fund, whether their taxable bond or tax free bond or equity type funds. I’ll tell you that they understand that they’re going to try to keep costs low and be mindful or what happens when rates rise.

But even through rising rates … we think everything yieldy, in my opinion, will go down at some point when rates go up because people will all assume rates go up, prices have to go down. It’s that seesaw, if you took the Series 7 brokerage test, in that we all had to study for and learning when prices go up for bonds, yield goes down. When yields go up, prices go down.

People tend to apply that same measurement for REITs and utilities and other things. What’s interesting is that a lot of the closed-end funds have thought about this and there are a good number of funds that have low duration or that have variable components to their investments like the senior loan tradition of closed-end funds, like the BDCs, the debt-BDCs are traditionally I think about 55%-60% variable loans, and I would expect that to shift a little higher during this year as we get close to that date. Then even look at high yield or convertibles which have that equity upside, so even though their yields can go down for high yield bond funds during rising rate environment, the bonds themselves actually perform very well because the market’s typically do well through a positive environment. We’ve discussed this.

Again, earnings coverage is strong, 6 discounts, duration is a little bit lower than it was the last four quarters, and the net asset value volatility … the market price volatility have come down. Check this slide out from a year or two ago. It was a much different animal. I don’t see any specific questions here.

Slide #24: This is the UNII trend. It’s more sensitive here after we break out state and national funds. State funds don’t have this much competition, so they tend to just have less changes because there’s not as much … it’s usually less liquidity there so it’s harder to change your mind, so there’s more nimble work done in the national funds because they’re more competing for trades and dollars and interest in the sector.

Slide #25: When you think about … it’s tax time. People hopefully are filing this week or doing an extension like a lot of our folks do. Recently, I was in California for work. I’ll be in New York and New Jersey the next couple of weeks. Taxes suck in those environments. Looking at tax equivalent yields, what’s possible? Just to compare what’s out there. MUB is an ETF in the space. I really don’t know anything about it except for it’s a muni bond ETF. It yields 2.54 as of quarter-end and based on federal taxes.

We do a lot of work in New York MUB’s TEY is 4.4-4.6 tax equivalent yield to have that investment. We then like to kind of remind people what the benefits or what the nature of a closed-end fund in the space, municipal bond space is. You can’t buy the net asset value unleveraged portfolio but if you did that would be a 4.10 for the average hundred funds in that neighborhood.

If you could buy that because of the longer focused nature of that portfolio because of looking back into a more historical portfolio from yesteryear and that permanent capital that allows managers to be more thoughtful about not worrying about where the market is in the short term, you’re going to get a much higher taxable yield. Then if you leverage it which is NAV yield, you’re going to jump up another two and change percent. Then if there’s a small discount, this was a lot better a year ago, but basically a 10% tax-equivalent yield.

What that means is that if you have a thing yielding 10%, and a muni bond yielding 5.75%, and you’re in a relatively high tax bracket, then there’s a really hard decision that if you’re worried about markets crashing, which I don’t see but is possible, and if you’re worried about having investment grade bond focus, I’d argue munis are very attractive. But they’re not attractive for the whole portfolio, they’re only attractive for the part of it where you want to have an equity like hedge and you want to have a taxable environment, you want to avoid paying taxes on the yield. Hopefully that helps. This slide a lot of people have enjoyed.

Slide #26: Press releases, again, scanning this, we do track it. People like it. I don’t see a lot of significant changes to what’s going on. Really because it was in the average per quarter since 2003 when we added this slide, we look at it versus fourth quarter, there are not a lot of changes. Tender offers are down a little bit but I think those are more likely … tender offers are down a little bit, that’s the only thing I see.

Slide #27: We have the normal changes of how many changes there were during the quarter which is important, and then we did for the full 2014 we’ll be adding this life to date for 2014, possibly deeper in the future, so you can get a sense of what’s normal. But again, I say nine out of that ten dividends that are in the quarter are going to stay the same. It’s really that 10% that tend to change every quarter which drives an average 40% a year of changes. Those changes you might not see as dramatic but the cuts outweighed the increases, so being in the thing you thought was paying the market yield on your screen and then it doesn’t, 10% less income on average, is not fun. 7% increases are wonderful.

We look at the smaller changes versus bigger changes. Again, I just say they’re about the same on both sides. The trends are continually going to happen. They are similar to where they were last year and I don’t expect them to stop or change dramatically this year.

Slide #28: Graph of changes made by sector. I’ll just comment that taxable bond funds were the biggest aggregate decreases but also had significant increases, especially equity funds were the biggest aggregate increases which a lot of those were MLP funds, if you can believe it, which is a sector that people feel very painful towards, price wise have actually been increasing their cents per share, and then at wider discounts it’s an even bigger number than when they trade at their normal levels. But these changes, those are the two things of note. Again, municipal bond funds are not the biggest contender here in the cuts but obviously are significant cuts going forward, last quarter.

Slide #29: Performance, just noting where the negative was with red. The fourth quarter performance was negative for a lot of the non US equity space and we really saw positive performance throughout the entire closed-end fund sector. NAV was 0.1% on average for specialty funds, obviously a very diverse community of closed-end funds, but market prices were up almost 1% to that sector which was narrowing discounts. Global funds outperformed as they had a really bad 2014. It’s not surprising. After a really bad period of time, closed-end funds, that sector at some point turns and outperforms its peers.

The US equity closed-end funds traditionally lag. They don’t go down as much. They don’t go up as much. They’re straight like SB500 and that’s because there are other things in there than pure equity and pure growth equity. They just tend to be a little more boring version of equity exposure. They don’t go up as much but they generally don’t go down as much net asset value wise. Obviously when discounts widen dramatically, the closed-end funds should underperform the indices because there’s no bifurcation of analysis for this one. With closed-end funds you have a net asset value which is what it’s worth, and then what the market price was perceived to be worth. Long term you care about NAV, growth, NAV performance but getting that at the right market price is a great way to add alpha or shoot yourself in the foot if you don’t get it right.

Slide #30: Activist Update, I could probably send an hour on this. It’s been proven to be a big year in the sector across the normal neighborhood with some discounts. We’ve seen more focus in the New York muni space from Bulldog. They didn’t actually make this list but Bulldog just recently had a filing for an equity BDC, BDCV, they have 9% of it and I think they have some plans for it. We look at other areas. There’s a proxy contest in the PIMCO PCI that I believe just ended or will end soon. It’s going to be a big year. I think the players are out there looking to find some alpha, and I think 2014 was a very quiet year for activist. Their teams are relatively quiet outside of some of the bond sectors and I think we’re going to see a lot coming up in the next 90 days in the activist neighborhood.

Again, when you think about what an activist can do, they need some liquidity, maybe not as much as you think because they usually have great traders. They generally like to hedge out net asset value risk so that they’re truly looking to narrow the discount as their alpha, and they generally focus on that. Look for funds that don’t have blocking, large internal ownership or other ownership that generally votes with management or is hard for them to work with. Again, not too small because usually then it’s too small to grow money on, but generally not too big because they have to deploy the assets to get 9% to really solve ordinary discounts. So kind of that mid-sized fund with those issues are the targets that pop up from time to time.

Slide #31: I keep waiting for the chart to get exciting, every quarter we do it. It’s slowly increasing. Institution ownership, there’s as whole, except non US equity funds are down, but the rest are pretty much up trends. So just slowly the aggregate exposure is going up. There were more decreases in the holdings during the quarter than increases for the activist positions but still you can see there were a lot of changes. While it’s not a lot to really report on yet, I’ll tell you there are a lot of changes in the percentage ownership of these funds as they’re looking to prepare for something or capitalize on something that they’ve been involved with or try to be involved with in the sector. Again, wish this chart was more exciting but it’s not.

Slide #32: IPOs, one IPO The Calamos fund that just happened at the end of March, another BDC, but the side was solid above the 10 year average. It’s nice to see one come out. Again, like I said, we had a good chat with Wells Fargo talking about the 2015 IPO possibilities. Some interesting things happened in that market. It looks like RiverNorth is coming. I haven’t talked to them but I heard from other sources that they are looking to launch their closed-end fund of closed-end funds, to go and compete with FOF in that market of what’s possible. We see other funds looking at a couple of provisions to make it easier to work in the market, and that would be just share buy back in place which helps support net asset value and the stock price, because if you buy it at a discount, if it goes to discount, it’s accretive to net asset value.

Looking to have actually more support after the 45 day traditional investment banking support, so going from day 46 to 270. I told them that was interesting because our researcher said you can get the best pricing for a closed-end fund after the IPO between six and nine months, and nine months is kind of the average best entry point, which is right at that 270 day point which they’re looking to support with.  Then looking to do some term, so they’re the first equity term fund, the Miller Howard Equity Fund last year end of fourth quarter, and we’re seeing more terms offered to give people a chance to get out at net asset value at some point in the future.

The new thing that I had heard before, and again, I’ve spoken to a couple of fund sponsors: some like it, some don’t, the thought of if net asset value grows, there’ll be a special dividend so that you’re rewarded as a shareholder independent of the market price, with a special dividend that will generally be paid in stocks. It’s not planned for but, again, if NAV goes up 10 cents, you should get rewarded for that independent of the market price. I haven’t seen that pulled the trigger on yet but keep your eyes out for that, that’s probably one of our newest things for IPOs.

Slide #33: BDCs, the big news was Goldman Sachs launched a BDC. They had a private BDC. They had a liquidity event for I think $800 million dollar fund in total. They did an equity raise to $120 I believe, and it’s nice to see another BDC kind of coming on the backs of what’s been a challenging six months for the sector to be trading at the levels it has been.

We do think that we’ll get more BDCs coming out later this year but then here are those notes on CCD came out at $25 a share end of quarter, just a couple days later just above that. I checked it before we started the session, it’s a couple of cents above that as of close of today, trading right around a little over a five premium versus net asset value because of the low that was involved. But as I was saying, it’s very early, the stock’s not yet trading on its own.

Slide #34: The Goldman Sachs BDC, again, a larger fund but the IPO part was $120 million. It’s currently a six premium and actually it’s about 50 cents or so higher than quarter-end. It’s been trading well but we’ll now more. Again, I’d argue, we’ll know more … I like the seven month mark because you have a semi-annual report and you’re typically well past the support of the  investment banking market to see how the thing is actually going to trade going forward.

Slide #35: That brings us to the recent IPOs and we bring this because some people just like to be reminded of this list. This is the list that’s in our data. If you’re looking for extra alpha, if you like the manager, the one’s where the discount is I’d say wider than 8 or 9 and the current price versus IPO price is wider than 10%, there’s three on this list that make that criteria, if you want to be in a BDC or that sector, it’s a potentially a good entry point.

I’m not making a recommendation but if you want to be in MLPs, Debt-BDCs or technology health science exposure, the GGZ, the ABDC and the BST are attractive in their price point. BST is the newer of all of those but has potentially some more discount to go to, though that sector net asset value can trump discount changes. It depends on your outlook, I would argue for the sector because while we all like discounts, if the net asset value goes up 10% and the discount widens 1%, you technically haven’t made any money, you’ve gotten a worse entry point. But that’s the list. Nothing egregious outside of DSE, that’s pretty egregious, but they’re trading right now at a pretty good level but the price did get slammed pretty hard.

Slide #36: Correlation data, all I’ll say is the biggest change in correlation was muni bond funds but still not to normal levels but just to far more normal levels. Correlation trading off a little bit for everything else.

Slide #37: I much prefer that screen graphically here for almost three years. You can get a sense of what the peak and valley values are.

People don’t always know this but these are the 90 day average of the market price net asset value correlation. The question is why is this important? Why do I try this data and look at it for our work as a firm? We look at it because we want to know is the discount narrowing or widening, and is it because of what’s going on in the sector of the fund or because of just investor sentiment dislocating. What we’re looking for is when discounts are trending higher or lower and the correlation is apexing or going into a valley. We want to see when it turns on the high or turns on the bottom while that other piece is happening, and that suggests to us when we think there’s a chance to … if we’re long, to narrow some discount or if we’re not in, wait for that widening of discount to help us with our entry point for a sector.

We have this data on a fund-by-fund-by-phone level but obviously it’s a lot to look at so we just do the major groups because, again, the group is the least homogenous, especially equity funds because you’re bucketing MLP fund with covered call funds and it’s just the nature of that sector.

Slide #38: Volatility is down for the bond funds as a whole. It’s normal for the equity funds. It’s still a little high for BDCs but equity … that’s a normal number, debt-BDCs are a little higher than normal. That’s just the one year standard deviation. We’re hoping to have, by next quarter, some more historical data in this chart. That would be helpful for the people.

Slide #39: I’ve covered some of my thoughts but I’ll just run through the major groups of closed-end funds and tell you what I think is going to happen for 2015 based on my opinion, based on the data, based on my biases that are in the market.

US equity funds, again, I like discounts, I like NAV performance, I’m looking for managers that give me both. I’m looking to just be there and I think there are some upside there but that it’s not easy money at this point. I think that the market can go up, I just don’t see another reason for them to go up double digits in 2015. They’re already up well last year, and a very strong 2013.

Non US equity funds I think still have some discount narrowing to go. I think there’s still some time to be a contrarian there. People are still annoyed with some of the European and Asian markets, and the commodity focus in some of these markets. I think there is upside from discounts narrowing and some net asset value performance on top of that. I think that there will be higher total return in 2015 for the global funds than the US equity funds just because it’s easier to make money when you had a horrible last year, and you did not have a horrible last year for US equity. Not the year before but still not a horrible year.

Specialty equity funds, I’ll focus primarily on a couple areas. I like the covered call sector because it’s liquid, pays you to wait, you generally get a third less volatility or Beta than S&P 500 which means if it has a huge year you’re not up as much but if it has a bad year you’re generally not down as much. Be thoughtful of discounts. Focus on net asset value performance, return in capital in the covered call funds or other equity income strategies that are US focused can be very helpful if you hold for over a year because it’s a tax deferred yield versus a short term capital gains income are hurting this year’s taxes.

MLP funds I think if in the midstream which is most in the sector. If you look at NAV performance, if you look at … I generally like deferred tax liability (DTL) though it’s a long term issue, I don’t really own things long enough to experience the deferred tax liability. I like the return in capital here and the yield is not hard to get to high 6s/low 7s in that space. People are still really concerned about the price of energy and its impact on MLPs. I’m not an expert on MLPs but have attended enough sessions and I’ve read enough articles that make me very comfortable to have it as a portion of my income portfolio where dividends should go up, where discounts are wide and where people are frustrated in this space which I think is where you want to be a contrarian investor in closed-end funds.

REITs, real assets, REITs had a really good year last year. I still like parts of that segment but it’s a little harder to love them when it’s almost 30% total return for the average fund in that sector. There are still some upsides there. I think the type of REIT you’re in is important and how those REITs will handle rising rates is important, which again, is why you’re in active management.

We did interview a real asset fund which is not a REIT. It’s a contractual reoccurring equity and bond investments. Nuveen has them. I really haven’t seen it anywhere else but we were curious on what the heck it was versus a REIT fund. There’s a 4,000 plus word interview if you sign up for the Scott Letter that will help answer that question for you. DRA just did a tender and a dividend increase, and it’s converting to a portfolio like JRI. They wouldn’t comment on it, but I wouldn’t be surprised, the way it’s going with the BlackRock and Nuveen’s of the world, that those funds might eventually merge. Again, they didn’t tell me that but just the data suggests it in my opinion.

Taxable bond funds. Here I think you want to be focused on the senior loan sector in an emerging market because the discounts are wide … they overweight the senior loan in an emerging market but that the discount is helpful there. High yield, I think it would perform fine over the long term. I just think that discounts are going to be wider for a while and there’s more up-gravity to other areas. But they’re not duration assets so I’m not as worried for that.

I’ve never been excited about mortgage bond funds, investment grade bond funds or government bond funds except global government bond funds and that’s in this space because I just feel they’re not the best use of the closed-end fund structure and they’re just not my favorite place but that is a personal bias there.

National muni bond funds, I covered it but I’d say be thoughtful about discounts, and use it for the longer pieces of your portfolio. Understand the net asset value is going to go down when rates go up for most of those funds but if you’re clipping a 6 plus yield what is your time horizon, don’t panic, sell, understand that if rates go up … Fitch has done some good work on it, if rates go up, how impact the average age duration muni bond fund. I’d say what’s really important for this is the pace of increases. They are quarter point moves every other meeting. It’s going to be a far better experience for bond investors than if it’s a 50 basis point move every meeting for some reason. That’s going to be a lot more painful.

Remember, we’ve seen yields recently go from 7 down to 5.8, which is what they did last time during the rising rate market because this has been a longer period of not rising, when rates do go up, bonds will get called or matured or traded away for investment reasons and replaced, and as rates start to go up you’ll eventually get to a point where the income is additive again to the distribution but still, I think there’s little aggregate risk in muni bond funds distribution wise, and that it’s 90% investment grade paper so it should be part of most investor’s taxable bond allocation.

States specific, just be willing to be more patient and know why you’re there. Outside of California and New York, I don’t know why you’d want to be in those funds. Debt focused BDCs, I think there are three groups here. There are the higher yielding ones that have had issues and that you’ve got discounts on and picked the better ones that are showing more favorable shareholder relations, so not doing stock below NAV.

Having made more favorable fee, some of the newer funds are coming out with better fee relationships that are more shareholder friendly but still, 20 discounts for experienced management, fixed leverage, variable loans, the discount kind of protects you but there’s a group of funds that are those deeper discounted, couple funds there still have dividend cuts in my opinion. There are those funds that are mid-discounts that I think are mostly energy beat-up, that I think the energy story hay weighed on them, which would be like Pennant Park and AINV Apollo, and we’d also bucket … those would be the ones with the biggest factor for … where I think the discounts are there because of the above average energy exposure which is 8% for the BDC space versus 16-17% for the high yield bond space.

I guess there are four groups technically. There are really high premium BDCs I just can’t own yet because I’m a closed-end fund investor and it’s just too hard to pay 30-40% above book value even though I like the management, like the portfolio. There are small premium funds. The small premium funds are the ones I’d say that are one premium up to 10, 12, 13 or thereabouts. It’s hard to go higher than in my opinion and they can come to market above NAV which is good, and make it more growth focused BDCs. Their yields are lower but they tend to be more shareholder friendly. They tend to have better fees.

We use all three and we want to be able to change our minds. In BDCs you can change your mind because BDCs are more liquid than other pieces. For the equity BDC sector, I’m going to say is very small outside of ACAS, which I don’t know what they’re going to do. There are some thoughts about unwinding some pieces of the portfolio but just a very small piece of the neighborhood.

Slide #40: This is a chart we’ve used for a couple of different quarters. The average total return and yield change for the major sectors, if you go to our blog and look for the story, I believe it was done in July 2014. I’m trying to remember when we wrote this article. But 97% of closed-end funds change their dividend policy during the rise of interest rates from ’04 to ’07. The key here is that dividends can go up or down but total return was positive for most funds. 94% of closed-end funds have positive total returns.

Granted that was a long period of time, so just making a little bit of money shouldn’t be the goal but if you stepped into a duration focused yieldy closed-end fund right before rates went up and then you got out right when rates stopped going up, this was that experience which isn’t particularly the worst experience but you should be able to time it better than this data point for the sector.

Slide #41: Now I’m going to make sure we covered everything you asked us at registration. Everything after that will be in the slides. I’ll mention it but this is based on the last piece of note. Discounts, four in change for Debt-BDCs, we’re focused on that versus equity BDCs. I do think that we’re going to see that get closer to aggregate to one or two discounts through the next earning season and potentially to a small premium by the end of the year.

Non traded BDCs impact on the public BDC market. Right now the public BDC market I believe is about $36 billion, it’s on that slide. The private BDC market is anticipated or estimated to be about $15 billion. We do expect to see BDCA, in the next 8-16 months, bring out their private BDC. I believe it closes next week potentially in the private stage and then it typically takes 9-18 months till they bring it to market. Obviously discount levels will impact that. There are some other private BDCs in the market. There’s Franklyn Squares two and three out there. I’d say it impacts it as in those private BDCs need, generally speaking, a public market to be the liquidity event for investors.

The major advantage of a private BDC or non-traded BDC is that you don’t see the net asset value or the market price every day. It doesn’t mean there isn’t one, and I’d argue there’s a good number, of options in the public debt-BDC sector now that you could own, it’s not hard to find a handful of 4-10 bend on your needs in your investment style, that are appropriate, that give you discounts the more yield, and you can change your mind and there’s no paperwork. It’s just a very transparent liquid version.

BDC trends, a couple things here, BDC loans in the last year, the loan … as in what the average yield they can get from the middle market loans has been trending higher that they’re able to tap into. So the loan market is getting better for them. I think that there are some loans done in 2012 and 2013 that will be tested in the next year or so for how well they were written for some of the investments. Energy effect on BDCs, I think are mostly overdone. Half exposure of high yield bonds, generally most of the stuff we focus on you’re getting half first lien, a quarter second lien. Recovery rates are higher for BDC and senior loans than high yield, so I think the discounts have been protecting you.

Then rankings. I tried to talk on that but rankings would be just thinking about shareholder friendly funds, deep discount funds versus those that are more portfolio discounts just from the sector. Then there’s that mid-to-small premium BDCs and the large premium BDCs. I know people who have made lots of money in the Hercules and the Main Street and TCAP. I just have personally … coming to this from a closed-end fund neighborhood, I like discounts, I like dividend stability and I like net asset value performance. I need all three really to make myself happy.

Discount trends, I think that they’re going to narrow for many of the sectors this year but I think they’re going to stay wide for the more duration focused ones. I don’t think munis will breach 5 discounts for a sustainable level, and they probably can easily go to a 7, 7.5 discount. They might go to a 7 or 8 when rates do finally go up. Again, I’d say discounts aren’t the only answer. Remember, the cost basis plus yield of your total return. Remember the net asset value performance, good leverage terms are helpful to get a better result.

Historical discounts, we had that for a while but equity funds, 8-10 discounts are normal for US/non US equity. Sector funds tend to trade more like a taxable bond neighborhood. Taxable bond fund sectors of them can go to premiums. Sectors have the most pervasive discounts typically. Some asked about the “most stable fund”. We have people ask about more than 50 different specific closed-end funds for this call, so I can’t really speak about specific ones easily just to be fair. UNII I covered early on.

Growth trends. I think that one of the biggest differences that I think people need to look at, with closed-end funds, is remember it’s a piece of your asset allocation for the sectors you’re going after. If you want high yield, senior loan, BDC, US equity, MLP, those sectors then a piece of it can be here and it’s hard to justify a narrow discount or a big premium. Sometimes you can but the discount helps you there.

We like the fundamental data. We do a lot of good work there. We try to for our clients but I’d say if you don’t have a ton of time or a ton of resources, the simple answer is discount versus peers and historical, that’s available for free at thanks to Nuveen, and net asset value performance versus peers, and index which you can get pretty well through cefconnect.

If the NAV is performing the way it should, if the discount is wider than it should be, it’s a good place to be. If NAV is lagging and discounts are narrow, it’s working the wrong direction because the risk is high. BDCs outside the US, we’ve heard of that but BDCs by definition had to be 70% “good assets” which are private or small capped US companies. The BDC market is essentially 99% plus US focused but I can see BDC-like structures outside the US over time, just like there’s closed-end funds and closed-end fund like structures outside the US if you’re in other markets. But if you’re a US listed thing, not yet but I’m sure if they can find a way to amend some of the regulations, it’s possible.

Dividend changes were hopefully covered well. PHK, all I’ll say is you know I don’t like big premiums. There was an article … I don’t know the author at all but I read on PHK, all I remember from the article, is argued why the yield should be going down for PHK and it did say he is short the stock. I don’t know if he’s covered it but look on Seeking Alpha if you want to read an in depth commentary on the dividend outlook. All I would say is I don’t short closed-end funds. I’m more of a long focused manager. Our clients really want us to be more of a long manager at this stage of my career. I don’t short it. It’s a painful stock to short if you’re wrong but I generally agree with his premise that I think the yield has a good chance to go down versus up.

Return in capital. I think the biggest thing here is not all bad. That if you just need to look at the dividend level … we look at net asset value adjusted yield without leverage to get a sense of what the manager has to hit to meet the board of director’s policy, and when that seems repeatable, sustainable, that’s a good thing. Then that environment, return in capital, is positive if held over a year because it’s tax deferred versus the higher tax pain you can get as a closed-end fund investor.

Should closed-end fund/bond funds be avoided if rates rise? I just think we should avoid panicking and selling when they do rise. Yields will go down. Discounts will widen. The key will be pick your spots, pick your managers and be willing to be tactical because everything … many things will move together, the correlation data will either get very highly correlated or very low correlated during that period of time, and you’ll want to be in that space at the right time and making changes. Do I think distributions would be maintained during that? No, there already are significant cuts across many of these sectors. There will be more cuts through rising rates because it’s going to take a while for the rising rates. They come from the rising rates. They are from the fact that the portfolio has to replace more aggregate investments at the newer increasing rates that are available, and it just takes time.

People wonder, “How can rates … given they get cut when rates go up, that’s the wrong answer.” I go, “Well, it’s because this is not a “today portfolio”, it’s a historical portfolio that takes time to grow and tweak.” Some managers have very high turnover and some managers have low turnover, so that won’t be an impact.

I try to cover this. I like all of these sectors for rising interest rates. I think that munis are definitely a credit decision and a hedge against equity and unknown problems but taxes continue to suck for most investors that deal with taxes regularly.

Leverage loan, I couldn’t tell the guy or gal, I didn’t look, was about CEFs or BDCs but leveraged loan funds I actually like a lot because I think they’re disliked by investors and that’s where we like to be. We’re a little contrarian income focused and tactical for where we can get discount narrowing. Leveraged and down market, we had a good chat with some of the folks at Nuveen about their leverage work and how they’re positioning their leverage.

Fitch does a great session on leverage regularly. If you can be at Capital Link next week, we’ll be talking about closed-end funds, some of the nuggets from this presentation. There’s a whole separate panel on leverage. If you can’t find the report on Fitch, I’ll try to find the most recent one and send it out with the replay because they just really cover it at a level well beyond what we can do in our firm. We’re much more closed-end fund data. They’re the pure leverage experts. But remember, why are you in the investment? I think that’s the big answer.

Junk bond funds, not my favorite but I’m not out of them, I’m just underweight them. Global trends, I’m overweight global versus where we were last year. I think US is going to be okay but it’s not as easy. I like the more covered call and tax efficient version of US equity exposure. UIT ownership of closed-end funds, we have the UIT we work with that’s BDCs but a lot of people don’t know, UITs are kind of the largest aggregate buyer of closed-end fund shares but they do it, because I’ve actually had the chance to witness it for six months, every day when University Investment Trust, which is a wrapper around anything but closed-end funds are common investments inside of a UIT … every day the tickets that go in …

They’re like an open-end fund structure so just every day they’re buying something. It’s usually not big movements. There are usually good traders involved but overtime these things amass, sometimes very large numbers of closed-end funds, and then after either 15 or 24 months they unwind or roll into a new trust. If you see like First Trust is the largest UIT owner of closed-end funds. I think I read that they bring in $8 billion dollars a month in UIT assets, and I would guess about half that is closed-end fund. But they don’t report this so it’s totally guessing and what we hear around the water cooler.

Activist update covered it well I hope. Open-end conversions, they’re rare. We have a chart of it in the back but they’re pretty rare. Covered new funds, tried to cover our outlook. I think there’s going to be more creativity in the closed-end fund structure than we’ve ever seen in my 14 year career. I’m excited for that. I tell you, I’m not against closed-end fund IPOs, actually I think they’re great, I just can’t find a way to be convinced to buy the IPO yet because I like to trade and look at trading data. They haven’t yet found a reason to make me want to be in because I feel that it’s going to be 80% of the time a better price at the start than six to nine months later. I’m hoping to get there. I’m happy to help, happy to think of ideas, happy to communicate with what our investors are telling us.

I had a great question and hopefully you’re still on the line if this was your question. How does a closed-end fund fit into or compliment a portfolio of regular stocks and regular bonds? I’ll address that as in I think you’ve got to be patient and diligent with closed-end funds. You can trade in a day if you choose to but you could be paying market prices you don’t like to get in or out if you’re trying to trade on a given day without help or just good hard work.

Think of it as both the tactical and more the permanent part of the portfolio. I don’t mean locked-in but just don’t sell because you have to. If a client’s going to need 10% of their money for something, then make sure they can pull that 10% from not closed-end funds because the way to do good work in closed-end funds is you pick good managers at good prices and sectors that they do well at. The less liquid securities, they do well because they’re fixed capital. The cheap leverage where you want to be there to increase the yield, they do very well, and the fact that you have that trading ability and you can just get in and out when you need to. That’s the benefit that fixed capital, active management and investor’s liquidity … but you can’t be a forced seller or you’re going to get a really bad experience.

I would say it’s a component that’s part of … and we use them all because it’s all I do but for the average advisor that I sit across from when we talk about the sector, they’re using closed-end funds for a piece of their bond portfolio, their tax free bond portfolio, their equity income portfolio. They’re using it to give higher yield than you can find in other places but not for magical places. You’re getting it from some leverage and discounts or from pass through of short term and long term gains for the most part. It’s not a full replacement for most advisors or individuals, it’s traditionally a low end 5-8%, on the high end for most people probably 15-30%. Of course we have people that have it as their entire investment capital but they know us and we know the sector well.

Compelling investment opportunities, I’d say look for the energy, taxable bonds or unloved global is still kinda unloved. Just look for them where people are just not happy and go ahead and focus there. I think that there’s good account appreciation where discounts can narrow or where managers can do good alpha work, and it’s really in so many sectors. I’ve tried to talk to a lot of them but the problem is I don’t know markets are going to go and so I’m going to try and be diversified because diversification does help protect you. I had the quarterly performance numbers on all the major sectors. If I missed something let me know.

People asked about closed-end fund discussion. There’s a good individual investor group driven, to my understanding, that Morningstar and we try to read every post there. LinkedIn, once again we are not the only group there but there are a lot more professional and guarded and more events and press releases and webinars there. Then Capital Link is next week we’ll be at. If you’re in New York City on April 23rd, good event, free for advisors, investment professionals and other … if you meet the qualifications it’s a free event. Usually we have 1,000 people or so show up during the day at some point.

Trading ideas, I’d say where there’s option, so where there are MLPs, covered call funds, taxable bond funds, senior loan, high yield, there are options of liquidity there. Global equity dividend, there’s some options there and some liquidity. Again, I just read a note, I added this question, the Morningstar closed-end fund ranking … their rankings for closed-end funds is purely computer driven. If there are only five funds in the sector, then there’s guaranteed to be a 1 star, 2 star, 3 star, 4 star and a 5 star from how it’s been explained to me. All I can say is I don’t know the methodology perfectly but just be mindful that their rankings for closed-end funds are not done by a human. Humans write articles that are helpful and guide investors but any purely data drive answer isn’t always good.

Actively management of ETFs versus closed-end funds, I’d say that it’s an interesting structure. I like discounts and by definition discounts shouldn’t exist in an ETF. I think that that’s a nice alternative structure to exist out there for certain investment strategies but I am by no means an expert at that sector. Non listed closed-end funds are actually a growing piece for people that like to fixed capital, that don’t need the daily trading. Interval funds and other like structures are becoming more common. We don’t cover them because they don’t trade but I have been reading more about them.

Then shorting closed-end funds, harder when there’s yield, it’s hard for there to be enough volume for most people to do good work but I do read about people doing it well and doing it with their capital. I’m told if you’re going to do it, you probably should be … margin rates are, I think, the lowest at Interactive Brokers, but I’ve also been told that they will sell you with much less warning as like Fidelity, Schwab, TDA, so be careful. I’ve never really been involved in shorting closed-end fund. I’ve heard that sometimes people oversold and inadvertently shorted and then covered the next day.

Slide #42: Data, this quarter we’ve focused more on our collections systems, so not a lot of new data. If you’re our data client, you didn’t see a whole lot of new stuff this quarter but just know we’re getting to a point where a lot more … we’ll be able to offer a lot more in the coming quarters and you’ll see a pickup again in the data we’re covering. If they do what I ask them to, we might be at 300 data points by year end. If we get everything I want and really extreme sensitivity on BDCs, for like every loan in the portfolio for every BDC, organized and categorized so I can do some cool work in the BDC space.

But we are very excited. Next month we come up on our three year anniversary for our self-collecting data. I’ve been told that it’s impressive how few mistakes we’ve had from the fact we didn’t do this three years ago. Our goal is to do more charts, more charts at the individual security level, to put more data on our website, to offer more high level stuff for free, and then more deep stuff for our paying subscribers. We are excited because we’re very close to having three year Z-stats and three years for closed-end funds as we hit that three year mark.

Slide #43: A friend of ours, not related to us but we do know, I had lunch with him the other week in San Francisco. This is a snapshot, not from recently, but that’s his link right there. This is his heat map or tree map and it’s nice because it visualizes every closed-end fund by volume and price movement on one screen, and relatively organizes them, not perfectly but well. One day PHK had a bad day. It was down 9% and it was like this huge eighth of a screen. It was a big volume and such a big red number. If you’re active in this space, I highly suggest it.

Slide #44: Mergers – small.

Slide #45: Open-endings – small.

Slide #46: These are links to our stuff. We added a Vimeo channel last quarter. It’s new on this list.

Slide: #47: Free links to more data than we think you may have on your own.

Slide #48: Someone asked us what we actually did … these are our nine models.

Slide #49: This is their performance (time-weighted and net) through inception.

Slide #50: That’s our bios and that’s the end.

I do have one more poll if you’re still around just to find out … as we close out this session, I try to do this in 75 minutes. I seem to always add more information and somehow find a way to do it each time in 75 minutes, so appreciate that. Again, John Cole Scott, Closed-End Fund Advisors, it looks like this has recorded fine. We’ll post the slides and the replay. I do plan to have it transcribed and then edited down to be of more help to investors that can’t get to it or don’t want to listen to 75 minutes. Then I’m told that one of our friends is going to produce small articles from this that will get out other places that hopefully will be of use to you.

I don’t see any other questions. I do appreciate your time this afternoon. Our next session will be, again, second week of July. For this session, we do plan to update our muni bond presentation in the next quarter and potentially have a BDC focus webinar in the sector. If you think we should be doing something, tell me why it makes sense, tell me how it can help me or my clients, I’m happy to add it to our wheelhouse and let it live and breathe in the closed-end fund neighborhood. With that, have a great day. Hopefully I’ll see you guys soon.


*DISCLOSURES:  The information in this presentation is not for general circulation and should not be considered an offer, or solicitation, to deal in any of the mentioned funds. The information is provided on a general basis for information purposes only, and is not to be relied on as advice, as it does not take into account the investment objectives, financial situation or particular needs of any specific investor.

Any research or analysis used to derive, or in relation to, the information herein has been procured by Closed-End Fund Advisors (“CEFA”) for its own use, and may have been acted on for its own purpose. The information herein, including any opinions or forecasts have been obtained from or is based on sources believed by CEFA to be reliable, but CEFA does not warrant the accuracy, adequacy or completeness of the same, and expressly disclaims liability for any errors or omissions. As such, any person acting upon or in reliance of these materials does so entirely at his or her own risk. Any projections or other forward-looking statements regarding future events or performance of countries, markets or companies are not necessarily indicative of, and may differ from, actual events or results. No warranty whatsoever is given and no liability whatsoever is accepted by CEFA or its affiliates, for any loss, arising directly or indirectly, as a result of any action or omission made in reliance of any information, opinion or projection made in this presentation.

The information herein shall not be disclosed, used or disseminated, in whole or part, and shall not be reproduced, copied or made available to others without CEFA expressed written permission. CEFA reserves the right to make changes and corrections to the information, including any opinions or forecasts expressed herein at any time, without notice.  Data comes from our CEF Universe service dated March 31, 2015 unless otherwise noted.

The net returns presented above for all of CEFA’s composites were calculated on a time-weighted return basis. All dividends, interest and income, realized and unrealized gains and losses, brokerage and custodial fees are fully reflected. CEFA advisory fees are fully detailed in its ADV Part 2, which is available upon request by calling John Cole Scott at (804) 288-2482. The CEFA composite includes all actual fee-paying and non-fee-paying, fully discretionary accounts in this investment strategy that have been under CEFA management for at least three months.

Diversified Growth and Growth & Income Models: These accounts are managed by both John Cole Scott and George Scott. John Cole Scott began managing accounts in the composite 06/31/2009. The founder of CEFA, George Scott has been managing accounts since the composites inception. As of December 31, 2013, the percentage of non-fee-paying CEFA accounts in this strategy was 10% Growth and 11% Growth & Income. The inception date of both the Globally Diversified Growth and Growth and Income composite is January 31, 1999.  Hybrid Income Model: As of December 31, 2013, the percentage of non-fee-paying CEFA accounts in this strategy was 0%. The inception date of the Hybrid Income composite is November 1, 2006. International Opportunity: These accounts are managed by both John Cole Scott and George Scott. John Cole Scott began managing accounts in the International composite 12/31/2010. The founder of CEFA, George Scott has been managing accounts since the composites inception. As of December 31, 2013, the percentage of non-fee-paying CEFA accounts in this strategy was 11%. The inception date of the International Equity (formerly called International Equity and International REIT) composite is November 1, 2002. Foundation Balanced, Conservative Diversified and Special Opportunities: CEFA composites include all fee paying and non-fee paying clients in the model that have given CEFA full discretion and managed only by John Cole Scott. The percentage of non-fee-paying CEFA accounts these models is 0%.

The results for individual accounts at different periods may vary. Investors should not rely on prior performance as a reliable indication of future results. These figures are unaudited and may be subject to change. The information provided should not be considered as a recommendation to buy or sell any particular security outside of a managed account. CEFA reserves the right to modify its current investment strategies and techniques based on changing market conditions or client needs. The S&P 500 and DJ World Stock (excluding U.S.) indices were calculated using total return analysis with dividends reinvested. These indexes have not been selected to represent an appropriate benchmark to compare an client’s performance, but rather is disclosed to allow for comparison of the client’s performance to that of a certain well-known and widely recognized index.

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