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REPLAY with Transcription — CEF Advisors’ Quarterly CEF and BDC Review and Outlook – From July 20, 2015

July 15, 2015

webinar-newSign-up today to view the REPLAY from our 2Q15 CEF and BDC Research Call:  https://attendee.gotowebinar.com/register/5674384161574638082

Slides

We are pleased to announce out 2Q15 CEF and BDC Research Call

The session includes trends in the CEF industry:

  • Discounts & Discount Trends
  • Yield and Yield Trends
  • Dividend Cuts and Increases
  • Last Quarter’s and Recent Peer-group performance (NAV and Market Price).
  • UNII, Earnings and Return of Capital (RoC) Trends
  • Recent and Potential CEF IPO’s
  •  Liquidity & Liquidity Trends
  • Activist Updates & Trends
  • CEF Deaths & Mergers
  • NAV vs. Market Price Volatility
  • New CEF Universe Data
  • 2015 Outlook
  • Pre-submitted & Live Q&A

Please Register:  https://attendee.gotowebinar.com/register/2780385998560541442

Slides: http://www.cefadvisors.com/Download/2015-0720-CEFBDC-Update-Outlook.pdf

A rough transcription follows:

Second quarter closed-end fund and BDC review and our 2015 outlook as well as input from you when you registered for the session and of course during the session, please feel free to go ahead and type in questions, I will try and keep an eye on them during the session and if we need to, we’ll address them then but expect to answer them later on into the session. We also are recording the session, so we will be able to – as long as all the technology works – we’ll put it on our blog and we’re supposed to replay it through the go to webinar system, so anyone that you know that couldn’t attend the session will be able to attend the replay version of it. We will also TDS the slides so they will be available to attendees and replay attendees as needed. We typically have a good amount to go through so I’m just going to check one thing, you know, the question box and let’s go ahead.

Alright, we are recording. Alright, there we go. This is the fund disclaimers because I’m a Fenway licensed investment professional, I must share with you the different clients and legal counsel. It’s really interesting, I keep thinking when doing a session for a good number of years that we get a ton of repeat business, and we do but it still seems that every single session about half of the attendees, this is the first time that they’ve attended the session and for a good number of people, that group, they barely are of just being introduced to our firm. If you’ve not heard of us or have forgotten who we are, we are an investment management firm that does portfolio management, research and data projects. We are a registered investment advisory firm and of course we focus on closed-end funds and BDC’s which are very, very, very similar and they’re not perfectly the same.

We are an independent firm, we’re fee only and family owned, we have no revenue derived from commissions. Our oldest, present periodical or practice we’ve done in the past is a ”Scott letter closed-end fund report.” We recently released over e-mail the interview with the Royce value trust and are in the process of producing an interview with the Advent convertible bond funds. Our main business that pays much of the bills historically has been our SMA or separately managed accounts platform where people decide to hand over management of their assets into one of our current 9 portfolio models. In the last year we’ve developed a UIT which is a way of wrapping an investment idea into an investment that can be about the individual investors but it’s historically been often recommended from financial advisors, and we’re the portfolio consultant on the smart trust BDC or select BDC – UIT series 4 which has launched last week.

In the last month we also had 2 models approved that we run on the COVESTOR platform, they’re a ROBO advisor that was recently purchased by Interactive brokers. This is a way of eventually getting all our models on that platform for people that don’t have the ability to gives us larger blocks of money but still want access to our core focused portfolios without the personal ovation but at a much smaller minimum. Alright, we also have developed a tower our work in unique fashion, a closed-end fund and BDC news and SEC alert system and we actually built it for ourselves and at a conference one of the attendees next to me asked ”Can I buy that?” and I being a capitalist said ”Yes, how about 104 dollars a year, 2 dollars a week?” So that is available, there is a trial on the universe part of our website.

The universe project was initially – I did back in ’08’ when I was in the quest for better understanding and better clarity on the UNII or the EUNII or UNII. Undistributed net investment income for closed-end bond funds and there was only one vendor that had it so we partnered. They were later purchased by Morning Star and eventually we decided that we had enough experience and wanted to control the data. For three and a half years almost, three and a quarter years, we’ve been self-sourcing data and again, we do re-sell access to that, is has a BDC tab, a muni tab, a closed-end fund death and transition tab as well as the current main closed-end fund database. We’ve been doing a little more work with institutional investors, with fund sponsors and some individuals. Again, people don’t quite fit in the bucket of needing data or research.

Then I’m a big fan of LinkedIn, it helps me meet people and stay in touch with those that I haven’t seen in a while. We started a group there in the fall of ’08’ when the market was having a way worse time than now as a way to connect people to care about the closed-end fund structure. Again, we’re actually just over 26 years old, very happy to be here. Alright, this is the start of the data presentation. Again, I’m going to go over the parts that are more important, I’ve got the notes I took from all your great inputs if they were done within the last, not in the last hour, I would have missed it probably. In the closed-end fund sector we have 564 traditional funds. We had a loss of one equities fund, a gain of two taxable bond funds and a loss of 4 state bond funds from mergers.

There is no change in the BDC sector. We entered the sector with combined net assets of 292 billion dollars. If you happen to be the type of person that looks at the ICI stats, they actually do gross common and don’t track BDC’s separately so the data is similar but slightly different because the gross would include preferred stock which we consider; we don’t do gross assets, we do net assets, that’s just the way we think about closed-end funds, but it is a share class, it’s just a low on our debt share class. Discount-wise, I mean discounts, they’ve been wider but they are considered relatively wide, that was a hot topic for you guys in the questions on the registration page. Right now we’ve got specialty equity funds getting close to 9% but 1 and a half % wider than the relative discount, which is the current discount, versus the 90 day average.

It’s one way we asses discount momentum, we see it’s a specialty equity led by the energy and MLT grouping which is a big chunk of that, it’s about 20% of that grouping, and bond funds. Our national muni bond funds have widened almost 9%. Taxable bond funds almost 210% if you look at their relative movements, and remember this is not just from the peak in the last 90 days but the average in the last 90 days and so we’ve really seen from the peak in the last 90 days, discounts widening almost 3 to 4% for most major groups of closed-end funds. Now what’s been driving that, that was actually interesting time with the Scott letter we were interviewing the advent funds and three years ago, we interviewed the advent funds as one of the first entrees to the convertible bonds sector and we were in that interview talking about rise in interest rates and three years later, we still are, it was a topic covered and the difference is, I think we’re just much, much closer to the federal reserve actually raising their rates.

There is still some uncertainty by some folks that we believe they’re somewhat credible, to how can they actually impact rates when they raise their rates? However, closed-end funds discounts are wide. I think it’s predominantly because yieldy things get beat up when rates go up because many investors have heard the very true fact that for a regular bond, when rates go up, prices go down and conceptually that will put pressure on other yieldy things as they – as safer things have relatively higher yields then there is less need to stretch into higher yielding things. However, I would say we’re not going to be to normal rates until we’re about 4%, 3 and a half % higher than we are today and so there is still going to be plenty of need to stretch to these higher yielding things, RIT’s, MLP’s, BDC’s, covered call funds, utilities, equity dividend strategies because they’re still going to be much higher than other investments that are out there.

However, Mr. Market and the retail market don’t always do the most logical things that’s why groups like us and the other folks in the country that specialize in closed-end funds have a good living to make because there’s a lot of retail panic in what goes on. BDC’s, BDC’s right now on the debt side are close to about a 7 and a half discount and that’s not as wide as we had gone in the 4th quarter of 2014 but much wider than we did 60 days ago and also earlier in the first quarter. Yields have been pretty stable, there’s no dividend changes for that whole sector for the debt BDC’s in the second quarter and as you can see here that what data that we like to show is liquidity numbers, which is the 3rd to last column on the page and I see liquidity is up for most of the sectors and there’s been more interest in it even though some of trade volumes have been down a little bit on a second quarter versus first quarter basis as we’ll cover later.

Again, this is just a piece of our weekly PDF, the overview table that some people just like the closed-end funds data, we always start the presentation with this, seems to be a good entrance. I also like to look at – I’ve been adding some data from previous quarter presentations, trying to go back deeper and to compare the last quarter with maybe the previous quarter or previous one year average, and so this is an interesting look for closed-end funds and what percentage of funds are at premium versus at discounts. It shouldn’t be a surprise to anyone in the sector or interested in the sector that discounts are more prevalent than we’ve seen since we tracked this data, with 93% of closed-end funds trading below their net asset value. The quick version of why traditional closed-end funds generally do is because their investments are typically liquid and people feel that there’s some ability to replicate it on their own or through other structures, whether it’s open end funds or ETF’s, or individual positions on their own and there is some liquidity concerns for some funds where it might be traded under a million dollars a day and it might be hard to change your mind and so there’s some discount put on to liquidity and then I would argue, I’ve never heard someone else say this, but it’s not the most amazing thing in the world because discount exists because they can.

In life you need to put a risk or price of risk into the market for what could happen and because it’s there, there should be some risk and some pricing to it. Now BDC’s are generally different though currently exhibiting in that same just slightly better performance on discount pricing because BDC’s, traditionally, when they’re created, they’re created smaller and they grow through secondaries because you can’t really replicate their portfolio any other way without being accredited and having friends at private equity firms. But currently there are discounts which we’ll cover in some of the commentary section, but conceptually, first, sorry, second quarter net value performance, the big standout is the muni bonds, they were all negative for their performance but of course, because there is some craziness in closed-end funds, 11 of them were still up on a market price basis even though their guts were down for the quarter.

With that just all in, only a third of these funds were positive on NAV basis and only a fifth of the funds were positive on price basis for the second quarter, 2015. Now what does that mean? We’ll get into it but we think that the short answer, if you want to wait until the end you can hear more details, but we think that creates a greater buying opportunity because we think that there’s still reason to be in many of these sectors as part of your portfolio traditionally for income focused investors but also even for capital appreciation focused investors because of course, narrowing discounts is alpha over the guts, something you can’t get in any other holistic fund structure.

Right now this chart looks more interesting over time, it’s basically up to the debt equity BDC’s which are generally very small and traditionally command a 20 to 30% discount to normal markets. Right now we’re trading between a 7 and change and a 10 and change discount for all closed-end funds but again, a very buoyant landscape, everything is kind of priced at a similar level as of June 30th. However, we like to look deeper back in time, we have rights to data because we’ve collected it since May 11th of 2012 and we kind of group just because people like, in a lot of sense, their graphs with lots of subgroupings, but people generally care about all closed-end funds and they’re at or just above par in 2012 and then they widened in 2013, which everyone should be familiar with when Bernanke mentioned we were going to stop buying or start doing the tapering and we basically saw a pretty boring experience 2014, a mild widening in the 3rd quarter for the energy but nothing too crazy but we’ve seen actually a much more substantive, if you look at the last grey line of widening 4 traditional closed-end funds.

BDC’s which are a sector and a smaller group that instead of having 550 funds, they have 50 funds. They traditionally have more guts volatility as well as market price volatility, though of course the investments are typically private, they only get priced once a quarter for the guts but we saw that premiums up in the 0 to 5% range, which includes the equity ones, just to be fair and cover all BDC’s, actually higher if you exclude them from the calculation marked five to ten, were up there. But we saw a big discount wide last year in the 4th quarter and we saw a recovery and we’re actually getting down almost to those levels again, which were crazy cheap in my opinion and a heck of a good time to get into something.

Right now the average closed-end fund as of end of second quarter was at a 9 and a quarter discount give or take. This breaks up by the major groupings but as you can see there’s not a lot of difference. Traditionally US and non-US equity are the most boring stable lines outside of geo-political and major economic events. They’re the ones that trade less on sentiment and yield and more on just kind of what’s going on in the market. But I would say all the major sectors, except for a slight bump up in non-US equity but still it’s not very much, it’s still relatively low and this is the one year look back to the charts not so quite busy. Liquidity, I’ll say is there’s quite a few closed-end funds that trade less than numbers we feel comfortable doing outside of like a special opportunities model or individual work for groups. There’s very few that are considered rather liquid, only under 9% trade over 2 and half million dollars a day which is just one number where we know at that level we can get pretty much anything we want to either on our own or through our trading firms.

BDC’s, it’s a much different number. About 25% traded, over 2 and a half million dollars a day and if you want to go over a million, then it’s about half. Much more liquid market even though they come out smaller, they just tend to trade more liquid because it’s more people actively assigned to be in out of the funds over time versus there’s a good chunk of the closed-end fund market that we either sold on the IPO or bought it at a discount or bought it at some point in-between or after the IPO and I decided just to have a manager allocation, a sector allocation and an R trading and without that trading there’s just left liquidity for other people to trade with them, for the other side.

Like I said, volume and liquidity numbers are up in a way but the volume trends of actual absolute basis is down for everything. There were a minute increase, only 2% for state muni bond funds but because that’s kind of a state tax driven decision, the trading patterns there are far different than the national sector which already, if you’re in a muni bond fund you’re already tax avoidant, so you’re already trying to avoid trading because you don’t want to pay taxes on short term gains, so those sections, those groups traditionally have less trading on the whole. But basically about 13 to less trade volume for the sector but just all in all, I would say – because first quarter was just so much of a bounce after the fourth quarter – we expect a more normal trade volume in the third quarter and we expect it to get back to more of a above 5 or 10% increase for most groups next quarter or this current quarter that we’re in now.

This is a slide that was shared with us by Wallach Beth capital, if you’re an institution that can access upside traders or that has a need to, this is an old chart. If you look at the date, it’s probably from some time last year, yeah, but over a year ago but it reminds me because there’s so many people that might hear this conversation, that it’s a new concept for them. If you are either doing your own work or know how to work the orders or these people do people do e-mails and phone calls to help them negotiate and network for the orders, they’re often able to do some great work between the bid and ask, this was 25% of the average daily volume on the offer between the bid and the ask, sorry on the offer.

When people worry about closed-end funds liquidity, I think their concern should be, if you have to have it all done right now, like in the next 15 minutes, that’s a problem, but if you’re wanting to build a position and be able to get in and out over time, if you’re big enough to have it be a problem then these resources are available to you, there’s about 7 or 8 in the US we work with, 2 presently, probably adding a third sometime later this year to help us some with some BDC trading as we get more assets in that sector. Yield, hopefully not a surprise, most people are in closed-end funds because of yield or they find them because of yield but traditionally, you know, 87% of closed-end funds yield right now over 5%, so that’s almost 9 out of 10 and again, there’s some funds in the 5 to 6 and a half range but those a traditionally coupon, capital appreciation storage that happen to pay a yield when we look at the six and a half to ten range, that’s why we have half the universe and a lot of options for our income focused portfolios.

BDC’s, they tend to be, again, they’re at discounts and they’re usually not, they can only yield 9, now they currently yield 10 and we happen to see that the yield number is big and almost half the BDC’s yield over 10, the average is 10 versus closed-end funds, the average is, I believe just under 8. Income only yield, we look at this because you can pass through return of capital, short term gains, long term gains and let’s say you can’t manipulate the income port of a closed-end fund dividend if it has been done, but it’s far more the exception than the rule and so it gives us a chance to look historically at yield that is harder to manipulate and more likely just by the nature of income, you know, dividend income, bond income, to be repeatable, so you have to sense the trends but again, conceptually it’s a pretty boring chart. Slight uptake for BDC’s and for the yielded things and slight down take for non-US equity but for the most part you’re not looking for non-US equity to be a yielding position, you’re there for the fixed capital of the closed-end fund and in our case it’s the management team and their investment work in the country or region of your choice.

Alright, so if you attended the last 2 sessions, this is tracking the UNII balance or undistributed net investment income which is a life to date balance for closed-end funds, the newer it is, the actual absolute number is more important. We did normalize it by taking the income only yield for the closed-end fund and applying that to help normalize a lower priced fund and a higher priced fund and a fund that yields 4% versus 8% just to help normalize what that UNII balance means. But in effect if you’re adding to UNII which has happened over time but not recently, that’s helping you build a cushion for future needs if you need to use them to pay out the yield. What we’ve seen since May of 14 or just probably April of 14 is just a slight residual draw down of that balance, it’s not as pronounced and painful as it was in 12 and 13 when we saw much choppier, more aggressive movements.

But it just remind you that while we’re just now below the average for this period of time, that the UNII balances are being drawn on, so that means this is from muni bond funds, national muni bond funds, that there is a net usage of UNII on average for the sector. When they’ve run out of real UNII then it’s going to increase the number of dividend changes that we’ve seen. However, they’ve been making dividend changes, so it’s not like they haven’t been making them, like previous to December of 12 there really weren’t a lot of dividend changes in the sector on a negative side and then the market was very surprised. My perspective here would be, it’s a reason why to not just buy a muni bond fund on yield and discount, or even liquidity, or even manager performance but to actually look into the history of the UNII balance and muni balance and again, that’s what really started my data project back in LA, was to be better at this information.

There’s more noise in it for taxable bond funds, because you think about it, UNII bond funds, they do one thing, they buy tax re-bonds, they do different types of bonds to some degree, they do different states or different regions, but they’re a much more similar investment versus a taxable bonds market: you’ve got convertibles, you’ve got emerging market debt, you’ve got high yield, you’ve got floaters, you’ve got the whole gambit of opportunities. All I can say is this number is important but not as important as muni’s but it’s turning down as well because there are as a net usage of UNII balance or taxable bond funds as well for investors and again, just like in the other graph, we’re trending just below the level which reminds us why I think the perceived risk of the sector and why I think again, it continues to be more than discounts and yield.

Earnings coverage which is the cents per share of the distribution and the cents per share of the average earnings typically over a 90 day period where there’s some nuance by the fund sponsor, the number goes higher because the dividend policy gets smaller or because earnings go higher. Just like all data charts, I think it’s important to know how the numerator and denominator work for the math but again, the trends are picking up, there’s actually an average net earnings benefit to taxable bond funds though I’d say about half of that picked up in the end of June from dividends being lowered since we’ve seen quite a few dividend changes there. But then again, just a chance to see what’s normal, this reminds which groups where you’re kind of looking for a hundred and which groups you are not.

90 is kind of the normal for the less homogenous taxable bond group and really 95 to 100 is normal for muni bond funds. Usually they don’t get much as a group of over a hundred of individual funds, definitely do. BDC’s, even though there’s 50 of them, 443 on the debt side, they generally are above their levels but right now we’re a little bit below and one of the challenges is that for the BDC market we’re seeing that they’re not able to add new equity at the current discounts for most BDC’s, though some can at small premiums and some can and there’s some at higher premiums, so it’s just making it harder to grow the earnings of the BDC’s, and again, in our opinion that’s going to lead to, for most BDC’s, I think

better behavior, better policies and more rewards for the BDC’s that make better decisions on aggregate, things that align shareholder interest and things that make the consistency of yield more transparent and more comfortable to the BDC investor.

Return on capital, there’s only very few comments on this – this time, we’ve talked about this for years but I’d say the key would be when you start seeing return on capital rise dramatically in a bond based sector or fund, it starts to concern me. When people asked me why I was worried about, I think it was the 13, but the dividend cuts in the medium market and it’s because BD funds are short on return on capital and there’s just no logical reason why they should, outside of on the stake in which they’re popping up. It proved to me that the distribution policies were more aggressive than managers could make. Taxable bond funds though, it’s picking up a little bit which again, falls in line with the UNII balance pulling down and the earnings coverage movements as well.

I do see the question joseph but I will definitely get to it at the end, just so you know, I saw that question. Destructive return on capital, which we designed before we saw those huge movements in bonds, also we’ve added the one year NAV and the three year NAV versus NAV yield versus NAV total return because we were finding that some groups where they may have had one bad year but overall they had three relatively good year’s overall. The last columns, then again the numbers are volatile, this is the first quarter reviews of them. I’ve just been digesting them from about a week on my end. It suggests that the one year NAV total return versus the NAV yield. Then if the NAV yield is 8% and the portfolio grew 8%, that number would be zero, a very, very boring zero, like first 8 muni bond funds because there’s none in there and for national just basically positive.

If it was negative 8% then literally the market price, sell by 8% and the yield just did not meet the number, if it’s a more positive number, that’s better NAV than the NAV yield needs to hit, if It’s a more negative number then it’s a worse NAV performance than the NAV yield needs to hit. The challenge is, and return on capital is actually great from a tax perspective, so if return on capital distributions are repeatable and it’s not going to lead to a dividend change, then it’s going to help you – if you hold onto a security for 366 days, have a lower tax bill because of long terms gains versus short term and income considerations. What we have is how do you avoid the bad return on capital and how do you make use of the good return on capital, and so part of that is very simple, and this came up in some of the questions on the front end. Think about the sector. We typically use as data points our leverage, adjusted net assets value yield but net asset value yield is the distribution policy divided into NAV, which is public data.

The leveraged data, the percentage of leverage that is a public data point, we have a data point that backs it out and decide if that number is plausible and repeatable. If you’re in a sector that should see a distribution policy of 4 to 6% and the leverage of just of NAV yield is 8, that’s probably too aggressive, if it should be 5 or 6% and the number is 4, then it’s probably too conservative and is more upside. I think that’s the more important thing and then just what sectors should have return on capital versus shouldn’t? Like I said, bond funds are generally 99.9% times shouldn’t in my personal opinion. This is driven by MLP funds so we like to include stuff so you don’t wonder why they were included from last quarter but MLP’s are currently, I think tremendously exciting. There’s a handful that have some of the best relative NAV performance but the worst discount pricing.

There are people that seem to think that when rates go up, the MLP dividends go down when they generally go up one to two percent a year, sometimes it’s a crazy year and they go up three percent. For the portfolio, the only reason why an MLP, from the numerous managers we’ve interviewed and sat down with face to face, the only reason why MLP’s, the underlying MLP’s themselves have a dividend — God! It’s because they over leveraged or they ran themselves poorly just like any other company because they are a company. I keep thinking the mid-stream MLP’s, which is most of the focus for the closed-end fund version of the sector, don’t derive any pricing difference in their yield from the price of oil. I know oil is beaten up right now and so people are pressing down the underlying MLP’s and we see a lot of discounts in the 12 — 220% level for this sector and all I can — sorry I went back there, back one.

All I can say is, when MLP’s are this cheap, and I’m going to get into my outlook now but, and you’re diversified and you can own them in an IRO without the UBTI, there’s no K-1’s in the closed-end funds format. You can get a 85 cents to 80 cent dollar of MLP assets with yields that are ranging from 6 and a half to almost 9 for some of the funds and when rates go up, that’s great, congratulations and if you own it for a year, many of them that are all distributions are return on capital. That’s one of my favorite sectors right now; my favorite boring sector is MLP and my favorite less boring sector is BDC’s and they’re very tax different. BDCs, their income is traditionally all taxable at the highest short term gains or income based and MLP’s, many of them we focus on are tax differed.

Munis, because munis are a third of the traditional closed-end fund market and so we do want to cover them a little bit, I’m going to cover more just the fact of just of different questions about that these are the more duration focused sector for closed-end funds that a lot of people have. Why would you own a muni now? What’s going to happen to the sector when rates go up? Of course these are my opinions and guesses based on my experience, based on my reading, based on reviewing history. Discounts right now are almost as wide, they’re not quite as they were in tax law season 2013. All I can say is in the year before when they were at 3 to 4 premiums, we did not have a model in the sector, we were underweight, we were generally telling people ”Unless you’re an hedge and equity risk or it’s in California or New York in the highest tax bracket or second highest tax bracket, you probably shouldn’t be here just because the risk it too high. I can’t tell you when that discount will form but it will eventually.”

Did not know it would be quite that fast and dramatic but I guess what I learn the longer I’m in the capital markets is it’s — I’m pleasantly surprised on a regular basis but we’re almost back there. We come close to about a 4 of discount in this sector a few months ago and now we’re widening back now to about a 7 or 8. 10 is very wide during the peak of rise in rates the last time, the discounts for some funds widened as much as 8 to 13 – 14%, kind of averaging that 12 – 13 level, so there’s potentially 4% widening there. The problem is, a couple of things most people don’t know, some of my friends, one of my friend’s at Nuveen shared with me that I was so pleased to know, the rates for muni bonds at the set off of rate-wise tends to rise slower and lagged the LIBOR, which people focus on LIBOR, so that’s a benefit. The other thing is, as you’ll see in the next slide, sorry this is just a more fine liquidity and UNII trend, this is a tax driven decision and this is a hedging based decision in my opinion because right now, you can buy the MUB which is ETF, which yields 2.6%, the blended, leverage adjusted, so no leverage imputed and no discount imputed, return for the average national fund is 4.18.

The add in leverage is 5.5, you add in discount is 6, so the average is 6, it’s not hard to blend about 6 and a quarter right now. If you’re there and you’re very high income, not the highest but rather high income, it’s a 10, if you’re below that you’re more like nine a 9. A 9 to a 10 to 10 and a half tax equivalent yield for an asset class, it’s just generally 90% investment grade and that if there is an unbeknownst to us equity, GDP, global economy problem, these things tend to do very well. One of our investors, he’s sophisticated but older, he has about 10% of his assets in the munis because obviously taxes aren’t fun for him but it’s there because it’s taxable money and if he puts them in other income producing things, it’s very painful. What we’ve recommended to folks is to be thoughtful of the discounts being relatively wide now and that they’re there for tax reasons or hedging reasons and to also think about adding to the taxable bucket, covered call funds because those generally are less volatile than the SP500 based on review and MLP funds which to me are again, great relatively conservative investments, not un-volatile but the guts are rather conservative, the rates are kind of boring.

Both have generally high return of capital available historically which makes them tax sensitive and yet if the equity markets do well, covered call funds traditionally do well. MLP funds to me are so cheap, it’s hard not to own them, it’s like we’ll overweight them for everyone because they’re just so ridiculously cheap in my personal opinion. There’s usually about 2,300 to 2,500 press releases a quarter. I’d say there weren’t really many significant trends, we’re now following 13 fillings, a lot more closer to this record system. There were 4 new N2 fillings for traditional closed-end funds and I think three of those were Nuveen looking to do three termed out, high yield focused closed-end funds which I think it’s needed because it’s a more credit decision not a duration decision, so it’s an easier story to sell in the market and Dave Lamb and I talked about that last quarter before this call and I lied to him that they’re actually doing three. The term offerings have become popular on the bonds side, even on the equities side with the Mills Howard one last year but it gives people a chance that they know on a certain day, they have a chance to get their net asset value back, though no idea what it will be but there’s no discount possibility.

Though I imagine that it will have the same provisions as the other that the shareholders can actually chose to maintain this structure if they want and then we had 10 updates and 2 fillings. We did the initial that should happen but there’s more information now, hasn’t happened IPO wise. A little bit more portfolio manager changes: activists are way more involved second quarter than the previous year. We’ve been involved in more monitoring and actually was at the annual meeting two weeks ago in Colorado to be there to discuss what was going on with the activists and the board and the manager and everything.

Leverage changes are being very common, so I’d say there’s nothing that stands out except for — it’s nice to see to see new N2 fillings but three a quarter is normal. People worry about the sector’s not coming in new funds and argue that there is, this is research tracking this data very sensitively, we’re on pace if not above pace but I’d say portfolio managers and investment managers need to be thoughtful that there’s changes; some of changes that are internal because people retire or move on to another job or another business and some are actually driven by the activist.

Dividend increase and decreases; there is some good news here, we’re up to 91% maintains, I think last quarter is 90% but the changes, and this is interesting, the last time the rates went up, and this isn’t a light paper or our blog that ill reference, you can look up or e-mail it if you can’t find it, 97% of closed-end funds changed distribution last time rates went up. Over time, I think last year, 2 thirds of closed-end funds changed the distribution policy. For most funds, change is inevitable for the policy, it’s a policy not a promise and we like to let folks understand that but there was an almost equal number of increases and decreases. We do like to break out the small changes versus the large changes and all I can say is there were 27 changes bigger than 5% on the downside and only 21 changes on the upside but still a similar number and nothing too crazy. The small changes, they’re usually right around 2% either direction. If you have a small change, you can expect like 2% on either direction and the big change is very sum but you can expect typically a, I think the lowest number I’ve there on average is maybe the 12% range, maybe 10 in a really boring quarter, but I’d say 10 to 25% is not uncommon on the big change.

Some funds, and we do recognize some funds, their total return is far more from the net asset value than on the yield, that the yield is a smaller number and we are a benchmarking off of other changes in the previous one, 4 quarter besides the last one so that’s why it says second quarter 14 to first quarter 15, we’re trying to show when there’s a different amount than usual. The decreases are less on average than returns and yet there’s more maintain, so not amazing news but just better news than we had expected to some degree, alright.

I’ve got to find my mouse, there we go, this is a new slide or at least at a very boring, we had a very impactful version of if last time but we wanted to look at the changes by the major sectors because that’s important, but we also wanted to look at what’s new this time, is the green, the darkest green is last quarters changes, the lighter green is the previous year’s increases and the red is the last quarter’s negative and the peach is the last year’s negative. All I can say, the dividend cuts have mostly been taxable bond funds in the last quarter. In the last year, the munis have had more worth but not as much muni cuts in the last 90 days as previous.

People worry about the dividends on BDC’s, they were for 4 well known popular dividend cuts between December and February, a period of time, that 3 month period, since then if you look back both on a last quarter at a 1 year basis, there’s been more increases than decreases for that sector and for there I think, if the dividend is high, it’s okay to own them. If you’ve priced it into your formula or just if you’re more comfortable in the more repeatable, the BDC’s that won’t rely as much on one time revenue, though much of that has been washed out in my opinion, that sector is actually in pretty good shape as a whole. The new [00:40:25.02] relations work and good managers continue to write good loans — okay, someone is color blind, we’ll work on that for next quarter. Performance for the quarter, and again all I can say is the red — everything except for non US equity had some bright spots but the NAVS were down, the market prices were down, discounts widened for pretty much everything except for BDC’s, people were so worried about BDC’s and yet, then again yields part of it, but their NAVS and their market prices were up on the quarter.

They’re still rather cheap, they were a little bit cheaper 90 days ago but because these aren’t big numbers but they are proving that they can hold their own and I think that’s a very positive spot for the sector is that while a lot of yieldy things had a negative market price experience, the aggregate BDC and even debt BDC which is obviously the debt focused one had actually a positive experience for second quarter. Activist and this is just pulling some of the 13 fillings and some of the tenders and what not, we’ve got LBF; we’ve got the Deutsche funds, though currently that’s happened instead of the quarter. All I can say is the activist stuff, it’s five times more active than it was this period last year. With discounts as wide as they are, you will continue to see more work in this space.

I honestly don’t know how the bulldog which has been very active recently, keeps everything organized because it seems that they’re doing something every week in the closed-end funds space, both closed-end funds and the BDC space. I’m trying to make this graph more exciting but it’s very boring but what I like to see is that all in all the activists and the institution ownership has been trending up for the sector; discounts helped power that. There’s a slight net higher number of decreases for activist holdings but then, the point is this: in the last quarter, 187 notices that we own less of this, so it is a 2 direction that they’re adding, buying new things but they do have new clients, they’re getting investment from those over time typically, but they buy something just because they sell something else to seal that.

We talked about the IPO market but there’s been 4 this year, they’ve been a little smaller in aggregate versus previous year’s, we have to go to 2011 to see a smaller number on the average, though we’ve often felt the bigger IPO’s usually come out in the fall and I have no idea why, it just feels that way, feels like the last 3 – 4 months of the year are much more active but the market continues to grow new things. Some people ask me about what I think should happen, I think that we need to find a way to IPO closed-end fund without the commission coming out directly.

Maybe management fees can be a little bit higher or there can be contingent management fees based on performance and hurdle rates that can be higher or recoup it later and then just because that first hit is hard and then there’s the secondary markets report that typically is hard to find. The terms have been good, the markets report post green shoe has been good, we applaud those efforts. We haven’t seen it but we’ve heard rumors about a stock only dividend based on NAV performance of NAV gross in 10 to 11, you get a dollar dividend and stock to try and focus investors on the net asset value performance versus market price.

The terms I think will be good, honestly I just think that, I know it’s hard with large funds, I just think they need to be more aligned interest of ownership. I think funds need to be more willing to buy in shares at discounts because I think those ones that show a habit of that will be rewarded with better pricing and then if people get excited they always offer more shares of the secondary above net asset value and then that’s positive for all shareholders. Again, I the structure is continuing to adapt, that’s part of what I like about the US capital markets, we’re not full there but we’re on the way. BDC’s, we only had one during the year, it wasn’t during the quarter, it’s was at the end of first quarter but I think we’ll see that pick up to again, a couple a year probably in 2016. We might get one out this year, there’s a lot of interested people trying to get one out that want to get one out. We like to look at the quarter’s IPO’s, this was kind of on the backs of the Calamos deal in the first quarter, adds very similar provisions and structuring but right now it’s trading at a smaller premium and 92 cents, I think this is quarter end off the IPO price, which I’d say is actually very positive, though still relatively early, we’ll see next line when we look at older IPO’s.

Eagle growth income fund, actually I think very, very positively/well received, they could have made bigger I guess, if they thought about it, it’s trading at 11 premium and 87 cents above the IPO price. This proves that, as did say, it’s a strategy that’s replicate in other structures, as in UIT open end fund, SMA, ETS, can do well here. This is where the fixed capitalization of the capital of the fund and this is the ability to play leverage, is very, very good and as an itchy manager, we need boring investments but we need investments that we can only get in its place and we want them and then those things will come in premium.

Small premiums are very healthy for closed-end funds, so that gives the manager that choses to, the ability to keep growing the portfolio over time, to pick on more investments and yet that’s very positive for the shareholders. Tekla launched its 4th closed-end fund, yes 4th closed-end fund just under a month ago and it’s still kind of in the protected period so it’s less probably important that this pricing is here but still, I’d say a 5 premium because they’ve got funds that have been out since the 80’s that have had a couple of percent premium. Its QH is usually the 2 to 4 premium.

There is a manager that’s doubled the size of his funds in just about a year and it is secondary for his older funds, and I think it’s a great story for a good manager that’s focusing on investments that are hard to do other places, it’s like I’m saying the same things in a lay, and that those things like buys private investments because they work great in the closed-end fund and focuses on something that he specialized in, and that is good. And he’s not a small shop, he’s not a huge shop but they’ve got assets, I want to say 3 billion but I don’t have it in front of me> they’re e decent sized shop up in Boston and they do great work. I like to see groups like that, IPO closed-end funds because the market will give them the premium after support. This is where you start to get — the others helped, one was in third quarter, I forgot. This is in the last three quarters that have closed out, just analyzing the current market price versus IPO price, I would say that there are three funds that are doing great even though one of them is on a 9 discount, THQ is right at IPO price and that’s not bad for 90 days when you’re normally 9% lower. 92 here is historically normal for the third quarter stuff and we can see that the Goldman Sachs MLP fund is off almost 37% yet still commanding a premium.

There is some closed-end funds logic. Investors are down 37% from the IPO price but were still going to bid it up above when the peer group average is at 11 discount, which makes complete sense to me. This is why we have a job, this is why you as individual investors or financial advisors for your clients can do amazing work in the sector, is because there such irrationality of people that buy a brand name or buy only discounts and yield or people that may not realize that how poorly that’s done to — the sector has done poorly. Goldman is a great shop, you might see them back in the business. It was that the timing was not very good for them but the Eagle point, trading well.

Black Rock Health sciences, trading pretty good considering when it came out but still not a terribly successful IPO. Mills Howard, trading at a premium, that’s good but off some from the IPO price, but still it’s not again, fourth quarter was not an easy time. More forgiving of that than of the MLP in the third quarter. CCD trading at a small discount but decently off of the IPO price versus the Goldman Sachs BDC trading, honestly I think might be above a 20 premium right now. Probably a little over priced but again, at that level they can write new stock at equity whenever they want and the market will be very, very pleased with them and I mean, yeah right under the 21 premium, so 22.

Correlation data on this is such is that stuff is more correlated, we like to look at when discounts turn this in correlation data, here’s the chart, it’s slide 37 but we have to lot to cover and I want to make sure it’s done on time. All I can is that correlations are generally higher and for the sector, as investors are focusing more on the movement of the guts versus just the sentiment. We love it when we see correlations get really, really low because then people are just being very sill in our opinion. Volatility, you know what, again the story here is that the bonds stuff, the guts, the blue lines are pretty boring equity funds. Market price volatility is only slightly higher, typically like about 10% higher than the net asset value volatility and is less leveraged there, so that’s just the trading of the closed-end funds structure. The debt BDC’s which have been very volatile, typically are usually just a notch above US equity funds and non – US equity funds historically and now they’re maybe 2 notches above but there are periods now when they do go less volatile.

The outlook, so I’m going to do this slide where I’m looking over your questions. BDC’s, the story of them is, you need them to be able to pay the yield out; you need to have shareholder interest in line with management. We are pleased to see like when we can’t pay the dividend policy, we’ll take some money off our fees to pay the dividend policy. it’s a very powerful sentiment for BDC’s and I think BDC’s have tremendous opportunity where mid cycle by most accounts, most credit cycles, discounts are very wide, rates are going to be going up. Last time rates went up, BDC’s, the debt BDC’s did very well for a debt based product, they were up about 4 point — what? 5% on yield and 42% on total return during that time period, that 4 year time period of rates going up in 2007, so from 4 to 7.

All I can say is, equity funds, we’re still very, very confident in the global markets and the US markets in a diversified way. We have a chart, everyone has that’s it’s almost complete though, we’ll send out over e-mail to everyone once we have it, that it has all the closed-end fund asset classes for a ten year basis and how they’ve done and if you can pick the ones that are going to do best long term every time, consistently you can’t and they’re more volatile, the BDC’s tend to do better or worse but they are a more volatile sector. Equity funds, we’re very positive on, we think that with the presidential cycle, we’ve done some reading recently, that they will generally be good for taxes. We think that companies continue to show that they can grow well. Earnings growth for the SP500, a quarter of the SP500 hundred does earnings this week so it’s a big week for this answer to be right or wrong but again, it is only one quarter. Unemployment is generally better, so I’m optimistic for equity funds, I think there’s even opportunity in China because there’s so much selling there in certain closed-end funds. MLP funds, my biggest play for the more conservative investor, BDC’s for more aggressive but I think BDC’s could be part of a portfolio, it can be probably a, I would say 10 to 20% of the bond portion of your portfolio in the BDC market at these levels and then maybe if they’re overpriced, if they’re all premiums again, maybe half that for that sector.

We’ve talked a little bit about the bond markets, the worst sector performing last times rates rose was preferred equity, convertibles generally do well, floaters do well on yield but only okay on performance but I think at the current discount levels, they’re very, very, very attractive. All I can say is, if you’re — taxable accounts, overweight MLP’s, covered call and munis, there’s a generic S allocation that I cannot give advice but just to tell you what historically and what as a rule of thumb would be prudent. On the IRA, I would say BDC’s, I would say a little bit of high yield bond but they’re not as cheap as BDC’s in my opinion and they don’t have as much recovery if something goes wrong but as to good diversifier convertibles, we like a lot in the space.

We still like healthcare as an allocation and we like RITs but they had it good last year but we’re on to wait them but we think can do well. We wanted to talk about: so what makes a discount go away? That was the question from earlier. Discount goes away when investors, either for logical or illogical reasons just are willing to pay more. I think the appropriate way to attack this is to focus on — it’s not just liquidity and it’s not just performance because there’s a closed-end fund out there that has doubled the SP500 with half the equity allocation and it trades at a 10 to 15 discount, this is people I don’t seem to trust or what’s going on there?

I think people don’t cover them because we make money on a second hand market by selling services but there’s no wholesalers that make money after the thing is created, that’s the benefit of the structure but that’s also the downside, there’s no one really talking about after the fact. The press is often at a negative light in general though there’s more press that cover them in a more balanced or positive way, there’s a lot of groups that speak to the press regularly and try to give them the information. Okay, this in a white paper on closed-end funds and BDC’s to rising rates to a reporter that is looking for things that do well and rates go up, and then like closed-end funds can do it and discounts can be wide and ”Here is what we do for a living, go ahead and give it a shot, maybe you’ll see that story out there next week.

I think activists are helpful, they help remind fund sponsors that if you have shares, you can fire people, you change direction. I think that’s an important mechanism because we like most fund sponsors, we like most portfolio management teams but they need to remember that shareholders are in charge and activists is just self-interested but they’re there to make money when there’s an opportunity as in when other people have lost money, they’re there to kind of recapture some of that benefit and much of their work can be tagged along with or anyone can benefit from, a little bit of their work is done where they get negotiations and stuff privately but again, that’s just the way the markets work.

It’s completely fair because they invest a lot of time and money in these projects. Liquidity, I don’t see is a risk. People ask ”What’s a safe, less volatile thing or less risky” and most people say volatility is risk, I would argue and say that volatility is opportunity with closed-end funds. I mean trying to sell something when it’s having too good of a day with a discount as well above the recent average and you buy something that’s well below its recent average and yet you have opined that the guts or you want to be in the sector. There’s Morgan Stanley China closed-end fund and I got a call from Bloomberg asking about the discount going to 25 and part of it is the fact that not all of the stocks are trading but it’s a very, very wide discount and if you think China is broken then stay away but if you think that China can muddle through it and solve its problems, then it’s pretty good time to get in. Again, for a China allocation, we only buy if you want to be in China. All I can say is that there’s lots of types of closed-end funds, they sometimes trade together but look for the noise where investors are being ridiculous, look for when volatility is high, like people say buy BDC’s when the [00:57:34.17] is above 20 because people are just selling risky things and they just generally get beat up whenever the [00:57:39.24] is over 20, so for that then that’s helpful.

Trying to look over the other notes I have from you guys. I think we’re going to go into some of the questions you have after I have just finished up the slides. We’re mostly done; this is one table from that rising interest rate experience for closed-end funds, the major groupings. We also have like for example, so that’s the California funds. The California fund has an average return of 20% last raise of rates but their yield was down 19%. Again, expect duration focused things to reduce their yields when rates go up, though I would argue that discounts are wide enough that much of the [00:58:27.13] priced, I’d say between 60 and 70% for many of the sectors and I’d say that these are total return vehicles and we don’t know what’s going to happen next.

If I told you what’s happened in the last 10 years, if 10 years ago we had this conversation closing, ”Hey, next 10 years, this is going to happen” and I tell you about the good and the bad, there’s some really good stuff out there but there’s a lot of bad stuff that’s happened and again, if you’re going to create a portfolio that could have produced income — you can get to 8% comfortably or repeatable in my opinion with closed-end funds. That’s of course if you want and re-invest the difference but you can do that with a balanced portfolio, with a lot of different sectors and lot of different managers and occasionally when things get expensive, you pair it back or slot but things get cheap, you buy more or you swap into it.

That’s the closed-end fund benefit, is that you can get these extra pricing levels as long as you know why they’re there. Alright, so someone is asking about ASA — no, I mean gold’s is gold’s, ASA is the first metals closed-end fund and I’d say that gold is just not doing well and so the precious metal funds won’t. I think if you’re going to use that fund as an allocation, I think you just trust David Christian and so you’re going to have a 3%, 2%, I don’t know, whatever makes sense for you and you’re not going to look at it because if you going to look at it, now is when you buy more of it. I’m not saying you should but I think still gold seems on the border of that fund if my brain serves correctly.

Many closed-end funds are on almost tax law selling ridiculous levels. Corporate bonds, yes, I mean right now the spread on different closed-end fund, sorry, some of those we mentioned here, multi-sector bond funds. They allow the portfolio manager to pivot through credit markets and you had to be a good manager and you have to understand what he can and can’t do but multi-sector means more than one thing, not just investment grade, not just short duration, not just floaters, but not just two things because sometimes you see floaters and high yield together, pretty common. I like the multi-sector class because it allows the manager to pivot and as long as you have good pricing, repeatable dividends and good manager performance that’s good.

Again, sorry about the teach graphs, we’ll adjust that. FOF, FOF is a Cohen & Steers fund, a closed-end fund, it’s the only out there, I’d say if you’re along this sector, I don’t always agree with the exact allocation but we’re different managers, Doug is a fine manager, less cheaper than normal, 11. In fact discount right now is cheaper than normal but I pick closed-end funds for a living so we don’t typically buy that fund. It’s an LITS allocation, you’ve got to play the names, I know, I don’t think recently but we were up at capital link one year and hear a lot of Pinto funds or big premiums, I’m hoping, I haven’t looked at its performance recently but hoping he hasn’t because some of those funds are back and down on their premium. I mean, Jim, about the Pinto, I can but I don’t know your situation.

All I can say is there’s really five things that are my rule of thumb and my guide post for closed-end fund investing, is should you be in this sector, so you start at asset allocations, so start with your pie charts. We were doing consulting projects for investors, some have chosen to hire us and some haven’t and they give me their closed-end fund portfolio and we first say ”Okay, so here is how you allocate it, now let’s talk for a little bit. I think you should allocate it this way, can you live with it?” We first start with, you know, I show them the blended allocation for what we would recommend for them and then once they agree to that then we say to them ”Buy these funds and here is why these funds.”

I think that’s step one and the fund picking, there’s nuance work. I mean there’s picking great managers when you’re happy with the price but the price is piece of it, I mean it’s hard to well when things are expensive. it’s easier to do well just from the up-gravity of things reverting back to even a newer version of normal that’s not as narrow as it was before even at premium. 20 discounts for things that aren’t broken or cheap, the dividend policies. I was really pleased. There was a – I won’t speak names – there was a muni bond fund that wed owned but then we didn’t like the earnings coverage, so we rotated out of it and went into another fund, same sponsor by chance and then on the same day, the one we used to be in reduces dividend and the one we had bought increases dividend, I say ”Goodness, our data actually does things right sometimes.”

The dividend policy is important and the muni bond fund is a very, very boring structure where you just collect dividend and pass it through and you can delay it for a bit but over time, you’ve got to earn the dividend to pay the dividend. Discounts can protect you from decisions; things are stupid cheap you don’t have to be earning a dividend because you’ve got upside in excess of a dividend change and if you’ve already had this discount, a dividend change will really impact the market price, at least more within a day or two. I don’t know if that’s helpful and then say, we really look at NAV performance, NAV performance is so important to us than the expense ratios.

Which fund be it S2 funded would have exposure to equities? I don’t know, it changes every day. I would say, what I think of this more importantly is what can do well if the SP500 does well and yet maybe — unless it’s covered call funds, reduce the volatility, gives me consistent cash flow because most people are here for income purposes. I think the future of closed-end funds will be in more of the listed hedge funds like there are in London. You know, talked to people in the US, talked with the manager looking to maybe do a closed-end fund and so they have an interval fund which someone asked about which is maybe for an integral fund but ask me about private closed-end fund, are there private closed-end funds that are credit investors, that they were similar fillings to regular closed-end funds?

We don’t cover them because they don’t trade publically, they’re really more of registered hedge fund. They’re interval funds which are kind of a cross between open end funds and closed-end funds as in they are able to add money regularly, I think daily and redemptions are available quarterly or monthly. Not as much fixed capital as a closed-end fund but more fixed than an open end fund. I welcome these changes because it gives people chance to try to blur the lines between structures and they’re trying to figure out what works? What do investors like? What attracts assets? That usually leads to money.

How much worse would closed-end funds trade when we get to the heart tax law selling? I don’t know if you’re the one that — oh yeah, John, I think it was earlier, that was a good question earlier. I didn’t print your e-mail, I apologize. I would say that, so tax law selling, as I said earlier, I’d say, I think that’s at 60 to 70% priced into some foreign discounts. I just think, and there’s also a chance, there is a chance, a reasonable chance that it takes a lot longer to actually raise rates but with that said, that’s why I think diversification is a piece of it because we do our best to make decisions for clients but the market goes up and down every day and if we just sort of balance what we can control, what we can’t understand and then react to it as we need to it, I think that’s the best answer. I think rates when rates do go up, everything yieldy will have some problems but honestly, I feel like we’re there now.

There’s a chance when rates go up that things will snap back because it happened and that it was slower and less than people assumed and I think you know, some people say ”Oh, I’ll hold onto my cash until rates go up and then ill invest,” well okay, we’ll see when that happens. I wouldn’t worry too much about it. We talk to clients about ”What do you need from us? You need cash flow? Okay,” so right now we may be giving you a less portfolio put together for a client recently, 11% blended yield they’re going to have in the portfolio, 10% BDC’s, 30% taxable bond funds but the multi-sector, the senior loans convertibles, small high yield, emerging market and then 60% equity but a mix of — as RIT’s and MLP’s and covered call and US equity and global equity, 30 funds and all in all.

We’re giving you 89 cents dollars or we’re giving you 8 and a half percent yield and let us worry about the asset allocation, let us worry about — we’re doing our work. We worry about the swapping and changing and we’re supposed to be giving you X dollars a month and that’s all you can really experience, I think that’s a very common experience for closed-end funds. Those look like ETF’s because I don’t know the tickers, oh David, yeah the thing that’s done twice as well as the SP500, is really enigma, it’s a hedge fund in a closed-end fund wrapper, it’s next point financial, NHF. We interviewed them on our blog two years ago, three years ago.

They were a senior loan fund and we caught them when their equity was trending up and we said ”That’s funny,” so we started to buy it because we were like ”Its performing better and it seems less risky from a duration reason and from like a bond to fixed income reason” and then it wasn’t just making any sense to me so we interviewed Brian Metz who is the CEO, this is good sense, he was very well versed in the portfolio. They had like a 20 something discount in the year that they did 30% total return on a NAV basis. So yeah, that one is a, I hate to say special case, portfolios high turnover, it’s not a boring plain vanilla fund but I would say that, you know, different risks associated, the manager has been very successful, some very good timing, some very good plays. I keep hoping that they come out with some more funds because I really like the manager and id love for him to have different buckets that we can invest in.

Yeah, and at NHF, I mean we don’t speak a lot of things that we like that’s why people pay us to be their manager or for projects but at NHF, I mean if you know why you’re there, it’s very attractive, it’s a little less attractive than it was a year ago, it’s very attractive. I mean I have a few more slides, I really want to cover your question because that was obviously that’s what everyone found was important, again, you’re not going to cover it but the data we’ve covered — but conceptually, we now have a three year data point to work off, we’ve done some more momentum data. We now are tracking tenders, we’ve purchased through the secondaries and dividend growth and then number if days’ things trade on premiums in a one and three year basis, go figure in two years, well five year data.

BDC’s, again, basically the same stuff though we’ve had a deluded net asset value which is pertinent when it’s a secondary and it’s not always dilutive but we want to have an idea of once the investment comes out, we want people to know what the net asset value is based on the current data. History cover, this is again, a friends site, it’s currently a free site, he expects to maintain it as a free site as long as he chooses to maintain it. This is like heat map or tree map, the link is at the top, this is not a recent date but conceptually when things are moving, red and green, obviously it makes sense. Bigger boxes are more shares but a neat way just to quickly and I prefer for you to see that stuff, mergers are down but they are so high that they’ll be some pending but we’ve averaged 16 a year and we’ll probably do — if we do 12 this year I’ll be surprised.

People say closed-end funds are dying, there’s less of them, yeah, but there’s more net assets. What fund sponsors have done is this crazy thing that if we have three things that are the same thing, we’re going to put them together and create a bigger fund with better leverage terms, more liquidity, generally, lower expenses for the fixed stuff and all in all I think everyone wins. We have seen IPO’s, Mergers I think they are very appropriate, DEF had picked up slightly last year but still right in the average for the group and then these are just some chart of — we ran for a project and our data manager thought you guys might like some clean-one chart.

These are generally US equity funds, I think its 10 discounts are cheap, 9 or 8 and a half are rather expensive historically. Non US equity, 8 and a half is kind of expensive, 10 and a half is kind of cheap from an average basis. Here’s the pull down in special equity driven by MLP’s, here’s the muni bond, this chart. People that were at 5 discounts or less were like ”Oh, we were doing great” earlier this year, now they’re like at 8 and a quarter discounts, they’re like ”Holy crap! What happened?” I think that’s above a lot of the moves, like I said there’s some decent NAV performance long term for those things. I think we ran every closed-end fund, muni bond that have been around I think for these 10 years, 10 or 15 years, I ran it during the last quarter that they’re basically 6 and low change was their average performance total return. If you can buy them when they’re cheaper than normal, there’s some long term to that, if you buy them when they’re more expensive than normal, then there’s some long term downside to that.

These are the links, nothing new here. These are free resources, we added a link to gates research at the bottom, I’ve been tracking it for a while; actually Charles called an hour before this call. It is paid but currently I think it’s too cheap, it’s priced at 250 a year, I expect it to go up because it’s only about 50 tickers he’s covering but that’s pretty solid for the sector and there’s no one else really doing that work anymore, we tried it with our best ideas list and just didn’t feel it was the right answer for our investment firm, so that’s another support outside of these other free solutions which require you to do the more work yourself but if you want some prospect financers definitely give the research a try. These are our models, the ways we manage money for people.

Now, we have the BDC and the muni on COVESTOR, we will get the other ones there but they told us they had a whole of debt focused portfolios so we added our two debt focused portfolios there first. Long term performance, I’ll try and get this slide updated before we release it with second quarter data, this is still first quarter data because it wasn’t fully updated and that’s it. Let me see if there’s any more commentaries and — goodness, I only have about 5 minutes, I apologize. So yeah, our firm, unless you’re friends, family, employee, we’re looking for a million dollar household assets, so it can be two or three accounts because that makes the most sense. We have a client bringing in I think 1.2 million dollars and a 50,000 dollar taxable account. Much more than 50 is hard but we’re happy to make things simple for people because that makes sense. That’s why we’re pleased to offer more models, eventually at COVESTOR, they’re about interactive brokers during the quarter which slowed down our process with them, I actually started the relationship with them last august, and so that is something that I’d say but like I have 50 clients and I’m trying to keep that number around that number because we’re not looking to be the biggest firm ever.

We have about 105 million in assets and I was just doing some work on our quarter, we got about half of our revenue from the data, from the COVESTOR and from the UIT relationship. It allows us to have less resources to help people out but not push around too much money because there’s people that do it well but I just don’t want to push around a billion dollars because I don’t know how to do it. We’ve kind of decided to keep the firm, because of liquidity, between 200 and 250 million, would be my total, I’m 37 so I have some years to do that high side for the business. That’s the way it with these other relationships, you know, I’m happy to do consulting projects if that makes the most sense, we did some consulting work for fund sponsors in the first quarter for the board of director meetings, we did some work last year for another board of directors meeting.

With our data projects we have prospected there, I think that’s useful and we hope to develop more tools, maybe more UIT’s if it makes sense over time, maybe more — yeah there’s more ways to help people out. Some good news: for people that like BDC’s, now is a big focus, 14 people actually accept BDCs – which is a big number. We will have a BDC free research page, our data manager is programming it in pieces. We’ll let people know, it should be within a month but definitely by the next quarter’s update. It will be linked off of our company’s website; CEF advisors dot come, I’m sure you have been there at some point and they’ll probably host it on our data website but expect about 15 data points and eventually sortable by peak to value, smallest – biggest by each column, just so that people can login somewhere and see what the discounts are for BDC’s.

We have deep data with our spreadsheet and our PDF file for paid subscribers but we want to offer something. That’s probably the most exciting thing and by year end we should have some more web based tools for our research clients, those are in development as well by our data team. With that I appreciate everyone’s time, there’s a lot to cover, if I missed something e-mail me or call me, you’ll get a survey, hopefully you liked what you saw, hopefully if you have any questions about a product or service just give us a call, and someone will follow that up with you and again, we’ll do this many days and in the meantime good luck investing and remember, to be a good closed-end investor is to be a good contrarian because if everyone sold, there’s few sellers left, if everyone has bought, there’s few buyers left. With investments you want people to agree with you later and that this structure allows a great way to access that theme and so it’s got to be best on select allocation but I think you can make some good total return better than other structures by just pivoting and doing some due diligence. Good luck and god speed.

*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 June 30, 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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