BDCs have had a rough 12 months with many investors wondering if the sector is broken. The 43 debt-focused BDCs ended October 7, 2015 at an average -13.9% discount, after healthy +7% average rebound from the -20%+ discount lows seen in recent weeks. This is still very far from their 10 year average discount of only -0.41%. Upon further review, over the last ten years BDCs ended each year at a premium five times with an average +12.4%; while they ended the year at discounts five times with an average of -11.8%. If you exclude the 2008 financial crisis (not a common event) the average discount is -6.6%. The debt BDC sector currently has an average yield of 11.2%, or almost 3% income a quarter.
When investors see BDC yields, many think the portfolio must just be “junk bond like” exposure. CEFA backs out discounts and accounts for leverage to get a sense of what the portfolio manager has to do to hit the board of director’s dividend policy. We call this Leverage Adjusted NAV Yield. For debt BDCs it is currently 6.8% and, for comparison, the average taxable bond CEF has a Lev Adj NAV yield of 5.8%; only 1% lower than BDCs. We think this shows BDC portfolios are not as risky as some fear. Read more…
John Cole Scott, CEF Advisors
We’ve had, I think, two maybe three IPOs so far in the sector. We have another one that comes out this week, for the closed-end fund sector… And what I see, one or two closed-end fund IPOs a month is a natural, healthy process, because this is something where you want to have fund sponsors and syndicate desks get together and get the best ideas, just not every idea, out there. And the market’s going to allow that to adapt over time.
So I can opine that someday in the future closed-end funds may not be sold on the IPO with a stated yield. It might just be a great manager with a great idea, and you want to be there, because of that, remember, the fixed capitalization of a closed-end fund and that daily investor liquidity that you don’t get with other fixed-capital products.
Do you see any changes ahead possibly in the IPO structure, in the way fund companies launch new funds?
Yes, so we’ve seen a couple of things in the last couple of months, some of the new funds. We saw last fall, the first equity closed-end fund with a term provision, which means it will liquidate at net asset value 15 years out unless shareholders vote not to have that happen. So that helps protect long-term investors of pervasive discounts.
View Interview: http://investius.com/2015/08/24/cef-ipo-perspective/
Beyond municipal bond funds, tax-sensitive closed-end fund investors may want to consider MLP and covered call funds, says John Cole Scott of CEF Advisors.
We’re talking about tax-sensitive investing. Give us your thoughts. A lot of tax-sensitive investors automatically go into municipal closed-end funds. What are some other ideas you may want to suggest?
John Cole Scott, CEF Advisors
While being in muni bonds is great from an investment grade, quality-based hedge against equity markets, there are other ways to get yield, where if we think rates are going to go up, it won’t have any negative impact in general scenarios for investors. So, one of the best places now is MLP funds. MLP yields don’t go down because rates went up and the cost of borrowing went up. They go down because the company over-leverages itself because they’re not run well.
So it’s interesting. Just this morning two MLP funds raised their dividends by about one and a half percent. MLP funds right now are about a 9 discount but you have a handful of 12, 13, 14, 15-plus. They’ve got a yield of about almost 8 percent on average as a group. And you have a good number of funds north of that, so if you pick a diversified mix of MLP funds, hold them for over a year, you’ve got at worst case short-term capital gains on the yield and you don’t pay that… taxes… until you sell the investment.
What about the risk, again, of problems with oil prices?
View Interview: http://investius.com/2015/08/01/tax-sensitive-ideas/
Sign-up today to view the REPLAY from our 2Q15 CEF and BDC Research Call: https://attendee.gotowebinar.com/register/5674384161574638082
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
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.
We discussed the firm’s investment approach, CEF basics, sectors and funds we currently see as attractive (Healthcare, MLP, Convertible Bonds, Sr. Loan, Equity Dividend and Debt focused BDCs), as well as, commentary on some of Chuck’s listeners CEFs of interest for his well-known “Hold It or Fold It” segment.
You can listen to the show by clicking this link: [Click Here]
Or, copy and past the following link: http://www.cefadvisors.com/Download/150630-MarketCallwithJohnColeScott.mp3
MoneyLife host Chuck Jaffe is senior columnist for MarketWatch. His three weekly columns are syndicated nationally, and his “Your Funds” column is the most widely read feature on mutual fund investing in America. In 2009, Chuck was named to MutualFundWire’s list of the 40 Most Influential People in Fund Distribution, the only journalist ever to make the list. Learn more on their website: http://www.moneylifeshow.com/
CEFs / BDCs Discussed:
AGC, BST, AOD, JQC, TCPC; during “Hold It or Fold It:” AWP, OXLC, CRF, RCG, CHY
If you’re looking for yield, closed-end funds may interest you, says John Cole Scott of CEF Advisors. But remember, CEF distributions may change. [Watch Video]
John Cole Scott, CEF Advisors: Closed-end funds are more than yield and discounts. They’re manager performance and they’re asset allocation. So you don’t just pick a fund because it has a high yield. It needs to fit in your portfolio. You need to have a reason that you’re there.
Investius: If you’re one of many investors looking for yield, closed-end funds may interest you. John Cole Scott of CEF Advisors even calls them, as he put it, “yieldy.” That’s yield with a “y.” But he also notes that closed-end fund distributions are not like bond coupons. Payout levels may change, especially in a rising interest rate environment.
John Cole Scott: So a lot of closed-end fund investors don’t seem to realize that closed-end funds aren’t coupons or bonds. I always say that closed-end funds are listed equities that either derive their value from equity or bond “guts.” An d that the distribution policies are policies, not promises, and can’t be thought of like coupons on bonds… Ninety-seven percent of closed-end funds changed their distribution policy the last time rates went up. Sixty-five or so percent did it, from our data, in the last year. And almost half, 45%, did it in the last six months. So you can’t think of a distribution policy as stable. They go up and they go down, and you have to study them, from our research.
Watch Video: http://investius.com/2015/05/03/cef-yield/
We recently released videos that comment on CEFs & BDCs data and our outlook for 2015 on our Vimeo channel as a summary of our Quarterly CEF/BDC Research Call. A replay and transcription are available on our blog as well.
2015 CEF/BDC Outlook Commentary for BDCs and CEFs (And Ways to Position BDCs/CEFs in a Diversified Portfolios): https://vimeo.com/126740284
Sector Update: Municipal Bond CEFs: https://vimeo.com/126738843
Sector Update: Business Development Company (BDCs): https://vimeo.com/126739002
CEF/BDC Activism, 1Q IPO’s & Recent IPO Trading Levels: https://vimeo.com/126739479
Note: The GER discount was incorrectly stated as at an “attractive discount” when it was at a premium to NAV, however down -30% from IPO price. We apologize for the error.