Sunday Morning Coffee

Barron's has an interview with Thomas Herzfeld, who is all things closed end funds, this week.

This Herzfeld interview gives an inkling of hpw complex investing in CEFs can be when he says they look at 20-30 different things to pick funds.

I went to the Herzfeld website and found a link to a free back-issue of their regular reports that your can subscribe to. While I don't think I am going to subscribe there was a ton of information in the free back-issue.

Included in there toward the end were several portfolios with different objectives including a US Equities Portfolio. I'm not sure if it is OK to republish so I won't but I can share a couple of observations.

The portfolio had 14 different funds. I was surprised that in looking at them on ETFconnect there is very little overlap of holdings within the funds, there is some but not a lot. This is not easy to do. Consistent with the article almost all of the funds were trading at big discounts to NAV. Some of the funds have almost no volume. Of the 12 holdings that Yahoo could chart (there were two it could not) nine lagged the S&P 500, two beat and one had the same return.

I concede that in most instances the S&P 500 is not the best benchmark for this study as some of the funds are smaller in cap size. This lag, though, of the funds means one of two things; either this portfolio lagged badly (not the bet I would make) or they do a lot of trading and get good returns (this would be the way I would lean but I did not see any returns posted, apologies if I missed). For the month of April this portfolio had eight trades which seems active to me. Point being it would be very difficult for most do-it-yourselfers to replicate this on their own.

But this is his approach and I am sure it is successful for him but either you pay them to manage your money, try to do re-create something similar yourself or use closed end funds in a completely different manner. It that last one that I have gravitated to.

For certain segments of the market I think closed end funds work very well but I am not sure plain, domestic equity exposure is one of those segments. I have one call writing CEF as an across the board holding, some clients own one of the India CEFs, literally a couple of clients own a dividend capture fund and that is it on the equity side of the ledger. I do a little more with fixed income CEFs with a convertible bond fund, a foreign bond fund and in some instances a generic bond fund.

Herzfeld has forgotten more about CEFs than I'll ever know and so he can use all-CEF portfolios. Most us should not, including me.

The picture is of a restaurant in Hellnar, Iceland, a couple of hours outside of Reykjavik. Hellnar has a year round population of nine. Yikes.