I had an article about closed end funds run on TheStreet.com today.This chart was sent along to me in response to the article from TFS Capital which is the firm that runs the TFS Market Neutral Fund (TFSMX).
The point of my article was in times of crisis (real or perceived) CEFs usually get crushed.
I have a couple of CEFs in my ownership universe and they are no exception.
One reader left a couple comments on this morning's blog post (I'm guessing he read the TSCM post?) calling CEFs weapons of financial destruction.
Anyone owning too many of them would certainly feel that way. I used to write about them more when the ETF space was much smaller. I talked about moderation, which I believe is important in all aspects of investing, but it would not be surprising to hear about people owning to many of them. For some people even one may be too many.
Sorry, let 'er rip too early. The chart shows the point made in the article. Every so often CEFs puke down and scare the hell out of people. After that they either come screaming back work work back slowly. Coming back after this crisis is a good bet but I have no idea if they will scream back or work higher slowly.
15 comments:
I've been investing for some 30 years and I've never stopped learning. Unfortunately, I learned about CEFs during times of crisis the hard way. I owned several funds. All were run by the most reputable houses, helped to diversify my port in hard to fill segments, and boosted my yield. They were all taken out and shot; no, machine-gunned is more like it. I'll reconsider some selectively, but not until the volatility subsides.
CEFs covers a big universe to me. Any one with experience care to share what sectors they focus in on and how to pare things down to a manageable watchlist?
I used to use CEF's to fill holes in my strategic allocations but now that there are more investment vehicles available I tend to avoid them because discounts from NAV can be highly persistent even when there isn't a crisis.
I've traded them tactically for years though because those discounts often represent a fairly predictable and usable market inefficiency, first described (in public that is) AFAIK by Burton Malkiel in an early edition of his Random Walk Down Wall Street; he afterwards referred to it with typical modesty as the "Malkiel Step."
The size of the discount and the quality of the organization are more significant than the asset category in question; e.g., if you can buy NAV for 75 cents on the dollar or less in fund that has shown its quality then even in sectors that are doing poorly value investors fairly dependably return and bid it up closer to NAV (even if NAV itself is slower to recover).
For example I picked up a global growth and income, call-writing CEF today at a discount of 30%; strong organization, dividend appears secure and, at the current market price, places the yield at about 17% so I should be paid for waiting even if the market continues to fall.
Some of the free sites such as ETF Connect (www.etfconnect.com/) allow screening by discount I believe if you're curious. IAC when you find some candidates look at their premium/discount history for patterns, check out organizations, etc.
I have owned some CEF's for awhile and really like the yield. It is quite disturbing to see how hammered that they are in this market. Since the financial industry is so precarious I am wondering whether the financial firms that offer these funds are going to be able to survive and whether we will see some CEF's go under. I mean, how high are the probabilities of the happening?
bill b--Morningstar has a CEF discussion board with some savvy posters. You can learn a lot there about funds to focus on. Not surprisingly, it's gotten a little quiet recently. CEFA.com and etfconnect.com both offer pretty good search engines, which I suspect you're already familiar with.
I use CEFs primarily for streaming income and build my list starting with NAV discount and yield. Obviously, you need to be very careful of leveraged and high-yielding funds in this environment. Some of mine have not only taken big hits in terms of price, but also reduced their dividends. Double whammy.
If you prefer, there are some fund of funds CEFs where you can hand off the selection to a manager. Expenses run higher, but one presumably gets professional insight in return.
Yeah, they get crushed. So if the divy's sound and their at a discount, why not buy 'em and ride 'em back up? You're usually paid to wait.
Roger,
A bit O/T (sorry), but I was wondering. Roger, I know you use 50 DMA vs 200 DMA as one of your barometers as to the overall direction of the market, and to position your portfolios defensively, or offensively.
Do you also use it on the micro level? Helping you decide whether to enter a position you might have been watching for a while, or conversly, perhaps lighten, or completely exit a stock?
Thanks.
Jan
Jan,
rarely, occasionally, but rarely.
anon 2:58--It's tough in this market to determine with much certainty whether a dividend is safe or not. There are rumors floating around that GE may cut this week. The other thing to be careful of is that the distribution for CEFs can have lots of moving parts, including the return of your own principle. So while a "dividend" may look safe and not get reduced, it's quite possible you're just getting some of your own money back as "yield."
The distributions are high but not a free lunch. They cannot pay it all out of income so they use leverage and/or return of capital. Some can pay from capital gains. Hard to analyze and totally understand. If you don't, don't invest in them.
I've invested in and watched CEF's, both muni's and taxable, for over a decade. They do get crushed in times like this but they have always come back. That's always!
But, is this the one time it's different? I always say that when their crushed and it turns out that it's not different. They come all the way back and the dividends are a bonus.
But is this time different?
to anon 501
If this time is different, watch NUV. A non-leveraged muni that's been around for over 20 years with a yield of just under 6%.
The chart shows that it's only been this low one other time in history and it's always bounced back.
How do you feel about one of the strategies you've mentioned before on your blog, buying a CEF at a huge discount and buying a highly correlated inverse fund to make it a pure play on the gap between share price and NAV? Starting to see a few opportunities in this space to match CEFs with inverse index funds.
Felix Solomon points out that small etfs can be dangerous in markets like this, with PCY, for example, trading like a cef.
Wall Street Garage Sale Produces Closed End Fund Bargains
There's a bright light at the end of the tunnel--- finally. Most of the really well respected, long term investors are advising their audiences to hang in there, to stop the panic selling, and to look for the great companies that have withstood the economic downturns of the past.
Buffet, Bogle, Gross, Schwab, and company offer sound advice--- don't run and hide, it's time to hit the Wall Street Mall and go shopping! They've seen the indicators; they've been there before. So have many of you. Clearly, it's time for action.
With IGV stock prices down 50% or more, and income securities as low or lower, Chuck Jaffe points out in MarketWatch that the case for loading up on managed Closed End Funds (CEFs) is a strong one. The great companies are in garage sale mode, and managed CEFs are selling at an additional 25% below net asset value (NAV).mcr
Jaffe writes: "With investments, investors can only guess at how big a bargain they are getting. The one exception is CEFs, where investors looking for both bargains and income streams get a price tag that shows the actual amount of their discount--- an intriguing choice for current market conditions."
Jaffe emphasizes that investors "look inside" the wide variety of CEFs out there, and there are excellent educational websites, like ETF Connect, for hands on research. He quotes investment manager Jerry Paul, who feels that "the buying case is pretty clear", and that "the best times for closed end funds have been in crisis environments".
The CEF idea, in both equity and fixed income portfolios, boils down to this lightly edited commentary from an old friend that brainwashing book readers know as Deep Pockets: "Closed end funds are misunderstood investments and perhaps that is reflected in their volatility."
"Seems to me that the leverage on the funds would be the cause of concern, yet the taxable funds like Blackrock are not leveraged yet seem to have the same volatility as the leveraged funds. Credit risk could be another cause of concern, yet the insured municipal funds seem to be as volatile as the uninsured."
"As you have pointed out, overall income streams have been stable, yet double digit yields are all over the place. Fixed income assets are on SALE because of the decline in the bond market and thus the reduced net asset values."
"Additional opportunity exists because the Market Values of CEF stocks are at huge discounts to their already lowered NAVs. It is like the 25% markdown sale items are reduced by an additional 25% for no reason other then fear and misunderstanding."
"Looking at prior periods of panic in the markets, closed end funds historically have big rallies toward the end of bear markets. 2003 saw many closed end funds achieve returns of 25-30% in just twelve months. Those who locked in high rates during panic-selling enjoyed high income streams going forward, long after the markets turned up and current yields went down."
Deep Pockets also believes that there are flickering beacons of hope out there for a rally to commence in both markets before too much more blood is shed by the faint of heart. Here are some bright lights to focus on:
Light One: "The credit markets are beginning to thaw, with LIBOR rates coming down and commercial paper markets starting to function more normally. Some of the fear of systemic failure is abating"--- and the Fed cash infusion has not yet started.
Light Two: "Oil prices are dropping back into normal ranges, increasing the purchasing power of consumers", and reducing the costs of getting goods to market--- but hopefully not enough to discourage conservation and US development efforts.
Light Three: "The price of gold has fallen, a normal sign that fear and panic have lessened."
Light Four: "The dollar has risen to multi-year highs against many currencies increasing confidence that we will lead the global recovery"--- no matter how bad you paint the picture, there's always a recovery.
Light Five: "You just don't hear too much about inflation anymore"--- and prices just haven't fallen as they would if things were looking even worse.
Light Six: "The few up days lately on Wall Street have inspired huge volume, while the volume on down days is falling"--- remember, buyers tend to hold on for profits down the road.
Light Seven: "The 2009 P/E ratio estimates for S & P 500 companies are historically low."
Light Eight: "Dividend yields on common stocks are historically high."
Light Nine: One huge element of economic uncertainty will disappear in early November, and most would agree that this too has been discounted. Typically, the media will place more emphasis on good news during the honeymoon period.
The rally is in your hands people, let's get out there and party! How? Buy back into your 401(k) value funds, add to your personal portfolios (particularly those high yielding income CEFs), and stop taking losses on solid, mainstream, dividend-paying companies.
Steve Selengut
http://www.sancoservices.com/
http://www.kiawahgolfinvestmentseminars.com
Professional Investment Management from 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
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