Cohen & Steers: CEF 'Spring-Loaded' in Market Recovery

During the current market decline, the share price-to-NAV discounts of closed-end funds (CEFs) have widened to 14.5%. This is the widest discount when compared to year-end comparables.

As the equity markets recover, the discounts will narrow generating incremental returns over the market’s returns. In 2003, the CEF sector's price-to-NAV advanced to a premium of 0.8%. The percentage change from the current discount to the 2003 year premium is approximately 30%. This would be incremental to the market driven return.

Cohen & Steers Closed-End Opportunity Fund (FOF) (NYSE: $10.00) represents a convenient way to invest in a recovery of the CEF sector. The Fund seeks to achieve its primary objective of high current income with a secondary objective of capital appreciation by investing at least 80% of its net assets in common stock of closed end management investment companies. FOF pays a monthly dividend $.1175 (annualized $1.41) with a current yield of almost 14%. The stock trades at a 6% premium to its NAV.

However, since FOF invests in the stocks of CEFs, FOF effectively trades at a discount to the aggregate NAV of its CEF holdings. FOF has total assets of approximately $445 million, trades an average daily volume of approximately 100,000 shares and has an expense ratio of 0.9% (industry average expense ratio of 1.5%). Cohen & Steers is an investment manager that has extensive experience with equity income securities—in particular, Real Estate Investment Trusts (“REITs”).

Disclosure: Author holds a long position in FOF

Comments

[grinninbrit71:]

this is a crazy article... its a good spring-loaded vehicle for a market recovery because even at a 6% premium, it "effectively" trades at a discount because its components trade at a discount.

well yeah, thats true... but then again just buying the components saves you the 6% overpayment and the annual management fee's of the fund (which of course the investor has to absorb in addition to the large management fee's that component CEF's often charge too.)

go find its top 10 holdings and buy those yourself, forget the vehicle holding them selling at a premium... unless of course this vehicle moves to a nice 10-20% discount while at the same time the components are at reasonable discounts of 10-20%

also remember that while discounts now are very large compared to the prem/discount landscape of the last 10-15 years.... you need to throw the last 10-15 years out !!!! these are junk bubble years. CEF's have been around since the great depression. go back and look at the long history excluding the wacko 90's-00's. 10-20% discounts are the norm.

so now that the components are at 10-20% discounts, assume that to be "par". so if you really want a "parent" holding of these funds, and that parent wants to charge you 1% a year management fees, perhaps a 10% discount of FOF would make it a reasonable buy. That would then make this article more spot-on.

2008 Oct 23 06:46 PM

[Joe Eqcome:]

IMHO, for those who have the time and effort to research and purchase the individual stocks in FOF's portfolio—go with God! But, remember, you’re going to be absorbing the cost of 10 trades versus one. Assuming you purchased 100 shares of each of the 10 top holdings at $10 per trade it would cost you $100 versus one 1,000 share FOF trade at a $10 commission. This should help mitigate FOF's management fee (less than 1%). FOF is just a convenient way to play the CEF discount contraction in a rising market--not the only one.

Secondly, while CEFs have been around since the Depression (regulated by the ’40 Act) its current composition would not be comparable with far earlier periods. After being moribund for decades, the CEF industry experienced a growth spurt. Since 1990 the CEF industry has gone from $52.4 billion in assets (71% bond funds) to $315 billion is asset in 2007 (only 20% represented bond funds) (ICI Fact book). So a comparison with the pre-90's might not be meaningful.

Lastly, FOF currently trades at a discount of almost 2% to its NAV which represents a further discount to its discounted holdings.

While FOF is currently yield almost 15%, only 28% of the distribution is covered by investment income. It will likely have to tap into its capital to maintain the distribution--placing downward pressure on its NAV

2008 Oct 24 02:28 PM

[Joe Eqcome:]

With regards to the contention that a premium on FOF dilutes the benefits of a positive change in the contraction of the underlying portfolio discount is only true if in fact the premium of FOF change in an adverse direction, i.e., declines. So, FOF’s premium is a relative and not an absolute investment factor.

Example, if the underlying stocks owned by FOF go from a 10% discount to a 5% discount, the portfolio of stocks should increase by 5.8%. This would also be true for FOF's stock price--assuming the premium (or discount) remains the same. If in fact the premium increases (or in the case of a discount, contracts), the return on the underlying portfolio is further enhanced. If FOF's premium increases from 1% to 2% (a small nominal increment) the return on FOF's stock would be 6.9% vs. the underlying return of 5.8%.

FOF currently trades at a slight premium of 0.76% (10/24/08). FOF has been trading at a monthly average discount of 2% price to NAV since its inception, so there is the possibility that if FOF gravitates to its historic mean it may have some dilutive effect on the underlying return of its portfolio. Although, in market recoveries CEF's discounts contract and premiums expand.

2008 Oct 26 09:42 AM