What's going on with the closed-end funds [CEFs] lately? During the last week of October, and the first two weeks of November, most have taken a haircut, particularly those selling at premiums to their net asset value [NAV].
Several analysts have offered rationales for the declines, including: the fact that some premiums had attained ridiculous levels, the overall decline of the stock market in general, the impending "fiscal cliff" and associated increases to the taxation of dividends, the puncturing of the "yield bubble," and the consequences of chasing high yields.
Obviously, the real reason is probably a combination of all of the above. Personally, since I would never consider paying a premium to NAV for any CEF, narrowing the price to NAV spread is viewed as a positive.
The Protected Principal Retirement Portfolio CEFs
At the end of October I decided to reduce some of our portfolios holdings, particularly the CEFs and REITs, pending the outcome (or resolution) of "fiscal cliff" issues. I did not see the re-election of the incumbent as anything if not a short- and intermediate-term negative for stocks sensitive to the impending fiscal scenario.
With that in mind, I sold portfolio positions in Calamos Global Dynamic Income Fund (CHW), Cohen & Steers Quality Income Realty Fund (RQI), and Alpine Total Dynamic Dividend Fund (AOD). We booked a substantial profit in RQI, a very small profit in CHW, and actually got out of AOD better than break even.
We are left with fairly substantial positions in Alpine Global Premier Properties (AWP) and GAMCO Global Gold, Natural Resources and Income Trust (GGN). I continue to like each of these, and have no intention of liquidating either at this time.
What CEFs Are We Looking At Now?
Given a 50-50 chance of 2013 fiscal cliff issues being resolved I have been researching CEFs for opportunities, particularly after their recent decline.
The candidates that have resulted from my screens include: EV Tax-Managed Global Fund (EXG); H&Q Healthcare Investors (HQH); Nuveen Diversified Currency Opportunities (JGT); Nuveen Real Estate Income (JRS); and possibly the opportunity to re-purchase CHW at lower levels.
Let's take a quick look at each of the candidates:
EXG is one of many, many CEFs that utilize options strategies as a means to enhance income. They invest globally, which I consider a plus, since their current holdings give the investor exposure to energy, consumer staples, drugs and technology, among other asset classes.
EXG currently trades at an 13.4 percent discount to NAV and pays a quarterly dividend of $.244, of which $.17 is a return of capital. The dividend yield on the NAV is 9.68 percent. The dividend has already been reduced to more reasonable levels, and I do not expect further reductions.
The price has increased over 18 percent year to date while the NAV has increased close to 13 percent. The ratio of the discount to the fee is over 12:1.
Hambrecht & Quist Capital Management offers two healthcare CEFs: H&Q Healthcare Investors and H&Q Lifesciences Investors (HQL). The primary difference is that HQH invests primarily in big-pharma while HQL is more of a biotech fund. I believe that healthcare and big-pharma should benefit from the coming Presidential administration.
HQH trades at a discount of 2.7 percent to NAV, and the fund pays $.38 quarterly (all of which is a short-term gain), for a current yield of 8.48 percent. The dividend was recently raised to $.38 from $.36.
The stock price is up 38 percent year to date while the NAV has increased by 27 percent. The discount to fee ratio is only 2.0, suggesting that HQH might be a bit overpriced at today's levels.
I have personally followed JGT for a few years, and owned it for a short time a few years back. The fund is a play on foreign currencies since the dividends they receive are in foreign funds, which can result in enhanced dividends when converted to U.S. dollars and deposited into our brokerage accounts.
JGT sells at an 11.3 percent discount to NAV and has a present yield of 9.1 percent. The quarterly dividend is $.2975, and $.155 of this is return of capital.
The ratio of the discount to annual fees is about 11:1. The stock price has appreciated by 16 percent year to date and the NAV has increased almost 13 percent. Brazil, Mexico, South Korea, Canada, Australia and Turkey constitute the fund's largest investment positions on a percentage basis.
JRS is a real estate fund, investing in a combination of common stocks, preferred stocks and debt instruments. After a brief dip to a discount, the price is now back to a small premium (2.8 percent).
The dividend is $.23 quarterly, for a yield of just over 8.6 percent. $.15 is considered a return of capital. The fund's stock price has increased by 9 percent year to date, while the NAV has increased by 15 percent. You don't see the NAV of a fund outstripping the stock price in many cases, and I consider this to be very positive.
JRS is invested 100 percent in U.S. equity REITs - just about all large caps. Their largest positions are equally spread among office, specialty and retail REITs.
I'm not yet certain, but might have exited CHW prematurely. I enjoy receiving monthly distributions, and CHW is very consistent in this area.
With a discount of just over 10 percent and a yield of nine percent it continues to be attractive here. CHW has outperformed many CEFs this year with a price increase of over 22 percent, and a NAV increase of 14 percent.
The aforementioned CEFs occupy high positions on the portfolio watch list. I remain in the camp that expects further market pullbacks at least short-term, so I will closely monitor all of the funds discussed in this article.
I believe that if we were to eventually add these to the Protected Principal Retirement portfolio they would add diversification into options income, healthcare, indirectly into currency positions and U.S. real estate (complimenting AWP's global investments).
Additional disclosure: The information contained in this article does not constitute a buy recommendation for any of the stocks or funds mentioned. It is provided for the sole purpose of allowing readers a starting point for the conduct of additional research.