Near the end of each year, there are often bargains available in one or more closed-end fund sectors. In some years, this is due to tax loss selling. This year, because of the upcoming fiscal cliff uncertainty, there has also been some selling to capture capital gains, because the capital gains rate will likely go up next year for investors in the top income tax bracket.
An equity closed-end fund that looks attractive now is the Swiss Helvetia Fund (SWZ). SWZ is a non-diversified fund whose objective is to seek long term capital appreciation by investing in equities or equity-linked securities of Swiss companies.
SWZ does not hedge its currency exposure, so by owning the fund, you are getting currency exposure to the Swiss Franc. Over the long term, I see this as a positive, since the Swiss franc has historically been a very strong currency.
Recently, the Swiss government has been "capping" the Swiss franc at 1.20 to the Euro in order to protect its export markets and to prevent deflation. But this cap will likely come to an end within the next few years in one of two ways-
- Optimistic scenario: The European crisis is resolved. No more need for the cap.
- Pessimistic scenario: The crisis deteriorates in Europe. The Swiss government can no longer enforce the Euro cap and may decide to peg the Swiss franc to a basket of other currencies.
At Friday's close, SWZ traded at a -14.7% discount to its net asset value. This is well above its 52-week average discount of -12.3%.
SWZ is a highly concentrated fund where the top ten holdings are over 70% of the portfolio. Here are the top ten SWZ portfolio holdings as of November 30, 2012 taken from the fund's web site-
Top 10 SWZ Holdings (as of 11/30/2012)
Nestle SA (OTCPK:NSRGY)
Roche Holding Genus (OTCQX:RHHBY)
Novartis AG (NVS)
Compagnie Financiere Richemont (OTCPK:CFRHF)
UBS AG (UBS)
Credit Suisse (CS)
Syngenta AG (SYT)
Swiss Life Holding
Swiss RE LTD (OTCPK:SSREY)
Holcim LTD (OTCPK:HCMLY)
Almost half of the SWZ portfolio is invested in only three stocks- Nestle, Roche Holding and Novartis. All three are global powerhouses. SWZ is definitely not a closet index fund. It is very heavily over weighted toward pharmaceuticals and food and beverages. This is the top ten sector breakdown as of September 30:
Industry Sector Allocation (as of September 30, 2012)
Food and Beverages
Industrial Goods and Services
Personal and Household Goods
Construction and Materials
Private Equity Partnerships
SWZ has an annual expense ratio of 1.31%, which is a bit on the high side, but not too bad for a fund investing in foreign stocks. For equity CEFs, I like to see the discount at least ten times the expense ratio, and SWZ qualifies using this standard. If you buy SWZ at today's price, you are buying solid stocks like Nestle, Roche and Novartis for a "wholesale" price of 85 cents on the dollar.
SWZ Historical Performance Record (annualized total returns)
Total Return SWZ Net Asset Value MSCI EAFE USD
Here are some other summary statistics for SWZ:
Swiss Helvetia Fund
- Total Assets: 406 Million
- Inception Date: August 27, 1987
- Inception Share Price= $8.00
- Last Semi-Annual Distribution= $0.053
- Fund Expense Ratio: 1.31% (Management Fee= 0.75%)
- Discount to NAV= -14.7%
- 6-Month average Discount= -12.91%
- 1-Year Z-stat for Discount= -2.01 (-2 std. deviations)
- Portfolio Turnover rate: 55%
- Leverage: None
- Average Daily Volume (shares) = 42,000
- Average Dollar Volume = $450,000
On December 11, 2012, the Fund's Board of Directors announced a new stock repurchase program for the Fund where it can repurchase up to 500,000 shares of its stock during 2013 in open market transactions. This should enhance shareholder value by increasing the fund's NAV and may help to reduce the discount next year.