Equity CEFs: My Article Performances From 2011

by: Douglas Albo

I starting writing on Seeking Alpha beginning in January, 2011, about the same time I opened up my Investment Advisory business to new clients. I'm not sure how many contributors have gone on record to give their total return performances of the stocks or funds they recommended since they started writing articles, but I thought it would be interesting to see how I've done.

The table below lists all of the articles I wrote in 2011 concluding with my picks for the 2012 year shown in the article which came out January 3rd, 2012. Though the table goes back almost two years now, I should point out that the funds I invest in can take time to reflect their under or over valuation, and many have not even done that to this day. It's true that Closed-end funds can be quite volatile on a day-to-day basis, but there is also a certain gravity to them that over time, will cause them to follow an 'invisible hand' if you will. That 'invisible hand' is dictated by the performance of a fund's Net Asset Value (NAV) as well as a fund's ability to maintain its high distribution and its relative valuation (i.e. premium/discount). Follow these parameters and you give yourself a huge advantage in finding funds that will show positive total return performance over time as well as avoiding funds that will continue to deteriorate even with their enticing high yields.

The performances for each equity Closed-End fund (CEF) I either rated Positive (green) or Negative (red) is shown in the table below assuming re-investment of all distributions from the date the article was written to December 21, 2012. I used Y-Charts for these comparisons since I cannot find a graphing website that shows total return performances on a non-reinvested basis. This is certainly better than most financial websites, like Yahoo! Finance or MSN Money, which simply graph the market prices without dividends or distributions, which for high yielding funds in the 8% to 12% range, is significantly short changing their total return performances. Though I wouldn't normally reinvest distributions (although for some positions, like the Royce Value Trust (NYSE:RVT) I do), Y-Charts only shows the returns on a reinvested basis.

Nonetheless, an investor would have realized these performances had they reinvested the distributions and without the luxury of being able to add to positions on weakness or to reduce positions into strength, something that you need to do with equity CEFs, I believe this exercise gives a pretty good indication of how an investor would have done if they had followed my advice.

Now, 2011 was not a good year for equity CEFs. In fact, except for the utility focused funds, equity CEFs had their worst year since the bear market in 2008 and closed the year at their widest discounts since the market recovery in early 2009. I had anticipated a more flat to negative year in 2011 and had advised readers to overweight the more defensive option-income funds, but even I did not realize how bad equity CEF market prices would go on to perform that year. It didn't matter that defensive option-income funds NAVs would hold up much better and in fact many of the option-income funds I recommended had positive total return NAVs in 2011...they were still thrown out by year's end. But even having to go through that, most of the funds (94%) I recommended in 2011 would still show positive returns today if you had just held onto them, most even without reinvesting.

So being right about the option-income strategy in 2011 didn't help the fund's market prices and it was very frustrating to see a fund's market price go down when the fund's NAV was performing much better but I stuck with my thesis. In fact, I took a lot of flack from readers for continually recommending the same option-income funds, mostly from Eaton Vance (NYSE:EV). Many thought I was even employed by Eaton Vance. What they didn't realize was that my analysis kept showing that the Eaton Vance option-income funds were, by far, the most undervalued of all equity CEFs compared to option-income funds from say, BlackRock (NYSE:BLK) and ING (NYSE:ING), two other large sponsors of option-income CEFs. I even went negative on the BlackRock option-income funds in a May 30, 2011 article, which turned out to be exactly the right call as all of the BlackRock funds I pointed out in the article went on to cut distributions aggressively and all went from premium valuations at the time to wide discounts currently. Contrast that to the Eaton Vance option-income funds which finally started to perform much better in 2012 along with many of the Nuveen option-income funds I recommended.

Though some of my articles may have been a little early, virtually all of them have been right given time. This fits into my strategy of not trying to hit short term home runs but rather trying to hit single after single even if it takes time. For example, negative calls on the PIMCO Global StocksPlus & Income fund (NYSE:PGP) in August, 2011 and the Gabelli Utility Trust fund (NYSE:GUT) in May, 2011 turned out to be correct as both have recently given up their huge premium valuations and are now negative since I wrote the articles.

So with that said, here are all of the funds I wrote about in 2011 and their total return performances through December 21, 2012 if you had simply held onto them and reinvested their distributions. Now I'm not trying to pat myself on the back since many of these fund's performances, particularly from my early 2011 articles, are not what I would consider to be that great or reflective of their valuations even if the funds performed much better starting with articles written later in 2011. In fact, many of these funds continue to trade at historically wide discounts and present excellent investment opportunities to this day.

Note: Actual starting date for performances is the closing price of the fund the business day before the article came out which was when the article was actually written. This is also to assure that there was no influence on the fund price the day the article appeared.

I'd next like to review a couple of the more emphatic positions I took as evidenced by how many times I wrote about the fund. The one fund that I recommended more than any other was the Eaton Vance Tax-Managed Buy/Write Income fund (NYSE:ETB), an option-income fund I recommended 10 times during 2011. As it turns out, ETB has been one of the best performers each time I wrote about it and at one point in 2012 had cut it's discount to about par from about a -15% discount at the end of 2011. In fact, ETB had done so well that I even wrote an article on August 27, 2012 which you can read seekingalpha.com/article/830361-equity-cefs-eaton-vance-announces-10-repurchase-program-for-its-option-income-funds, which stated that ETB had gotten ahead of itself and that there were other Eaton Vance option-income funds I would be buying instead.

Nonetheless, ETB along with the Eaton Vance Tax-Managed Buy/Write Opportunities fund (NYSE:ETV), another fund I have written about extensively, I consider must owns for any equity CEF portfolio. Why? Because both funds are very defensive in the face of a flat to even down market environment and have far outperformed the S&P 500 during the inevitable up and down market periods. Can you find funds that will perform better during strong up market periods? Absolutely, and that's why I recommended to overweight the more bullish leveraged funds in early 2012. But during flat market periods like in 2011 and over longer periods of times, ETB and ETV should continue to outperform their benchmarks both at the NAV and market price level. Here is a 5-year total return chart of ETB (orange) and ETV (red) compared to the S&P 500 (blue), as represented by the SPDR S&P 500 Trust (NYSEARCA:SPY). Again, total return performance includes all distributions reinvested, including all dividends for SPY. Though many investors, including myself, don't reinvest distributions, adding to your positions during periods of weakness or after ex-dividend dates when the fund is down or reducing when the fund is at or close to a premium valuation, can give you much of the same, if not better performance results than even reinvesting, though you have to prepared to follow these funds closely...which I do.

Another call I made multiple times during 2011 was to recommend a couple other Eaton Vance option-income funds which had not performed well historically but I felt were undervalued, especially compared to other equity CEFs. The Eaton Vance Tax-Managed Global Diversified Equity Income fund (NYSE:EXG) and the Eaton Vance Tax-Managed Diversified Equity Income fund (NYSE:ETY) were probably two of the more despised option-income funds when I first starting writing about them in January 2011 due to their multiple distribution cuts, high Return-of-Capital (ROC) in their distributions and resulting poor market price performances. However, I argued, much to the consternation of readers, that investors were not seeing the forest through the trees and that it was really funds like the Alpine Global Dynamic Dividend fund (NYSE:AGD) and the Alpine Total Dynamic Dividend fund (NYSE:AOD), two dividend-harvest strategy funds that were trading at much higher valuations, that were much more guilty of truly returning capital to investors even with their 100% qualified dividend distributions, i.e. no return-of-capital. What made the comparison even more compelling was that all four funds went public around the same time in late 2006 and early 2007 and all at the same $20 inception price.

From the time I wrote my first article on these funds on January 12, 2011, which you can read seekingalpha.com/article/246375-which-dividend-harvest-cefs-have-a-real-return-of-capital, EXG and ETY have far outperformed AGD and AOD each and every time I compared them. And yet its EXG and ETY that continue to trade at some of the widest discounts of all equity CEFs, at -15% and -14.5% respectively. It is truly one of the most amazing things you'll see in equity CEFs...fund's trading at premium valuations that have done nothing but lose money for investors while other's that have performed much better at NAV and have clearly turned things around continue to trade at wide discounts.

But this is where the opportunities are with equity CEFs. No one can say where a fund's price will go in the short run since a CEF's market price can be more influenced by investor emotions and market sentiment than for any other reason. But follow a fund's NAV and you'll eventually follow where the market price will go as well.

For 2012, I advised readers to overweight the leveraged equity CEFs instead of the option-income funds and this turned out to be the right call as well. I will be back to review my 2012 picks and pans after the new year but suffice to say that a few of my leveraged equity CEF picks had outstanding total return performances.

Disclosure: I am long ETB, ETV, EXG, ETY, RVT, JLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Short SPY, IVV