Ellsworth Fund: A Convertible Bond Fund At A Discount

Dec.27.12 | About: Ellsworth Fund (ECF)

Ellsworth Fund Ltd (NYSEMKT:ECF) is a close-end fund that trades on the New York Stock Exchange. Since its inception, it has been continuously managed by Thomas H. Dinsmore. ECF specializes in convertible securities. The fund has been around since 1986. There has been a decline in the issuance of convertible securities in the past few years, and ECF now has 12% of its assets in common stocks with high dividend yields. As of September 30, 2012, the yield on the common stocks was 3.99%.

Barclays Research has estimated the total value of the 520 domestic convertible securities at $209 billion, with an average yield of 4.2% and a conversion premium of 38.5%. This is a declining market sector which is generating less and less attention. It is still viable, and deserves our attention as an alternative to credit-sensitive fixed income securities or high-yielding common stocks. It does offer the best of both worlds. In addition, the discount of this closed-end fund from net asset value has been increasing and offers an added attraction, particularly when this discount approaches 15%

Performance and volatility, as of September 30, 2012, have been as follows:

Calendar YTD 1 Year 5 Year 10 Year 10-year Volatility
Market price 14.30% 18.41% 2.08% 5.34% 15.64%
Net Asset value 12.01 17.75 2.23 6.09 12.33
Bank of America US Cov. Index 11.83 16.63 2.80 7.92 12.62
S & P 500 Index 16.44 30.18 1.05 8.01 15.29
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As of September 30, 2012, its 9 largest holdings constituted only 19.15% of assets, and were as follows:

Intel 2.5%
Verizon 2.4
Gilead Sciences 2.4
AT & T 2.3
Wells Fargo 2.2
EMC 2.1
Nuance Communications 1.9
United Technologies 1.7
Chesapeake Energy 1.6
19.1%
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Major industry exposure is well diversified with investments in its 10 largest industries representing only 57.3% of assets and being as follows:

Semiconductors 10.3%
Pharmaceuticals 7.5
Software 6.9
Biotechnology 6.4
Oil & Gas 5.6
Telecommunications 5.3
Insurance 4.3
Metals & Mining 4.2
Commercial Banks 3.7
Computers 3.1
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This is a relatively small closed-end fund with gross assets of $114,153,893, of which 96.4% is invested. There is no leverage. The fund does not trade with any substantial liquidity, as its shareholders tend to sit on their stock. There are liquidity issues if buying in size. You must nibble with limit offers.

The breakdown in credit ratings is fairly conservative for investing in convertible securities and is as follows:

AAA 1%
AA 4
A 20
BBB 19
BB 21
B 12
CCC & less 3
Not Rated 20
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As of September 30, 2012, ECF had unrealized appreciation of $7,196,792, capital loss carryforwards of $9,344,507 and other losses of $2,320,369.

For the past five years, ECF has produced reasonable income with reasonable expenses and an acceptable turnover ratio. Statistics for this period are as follows:

2012 2011 2010 2009 2008
Market Value Return 18.41% (7.13%) 21.9% 23.9% (33.3%)
Expense Ratio 1.1 1.1 1.1 1.2 1.3
Investment Income Ratio 2.3 2.6 3.5 5.5 3.6
Portfolio Turnover Rare 39 47 62 71 61
Net Asset Value Return 17.75 (2.82) 16.4 6.1 (21.01)
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Conclusion:

This investment will never be a rocket, but it is well worth investing in for safety and return. It has been around a long time, and they know their business. The discount from net asset value has widened, and this adds to its appeal.

Disclosure: I am long ECF. 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.