Protected Principal Retirement Strategy: The Closed-End Fund Conundrum

by: Akaralph

I must admit that I am having a real problem identifying closed-end fund [CEF] candidates for inclusion in our portfolio as part of the re-allocation process.

The Protected Principal Retirement Strategy portfolio is presently devoid of any CEFs - having sold Alpine Global Premier Properties (NYSE:AWP) last month (maybe not the best decision - but we shall see).

In a recent SA article by John Cole Scott, he presented a summary of how the [CEF] asset class performed in 2012 (John, please correct me if I have any of this wrong). To me, it was not a pretty picture. He made the following points, among others:

  • 11 percent of CEFs decreased their dividends in 2012
  • Only 5 percent increased dividends in 2012
  • Non-US equity funds had the best performance in 2012 at + 20 percent
  • He is looking for more dividend cuts throughout 2013
  • He recommends exercising caution with CEFs in 2013
  • Suggests closely monitoring the net asset value [NAV] of CEFs

My article written on December 13 (here) outlined the key criteria I use to conduct my own evaluation of CEFs. These include:

  • A discount to NAV
  • A discount to fee ratio of about 10:1
  • The yield on the NAV should not exceed 12 percent
  • Annual fees and expenses should not exceed 1.5 percent

At the time that article was written, only three of the CEFs I follow met these criteria: BlockRock Resources and Commodity Fund (NYSE:BCX), EV - Tax Managed Global Fund (NYSE:EXG), and Nuveen Multi-Currency Fund (JGT). I have since soured on BCX due to dividend cuts, and a questionable outlook on commodity pricing.

With this in mind, let's take another look at the [CEF] asset class, and potential additions to the Protected Principal Retirement Strategy portfolio.

CEF Prospects

In addition to AWP, the following CEFs are presently (or still) on my view screen for 2013:

  • Blackrock Utility and Infrastructure (NYSE:BUI)
  • EV-Tax Managed Global Fund
  • H&Q Life Sciences Investors (NYSE:HQL)
  • Nuveen Multi-Currency Fund
  • Nuveen Real Estate Income Fund (NYSE:JRS)
  • Calamos Global Dynamic Income Fund (NASDAQ:CHW)

The Table which follows compares how each of these funds to my evaluative metrics.

CEF Disc./NAV Disc/Fee Yield on NAV Fee Percent
BUI -7.36% 7:1 7.21% 1.05%
CHW -8.84% 4.5:1 7.74% 1.98%
EXG -12.11% 11.5:1 9.23% 1.05%
HQL -1.45% 0.8:1 7.76% 1.73%
JGT -11.87% 11.2:1 7.98% 1.06%
JRS +3.55% N/A 8.63% 1.74%


From the Table above, it is easily seen that both EXG and JGT meet my screening criteria. I like each of these for the following specific reasons:

EXG - Presents the opportunity to invest in a diverse portfolio of global stocks with options strategies. Since the dividend decrease in March 2012, it appears to offer more stability. The present yield of 10.5 percent is attractive in today's market. The price increased almost 20 percent in 2012 while the NAV increased over 15 percent. The global portfolio is concentrated in larger cap stocks.

JGT - Presents the opportunity to participate in foreign currencies. Its quarterly dividend has also stabilized since a slight decrease in March 2012. The nine percent yield is currently attractive. JGT's price increased by 17 percent in 2012 while the NAV increased by about 14 percent. Their holdings offer participation in global markets, including the US, Brazil, Mexico, Chile, S. Korea, Canada, Poland, and Turkey, among other countries.


I am still not convinced that the time is appropriate to initiate positions in either of these CEFs, as I think there is a fair to good chance we get a market correction over the next few months. If this happens, both EXG and JGT, along with BUI (possibly) would become even more attractive.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Disclaimer: This article does not constitute a buy recommendation on any of the stocks mentioned.