Conclusion: There are reasons to be optimistic regarding closed-end fund [CEF] returns in 2009. It appears that 2008 will be the second time that CEFs have generated consecutive annual negative returns. Since 1980, 1998 and 1999 was the only other period that consecutive annual negative returns by CEFs were generated. If CEF returns were negative in 2009, it would be the first time this has occurred since 1980. While not impossible, the odds of CEFs generating negative returns for a third consecutive year are not supported by historical data.
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Is this the Window of Opportunity? Over the final trading days of 2008, we may see some “last gasp” tax-loss selling which may produce even further compelling CEF values. While CEF share prices are down over 40% YTD, real estate CEFs have generated the worst sector performance—down over 70% YTD. Real estate CEFs may benefit from a rebound in 2009 from their depressed levels. I prefer those with no auction rate preferred securities and little leverage. Some of the names that might make sense to own for a “snap back” are AWP, SLS, DRP and DVM.
Disclosure: Owns AWP, SLS, DRP, RQI and SRO.