Closed-End Funds: Due for Positive Returns in 2009

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.

click to enlarge

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.

Comments

[CMG:]

Dear Author,

I have recently started looking at the concept of CEF arbitrage & CEF research in general, having previously only researched the open-ended fund market. I've found you're articles very interesting and while I'm coming from a low knowledge base, you have obviously been looking at this market segment in some depth.

I was wondering where you got your data from and whether you look at data for the UK universe of funds. I would be interested in looking at whether similar conclusions can be drawn within the UK opportunity set.

2008 Dec 24 04:06 AM

[globalHOBBIT:]

Last week I sold 5000 shares of AWP at 3 dollars and change. My average cost was almost 8 dollars a share. This fund is managed by father and son Team Lieber was paying a $1.52 dividend per share annually it's been reduced to .36 cents annually.... a 75% cut. If you read their quarterly conference there was no indication they would cut the dividend at all. They even said in the Sept 09 conference call that the dividend may increase. I know this father and son team have a lot of their own money into it also at very much higher prices. The reality is global real estate is in serious trouble and this fund won't see any real price increase until very late 2009 but more likely 2010. Dec 16'th 2009 marked the first time there was insider selling of this fund EVER! That's never a good sign.......never.

2008 Dec 26 08:01 AM

[Joe Eqcome:]

CMG,
If you're looking for european real estate companies there are a couple of places you can look:
1) the European Public Real Estate Association; its website is erpa.com. It has a number of indices for non-US publicly traded real estate companies.
2) Another possible source of information would be the FTSE, their website is ftse.com. You can look under "indices".
The history of public REITs in the UK is fairly short as the legislation enabling UK REITs is only a couple of years old. However, there is a longer history of UK property companies--many of them--which I believe converted to UK REITs.
Additionally, there was an article in the WSJ on December 24th entitled: "Rethinking Property Stocks" that you might find of help.
I hope this is helpful.
Joe Eqcome


On Dec 24 04:06 AM CMG wrote:

> Dear Author,
>
> I have recently started looking at the concept of CEF arbitrage &
> CEF research in general, having previously only researched the open-ended
> fund market. I've found you're articles very interesting and while
> I'm coming from a low knowledge base, you have obviously been looking
> at this market segment in some depth.
>
> I was wondering where you got your data from and whether you look
> at data for the UK universe of funds. I would be interested in looking
> at whether similar conclusions can be drawn within the UK opportunity
> set.

2008 Dec 26 02:23 PM

[Joe Eqcome:]

GlobalHOBBIT,

Thank you for you input regarding AWP.

You are factually correct regarding the reduction in the dividend. However, I think that reduction was fully anticipated as post-announcement the stock did not trade down significantly. Since you've sold your stock last week it’s up about 12%. Sorry for you loss.

I just think now’s the time to buy these stocks as a trade--particularly when investors are as pessimistic as you. I'm looking only looking at these stocks as a trade--so, the longer term performance is less of a concern for me.

As an aside, there are many studies regarding insider trading that demonstrate—in general—insider selling is not as a predictive tool as generally believed regarding future stock price performance. (See article by David Teitelbaum regarding this subject.) I think your observation would have been more relevant if you could have demonstrated that this was an industry phenomenon as opposed to company specific.

“Insiders sell for one or a thousand reasons, but they buy for only one reason--they think the stock is going up.” I would place greater weight on insider buying than selling as the ratio of insider selling to buying can be anywhere from 10 to 1 to 50 to 1.

Happy trails,

Joe Eqcome



On Dec 26 08:01 AM globalHOBBIT wrote:

> Last week I sold 5000 shares of AWP at 3 dollars and change. My average
> cost was almost 8 dollars a share. This fund is managed by father
> and son Team Lieber was paying a $1.52 dividend per share annually
> it's been reduced to .36 cents annually.... a 75% cut. If you read
> their quarterly conference there was no indication they would cut
> the dividend at all. They even said in the Sept 09 conference call
> that the dividend may increase. I know this father and son team have
> a lot of their own money into it also at very much higher prices.
> The reality is global real estate is in serious trouble and this
> fund won't see any real price increase until very late 2009 but more
> likely 2010. Dec 16'th 2009 marked the first time there was insider
> selling of this fund EVER! That's never a good sign.......never.

2008 Dec 26 02:56 PM

[Delojozafado:]

Just some ruminations and the posing of a couple questions. I am watch listing SLS and I like it. It is the market I am unsure of. This Made-off sell off has produced some technical market conundrums. Friday's rally was on very light volume. It would seem as if we break through the S&P 500 850 barrier on the down side it could be a very bad January. The thing that is most puzzling to me is how so many of these buy sell write option leveraged CEFs have done so well in this mini week long sell off. BDJ, ETJ, FAV domestically and the IGD, EXG and LGI globally themed have just been kickin' butt. Very unusual relative strength in the face of a flat to slightly deteriorating market " Made-off Sell Off". Perhaps the author of this string could make some observations on the leveraging with preferred issuances that most of these CEFs seem to use. The whole thing blew up over at Allianze-Pimco with "PMX" and a half dozen of it's sisters. Read the message board, chart, and news on that stuff. Not very pretty. There are requirements of not exceeding 200% of your equity on this type of leverage? Another big sell off in the 2009 market that exceeds the Oct lows could really push the CEF funds with this kind of structure to the wall. A third year in a row of losses? The SLS seems to not employ preferred leverage. A 1 month comparison chart of SLS against the FFR ...(ETF) certainly looks interesting even discounting ex-dividends. But then you have this WEFIF that they both seem to find so compelling. Malls and shopping centers? Anyone? Then you also have what seems to me from reading the tea leaves of some of these chartists some unclear technicals right at this time. Another couple of days and the tax selling is all over. Most of it should already have occurred. The trouble is the shoes keep dropping. Still you have stuff like the list I have given doing fairly well if not really well. So that leads us to a brief and marginally related examination of gold. Jim Rodgers continues to be long the agriculture commodities , the Swissie, Yen and Loonie and on the verge of shorting the treasury (TBT or PST). He has not yet committed to gold even while increasing his silver positions. Gold had a very good last 2 weeks. Yesterday Dennis Gartman declared himself long in Gold. Well this then revolves around the (implied) intrinsic value of real estate in a weakening dollar environment. In this case non-dollar denominated real estate. I find that a compelling argument for the deeply discounted SLS. It is only to define the entry point or miss it altogether? Whither goes the market in this 790 -990 trading range? Even if successful in establishing a position some tight stops might be indicated!

2008 Dec 27 09:10 AM