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Registered investment advisor, closed-end funds, contrarian, CFA
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As illustrated below, 2008 was a difficult year for closed end fund (CEF) investors. Nonetheless, 2009 should be a year in which CEFs return to generating positive returns. This assessment is based upon the historical fact that since 1980 the CEF industry hasn’t experienced three consecutive years of negative returns. (See previous article: “Closed-End Funds: Due for Positive Returns in 2009.")

2008: An Ugly Year for CEFs: CEFs posted an average share price decline of 37.7% for 2008. CEFs paced the 38.5% decline for the S&P 500. Among the fund types, the allocation of losses (red) reflected investors’ avoidance of risk. The least loss was recorded in the investment grade bond (“InvGrdBndFnds”) sector and greatest loss in the special equity (“SpecEqFnds”) sector. The average distribution yield (blue) was 12.3% and reflects distribution from all sources: investment income, short and long term capital gains as well as return of capital. The current distribution rate is not a good reflection of distribution levels going forward. In fact, many CEFs are currently in the process of distribution reductions as their respective net asset values (NAV) have declined and their ability to distribute capital gains has been curtailed.

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Price vs. NAV Percentage Change: The chart below displays the average percentage change for share price (blue) versus NAV (red) at the end of 2008 for the various fund types. Over short periods of time, the share price and the NAV of CEFs can move independently; although, over a longer period of time there is a tendency for share price and NAV to gravitate toward the historical average premium or discount. The yellow bar in the chart represents the difference between the price change and the change in the NAV. This difference is what I’d like to refer to as the “fear factor”: the more negative, the greater the fear. This represents the percentage change of the share price relative to the underlying NAV. If the assets held by the CEF are fairly liquid, such adjustments in NAV should be reflected in the share price. Consequently, price and NAV should move somewhat in tandem. Cases where this may not be true is when the assets (NAV) of a CEF are re-priced less frequently than shares of the CEF itself, or visa versa.

CEF Dogs: For those investors who subscribe to “what goes down a lot might go up a little,” below is a table of the five worst performing CEFs in 2008 with more than $100 million in assets.

Disclosure: Auythor owns SRO
Source: CEFs' Dismal 2008 Performance: Better Outlook for 2009