CEFs Highest Spreads (Mostly Lower) And Focus Spreads -- Seeking The Difference

Includes: CAF, FMY
by: Joe Eqcome

Part of the recent "CEF Weekly" Reports have looked at the Price to NAV spreads ("PrcNAVSprd") of the CEFs in our database. Each week we have identified our "focus stocks" of the week as those funds with the highest and lowest PrcNAVSprds in an effort to track a performance correlation to this metric.

Comparison: The PrcNAVSprd is a comparison of a fund's premium/discount from one week to the next. A positive spread occurs when the fund's share price moves away from its NAV per share. A Negative spread would occur when the fund's share price moves toward its NAV per share.

Examples: From the week of Morgan Stanley China "A" Share's (NYSE:CAF) share price rose by 3.6% and its NAV per share fell by 1.4%. This represents a 5.0% PrcNAVSprd: the difference between the price change and NAV change (PrcNAVSprd = 3.6% - (-1.4%) = 5.0%). During the same week, shares of First Trust Mortgage Income (NYSE:FMY) experienced a price decrease of 6.6% and a NAV per share increase of 0.3%. This gives us a PrcNAVSprd of -6.9% (-6.6% - (+0.3%) = -6.9%).

Many Considerations: Extreme PrcNAVSprds may not accurately reflect the fund's NAV. For example, a price boost resulting in a high PrcNAVSprd could be the result of positive momentum in the fund's investment category and not the value of its underlying assets. However, overtime the fund's NAV may rise to meet the price rather than the price falling back to its original level. Shares trading may experience distributions changes that could also greatly affect the PrcNAVSprd. Other than that, the prices may be out-of-line through people buying and selling the shares while not thinking about the PrcNAVSprd.

Weekly CEFs: We have gathered this data from week-to-week through our recent "CEF Weekly" Reports. From the 11 times we have gathered such data, we have been accurate 7 times. On a cumulative weekly basis, the price change for the highest weekly PrcNAVSprd stocks is -0.33% and the price change for the lowest (focus stock) weekly PrcNAVSprd stocks is 0.88%.

From Review Date to Current Date: While the weekly highest PrcNAVSprd stocks (mostly negative) and weekly lowest PrcNAVSprd stocks (mostly positive) overall percentage change from review date to current date was 4.3%, there were a few outliers that misrepresent the overall data. By taking away these outliers (CAF for the highest spread stocks and JDD for the lowest spread stocks) the overall price change would have been a gain of 2.1% (highest spread) and a gain of 3.4%. This results in a price change difference between the two portfolios of 1.29%.

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Disclosure: I am long CAF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.