CEFs Down Last Week, But NPX Looks Interesting in This Environment

Includes: NPX, NUV
by: Joe Eqcome

Summary: Despite the S&P 500’s YTD decline of 7.9% (1/23/09), closed end funds (CEF) were up on average 6.9%. CEFs benefited earlier in January from the appreciation of fixed income funds. Both single state and national muni bond funds performed well in early January. Equity orientated funds (GenEqFnds and WrldEqFnds) were down in sympathy with the equity markets—although, not by as large a margin.

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Weekly CEF Price Changes (1/23/09): Investors’ concerns last week became apparent in the price movement of CEF fund categories. The dramatic decline in the preferred fund types highlighted fears of a nationalization of the banking system. Such a move could potentially wipe out holders of bank preferred shares. Alternatively, Democratic lawmakers’ emphasis on providing more direct help to the housing market may have accounted for a positive boost in the US mortgage fund types.

On Edge: Overall, the securities markets remain on edge. The questions regarding the stability of our financial system—which many thought resolved in November—again became questionable. YTD price changes for major investment sectors continue to decline; stocks, investment grade and muni bonds are off 7.9%, 3.0% and 2.2%, respectively. Some say, as January goes, so does the year.

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Where to hide? Common wisdom is that the credit markets must stabilize before the equity markets can recover. The recent performances of the various CEF fixed income funds versus equity funds seem to support that view. Investment logic would dictate that investors should consider fixed income funds that employ little leverage. Unfortunately, these investments are being bid up to the point of becoming relatively over-valued.

Largest Muni CEFs: I looked at five of the largest muni CEFs without ARPS (table below). NUV is the only one that has no leverage. NUV’s share price has been bid up to an 8.4% premium. This is in contrast to its historical average discount is approximately 5%. (All average discounts on the table are from 8/31/02 to keep the data consistent.)

Worthy of note is NPX: One of the muni funds in the table that may be interesting is NPX. It has a national muni portfolio with an average “AA” bond rating. (We can debate the value of the credit rating.) NPX is currently trading at an 11.4% discount; its average historical discount is 6.2%. So, there’s the potential for some price appreciation if its share price gravitates towards its mean discount. Additionally, its average portfolio coupon is the highest of the group—for which we have numbers; it also has the longest duration. NPX also has generated a positive return on its NAV since its inception.

Disclosure: I don’t currently own NPX but I’m considering it. If anyone has any thoughts regard it let me know.