Cohen & Steers Closed-End Opportunity Fund (NYSE: FOF) may be a good proxy for investors wanting to buy the closed-end fund (CEF) market segment in a single stock. As the name would imply, FOF invests at least 80% of its assets in the shares of other CEFs. Below is a graph of the month-end price of FOF compared to an unweighted CEF price index. While FOF doesn’t have a long operating history (inception date: 11/21/06), it has a high positive association with the CEF Unweighted Price Index. After the initial year’s compression of FOF’s share price to NAV, the positive association is extremely high: R^2 =.9958. (N.B., ProShares Short QQQ (NYSE: PSQ) has a -.9208 price relationship with FOF, i.e. if FOF goes up in price, there’s a tendency for PSQ to decline).(Click chart to enlarge.)
Discount on Discount: Additionally, FOF’s share price represents a “discount on a discount.” FOF traded at a 6.1% discount to its net asset value (NAV) as of February 11th, while its top 10 holdings traded at an average 9.4% discount. Extrapolating the top 10 discount to the whole portfolio would imply that FOF is trading at a 15% discount to the underlying NAV of its holdings. If both the portfolio’s NAV and share price’s NAV were to go to par (zero discounts for each) the implied FOF share price appreciation would be 17.5%. (There is typically a compression of CEF discounts in advancing stock markets.)
Caveats: FOF has reduced its previous $1.41 annual dividend payment per share from a monthly dividend payment rate of $.1175 to an annualized rate of $1.08 based upon a newly initiated quarterly payment rate of $.27 (current annualized yield of 11.8%). FOF applied and was granted an exemption by the SEC allowing it to pay a portion of its capital gains distribution throughout the year as opposed to a single year-end payment.
FOF’s investment income was $1.12 per share for calendar year 2007. The most recent report for the semi-annual period ending in June 30, 2008, reported investment income at only $.19 per share. Either FOF’s investment income is back-loaded, or without capital gains it would need to reduce its quarterly dividend in 2009 or support it with a higher return of capital component. Year-end result should be forthcoming in several weeks.
Afterthought: There is an ETN that tracks the Claymore CEF index. It is very illiquid; some days it doesn’t trade at all. It’s The Claymore CEF Index Linked GS ETN (NYSEARCA:GCE).
As always, speak to your investment advisor prior to making any investment during this turbulent market environment.