Average CEF Declines 9.9% in Another Bad Week for Market

Summary: It was a difficult week for closed end funds (CEF) as the average price decline of the fund types was 9.9%. (CEFs were down 6.4% YTD). The same pattern of price movement among the fund types continued to play out in a hostile equities environment. While all fund types declined bond oriented fund types declined the least. Preferred funds continued to be rocked by the instability in the banking system—posting a decline of 21%. With the exception of world equity funds, all equity oriented funds posted declines lower than the fund types’ average.

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For the sake of weekly comparison, the SPDR S&P 500 (SPY) was down 6.8%. Vanguard Total Bond (BND) and iShares Muni fund (MUB) were essentially flat, off 0.5% and 0.9%, respectively. Gold (GLD) also failed to move the needle (down 0.4%) while oil, as measure by the US Oil ETF, advanced 3.5%. The biggest CEF gainer for the week was Morgan Stanley China Fund (CAF), up 10.8%, and DWS RREEF Real Estate Fund (SRQ) was the biggest loser, off 36.5%.

One interesting observation: iPath Copper ETF (JJC) was up 9.2% last week, while the CEF Chile Fund (CH) was off 9.5%. A boost in cooper prices should have a positive impact on Chile’s economy (mining 13% of GDP) if sustained. Chilean stock market was one of the few international equity markets up YTD (3/4/09), 8.3% is USD.

Disclosure: Long CH

Comments

[ETFDesk dot...:]

I think CEFs are some of the best investments going right now; liquid, unleveraged equity names trading at 20%+ discounts. NAV's can be hedged through shorting or inverse ETFs. Do you have any favorite sectors Joe?

Mar 10 01:37 PM

[Joe Eqcome:]

ETFDesk dot com

I agree CEFs are attractive for all the reasons you’ve mentioned.

Historically, sectors that have done well in the early recovery phase are: world equity, general equity, special equities (real estate, financials and commodities) and high yield funds. Given the severity of the current cycle, some of these sectors may not perform as well as in the last stock market recovery.

One common characteristic of CEF stock recoveries is that there is usually a compression of the discounts. (See report entitled: “CEFs Almost at Bottom: Discounts Approaching 1999 Nadir”) Discount compression is like a turbo charger to the general rise in the equity markets.

Using the criteria of a 20% spread between the current discount and the average historical discount, assets greater than $100 million, no auction rate debt, an expense ratio less than 1.5%, you get 5 CEFs. Two are General Equity funds (BLU & ZF), two World Equity funds (ESD & KF) and one High Yield fund (ZTR). So, based upon the discount spread theme, general equity, world equity and high yield would be some of the fund types that appear currently most attractive.

On a pure “gut basis” I’d be looking at the real estate CEFs. They’re washed out and trade at a discount on a discount (AWP).

I hope this is helpful.

Joe Eqcome (I own BLU, ESD & AWF)

Mar 10 09:45 PM