Low Share Price CEFs Have Significant Advantage in a Market Recovery

by: Joe Eqcome

Summary: Lower share price closed-end funds (CEF) have a significant price appreciation advantage relative to higher share price CEFs in a stock market recovery. Current beneficiaries may include: BLU, CIK, ASG, ZF, USA and ZTR (see table).

The chart below illustrates the top and bottom share price quartiles of a sample of 121 CEFs based on share price appreciation 3, 6 and 9 months from the October 2002 stock market trough. The average price appreciation difference between the lowest and highest share price CEF quartiles for the 3 periods was 9.9%. (The comparable difference between small cap stocks, as measured by the ETF IWM and large cap stocks, as measured by SPY, was 6.7 %.)

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Turbo Effect: In addition to realizing the “small firm effect”, i.e. smaller cap stocks have a tendency to outperform larger cap stocks, lower per share price CEFs typically have wider share price discounts to NAV. CEF discounts tend to narrow in rising stock markets. Wider discounts have a tendency to narrow more, thus providing a boost to future prices of lower per share CEF stocks.

Current Low Priced CEFs: While it’s a fool’s errand to predict stock market bottoms, they in fact do occur. Below is a current list of lowest share price CEFs that may, or may not, benefit from the turbo charged “small firm effect” in a stock market recovery.

Screening Process: 648 CEFs were screened on the following criteria: total assets greater than $100 million as of last report date, no auction rate preferred securities, and an expense ratio less than 1.5%.

“He that contemneth small things shall fall by little and little.” –Ecclesiasticus

Disclosure: Author holds positions in BLU, ASG, USA, AWP

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