Low Share Price CEFs Have Significant Advantage in a Market Recovery

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 %.)

click to enlarge images

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

Comments

[Xyrus:]

Those huge yields should be big blinking red warning signs. How much of those distributions is ROC?

According to CEFA, the answer is MOST OF IT. One of the reasons why the prices are so low is that they are depleting their asset base by returning it to their investors. That is not a good thing.

When it comes to CEFs and their distributions, you need to be very careful. The CEFA site allows you to look at income yield vs. market yield. If you see something returning a market yield of 15% but their income yields is only 5%, you might want to take a harder look at the CEF.

~X~

Mar 13 01:51 PM

[whisperonth...:]

I'd like to see a listing of all the CEFs in one spot so I could do my own due diligence. It would also be nice to know if they had a monthly or quarterly dividend and what the yield is for the day the list was created.

Mar 13 06:23 PM

[whisperonth...:]

I'd like to see a listing of all the CEFs in one spot so I could do my own due diligence. It would also be nice to know if they had a monthly or quarterly dividend and what the yield is for the day the list was created.

Mar 13 06:23 PM

[Gruber:]

The article seems to focus on the price change from a cyclical low as a trading opportunity for 9 months or less. While the dividend yields appear to be suspect, as Xyrus points out, the yields appear to be an incidental part of the trade.

The problem with this strategy is rightly picking the bottom of the market. If you could do that, there are probably lots of other ways of making money with that knowledge.

Gruber

Mar 14 08:23 PM

[Gruber:]

Whiperonthewind

There are several sources of CEFs info that might be of use to you. ETFconnect.com, CEFA, and MorningStar.

Gruber


On Mar 13 06:23 PM whisperonthewind wrote:

> I'd like to see a listing of all the CEFs in one spot so I could
> do my own due diligence. It would also be nice to know if they had
> a monthly or quarterly dividend and what the yield is for the day
> the list was created.

Mar 14 08:30 PM

[Kenneth Fin...:]

What is the average bid/ask spread between the top and bottom quartile? Curiosu to see if this would somehow eliminate much of that outperformance.

Mar 16 09:38 AM

[HighTower:]

CEFGuru

While I don't have those numbers readily available, using the current low price CEFs in the artcile as a proxy, The average bid/asked spread for the 6 CEF in the article is .011 per share vs an average share price of 2.20. That would amount to a average spread as a percentage of price less than 1/2 percent (0.5%).

Joe Eqcome


On Mar 16 09:38 AM CEFGuru wrote:

> What is the average bid/ask spread between the top and bottom quartile?
> Curiosu to see if this would somehow eliminate much of that outperformance.

Mar 16 01:11 PM