CEF Fund Review: A Tale of Two Market Legs

Closed end fund (CEF) fund type performance YTD (4/24/09) reflects a tale of two markets. As measured by the SPDR S&P 500 ETF (SPY), the stock market YTD represents two legs: a -24.5% “down-leg” from the beginning of the year to the March 9^th and a subsequent 27.2% “up-leg” forming an imperfect “V”.

The table below illustrates the average share price change for each of the 13 CEF fund types during this period. The three bars for each of the fund types on the chart below represent the average percentage share price change in the following order: YTD, down-leg and up-leg.

Those circled fund types represent those that have experienced average price appreciation in both the down-leg and the up-leg of the stock market YTD.

There are both common and divergent characteristics of this group. Common to the group is the fund types were all debt related; divergent is the barbell nature of the funds’ type risk profiles. Both single state and national muni fund types would be considered more conservative, safer investments, while high yield and loan funds would have been considered riskier given the credit crisis and bank turmoil that has rippling through the economy. Consequently, there may have been elements of a flight to safety while at the same time an element of speculation regarding a recovery in the beaten down fund types.

The greatest swings in the down-leg to the up-leg occurred in the world equity funds and the special equity fund types. The former a function of stock market advances in Asian and Russian stock markets, while the latter can be partially attributed to the “snap back” in real estate funds that have been under significant downward pressure for the past 12 months.

The three fund types that are still underwater YTD are US Mortgage, General Equity and Preferred. Preferred fund types may still have some “juice” left—if the banking industry continues to improve. (John Hancock has three preferred-like funds with no ARPS—although they employ leverage: HPS, HPI & HPF.)

For purpose of comparison, the following asset classes are represented by their major, related ETFs.

YTD, on an unweighted average basis, the CEF universe (643 CEFs) was up 11.3%, distribution yields was 10.0%, discount to NAV declined to 8.5%, and the CEF fear factor was negative at a minus 6.0% (The CEF fear factor is difference between the changes in NAV less the change in price.)

YTD, Templeton Russia & East European Fund Inc. (TRF) has been one of the greatest gainers, up 79.2%. One of the greatest losers was The Swiss Helvetia Fund Inc. (SWZ), down 27.2%. The Chile Fund (CH), a play on emerging Latin American markets and a global economic expansion due to its copper mining, was up 19.7% YTD.

Disclosures: SPY, GLD, USO, TRF, SWZ and CH.

Comments

[oldman:]

MBB, an ETF for mortgage backed securites is positive.

Performance As of 31-Mar-09 Get Performance for:



MBB
PERFORMANCE OVERVIEW

Year to Date Return (Mkt): 1.53%
1-Year Total Return (Mkt): 7.07%
3-Year Total Return (Mkt): N/A

Apr 27 08:51 AM

[Alan Young:]

Joe, I like what you are trying to do, but I'm having a hard time following your analysis.

1. Rather than comparing CEFs in different asset classes, without context, it would be more useful to show CEF behavior in the same table as the corresponding ETF behavior over the same period— IOW, show for any given asset class whether CEFs performed better or worse than ETFs. Even though you may have the data here, it's hard to see.

2. Are your performance numbers based on price, or total return? Obviously there's a big difference when CEF distributions are yielding 10% or more over ETFs.

Thanks...

Apr 27 10:39 AM

[Joe Eqcome:]

Alan Young

Thank you for your comments. I've always find them to be thoughtful, constructive and of value. The old adage that "better is the enemy of good" applies here.

Let me address your thoughts in reverse order.

You're correct regarding the difference in performance price change versus total return and that's why I'm careful to make sure I articulate on which the calculations are based. I mentioned "share price change" twice in the second paragraph and once in the title of the chart and "average share price appreciation" in the third paragraph. So, I'm doing my best to make sure that distinction is being made. Additionally, for shorter periods of time, I believe the distribution plays a lesser role on returns; moreover, it’s difficult to determine the components of distribution which might contain return of capital which would not be a true return on investment.

You're also correct on the observation that the data for CEF and ETF comparison is available in the article. I try to maintain a discipline of not more than two pages of text with charts. So, I’m always struggling for the correct balance with respect to data presentation. Since my initial goal was comparing CEFs among themselves over various short periods of time I was left with little space to compare them with ETFs--which I believe would be an insightful comparison.

Joe Eqcome



On Apr 27 10:39 AM Alan Young wrote:

> Joe, I like what you are trying to do, but I'm having a hard time
> following your analysis.
>
> 1. Rather than comparing CEFs in different asset classes, without
> context, it would be more useful to show CEF behavior in the same
> table as the corresponding ETF behavior over the same period— IOW,
> show for any given asset class whether CEFs performed better or worse
> than ETFs. Even though you may have the data here, it's hard to see.
>
>
> 2. Are your performance numbers based on price, or total return?
> Obviously there's a big difference when CEF distributions are yielding
> 10% or more over ETFs.
>
> Thanks...

Apr 27 11:22 AM

[Joe Eqcome:]

Old Man

Thanks. MBB is a good find for the purpose of CEF US Mortgage fund type comparison. I'll add it to my list.

Joe Eqcome

On Apr 27 11:22 AM Joe Eqcome wrote:


On Apr 27 08:51 AM oldman wrote:

> MBB, an ETF for mortgage backed securites is positive.
>
> Performance As of 31-Mar-09 Get Performance for:
>
>
>
> MBB
> PERFORMANCE OVERVIEW
>
> Year to Date Return (Mkt): 1.53%
> 1-Year Total Return (Mkt): 7.07%
> 3-Year Total Return (Mkt): N/A
>
>

Apr 27 04:24 PM