Weekly CEF Review: Highs and Lows

The 13 closed end fund (CEF) types on average increased 3.1% the week ending 5/22/09 versus a modest 0.3% rise for the S&P 500 as measured by the SPDR S&P 500 ETF (SPY).

On an aggregate, unweighted basis, the weekly price increase for 641 CEFs was 2.5% for price data available. (CEFs current distribution yield is 8.8% and trade at a 7.8% discount.) The Claymore CEF Index registered an increase of 4.0% for the week. The Eqcome CEF Fear Index declined: prices increased 0.7% greater than their related NAVs.

This is consistent with a 1.5% decline in the CBOE Volatility Index (VIX) which rises when the market declines. Although, by the end of the week the VIX reversed course and began to climb.

The markets were wobbly during the week: rising early in the week with the Indian elections fueling prospects for global economic revival, and retracing later in the week with the warning for the potential downgrading of UK debt and the massive issuance of US government debt the upcoming week. The markets became more defensive as the week wore on as financials sank.

CEF debt fund types were bifurcated. Preferred, Convertible, Loan Participation and US Mortgage fund types posted stronger performance, while High yield, Investment grade and Munis posted below average results.

For sake of weekly comparison, both the performance of the S&P 500 and the VIX illustrated an overall sinking performance for equities. The debt segment of the markets posted mixed results: Vanguard Total Bond (BND), iShares Muni fund (MUB) and iShares mortgage backed securities fund (MBB) registered price changes of -0.3%, 0.5% and -0.2%, respectively. The commodity segment of the markets demonstrated strong performance with Gold (GLD) advancing 2.8%, while oil, as measure by the US Oil ETF (USO), surged 7.7% as a weak US dollar and inflationary fears crept back into investors’ consciousness.

Commercial real estate, as measured by Vanguard Real Estate Investment Trust ETF (VNQ), advanced by 2.8% on a dead cat bounce from the 11.3% drubbing it received the previous week. The commercial real estate sector will likely experience high volatility as investor try to wrestle with the notion if the “short story” is still viable or it’s too late to the party. (This is going to be a good sector to trade over the next 6 months and investors should consider trading the ProShares Ultra Real Estate (URE).)

CEF High & Low: For the sake of data points, two Morgan Stanley international funds were separately one of the best and worse performing CEFs. Morgan Stanley India Investment Fund (IIF) was one of the better CEF performers for the week, up 18.1% in response to the Indian elections. One of the week’s bigger losers was Morgan Stanley China fund (CAF), down 11.4%.

Focus CEF: The focus CEF for the week continues to be Boulder Growth & Income Fund Inc. (BIF), up 2.1% for the week. Insider buying surged in May totaling an additional $2.45 million for the month of May alone. Horejsi Trust No 1B (considered a “control person”) now owns 4.753 million shares or 18.6% of the total shares outstanding. As analysts who follow insider trading will tell you, insider selling and exercising options are poor indicators of future share price performance.

However, consistent insider buying of shares with new money is a superior metric for that purpose. One would have to logically infer insiders are confident that the share price is likely to increase.

Additionally, while you’re waiting, on an equity basis, 30% of BIF’s portfolio is invested in Berkshire Hathaway “A” and “B” shares. BIF is currently trading at a 22.2% discount, so you’re buying Warren Buffett at a discount. Even if you valued the other 70% of BIF’s portfolio at par, you would have a 3.3 year breakeven at BIF’s 2% annual management fee before the current discount was consumed by the cumulative fee. I feel fairly comfortable in providing Warren Buffett a 3 year heads start with respect to generating positive returns.

Disclosures: Long SPY and BIF

Comments

[Alan Young:]

Thanks for this fine overview. Would it be possible for you to post the average premium/discount within each sector? That change from week to week is of considerable interest.

With regard to CAF, a week or so ago it was sporting a PREMIUM of over 30%! It's finally coming back to earth.

With regard to real estate, I believe you mean that TRADERS (not investors) should consider URE and its inverse, SRS. Unless you are asserting that REITs are going to rally again?

Thanks

May 24 11:00 AM

[mavericks:]

Long BIF, huh? Your credibility with CEF's just took a hit.

May 24 11:19 AM

[Dan Plettner:]

Joe, do you think that the Current Board of Directors has been acting in the best interest of the average shareholder? Assuming there is to be a final outcome of the Proposal 1 Proxy vote If there is an outcome on Proposal 1 at the previously "adjourned" May 29th reconvened shareholder meeting, what would the best possible outcome for the average investor be?

I realize you continue to believe BIF is a long and I continue to believe your "house money" thesis holds merit. While I agree that restoration of the distribution policy would have positive effects on market returns, I believe an ethical Board of Directors not subjected to enormous Conflicts of Interest would do much more for all shareholders.

Disclosure: I too am long BIF, as many readers already know.

May 24 01:10 PM

[Joe Eqcome:]

Mavericks

To make a statement of opinion is your right under the First Amendment of the United States Constitution. However, as Hubert H. Humphrey once said, “The right to be heard does not automatically include the right to be taken seriously.”

To make a dismissive comment, as you have, without providing as basis for your investment position is of little value. I, and I’m sure others, would encourage you to substantiate your case against BIF. You may have strong reasoning from which we could all benefit. However, so far you haven’t provided any; you’ve just wasted electrons.

Joe Eqcome


On May 24 11:19 AM mavericks wrote:

> Long BIF, huh? Your credibility with CEF's just took a hit.

May 26 08:09 AM

[Joe Eqcome:]

Dan

On its face, it appears the actions initiated by BIF’s management (“insiders”) in late ‘08 may be intended to benefit insiders at the expense of majority shareholders.

Those actions include a staggered board, a suspended dividend and a cessation of new investments post a successful rights offering. All this curiously was enacted prior to the significant, systematic purchase by insiders of BIF’s stock at significantly lower prices.

We’ll all be curious to see what actions BIF’s management will take post completion of their share acquisition program with regards to reinstatement of the dividend and deployment of funds for investment. They may just shoot themselves with a smoking gun.

With respect to a staggered board, I believe this would not be in the best interest of the majority of shareholders (vote “No”). As someone once said, in the investment business, there’s either a conflict of interest or there’s no interest. The key is to manage the conflict.

I believe there are currently no checks and balances with regards to the potential conflict of interest of the insiders’ ownership (control person) and management of BIF being the same. The ability to summarily replace the entire board by a super-majority action (2/3’s) should provide some protection to shareholders as well as management.

Joe Eqcome (I have a small ownership position in BIF)

On May 24 01:10 PM Dan Plettner wrote:

> Joe, do you think that the Current Board of Directors has been acting
> in the best interest of the average shareholder? Assuming there is
> to be a final outcome of the Proposal 1 Proxy vote If there is an
> outcome on Proposal 1 at the previously "adjourned" May 29th reconvened
> shareholder meeting, what would the best possible outcome for the
> average investor be?
>
> I realize you continue to believe BIF is a long and I continue to
> believe your "house money" thesis holds merit. While I agree that
> restoration of the distribution policy would have positive effects
> on market returns, I believe an ethical Board of Directors not subjected
> to enormous Conflicts of Interest would do much more for all shareholders.
>
>
> Disclosure: I too am long BIF, as many readers already know.

May 26 08:36 AM

[Joe Eqcome:]

Alan Young

I’ll try to include the average weekly prem/disc change per CEF fund type in next week’s CEF review.

CHN may be a more interesting China play than CAF given the former is trading at a discount, has a higher distribution, lower expense ratio and has not appreciated as much as CAF YTD. (Food for thought)

You’re correct on ascribing the term “trader” as opposed to investor regarding playing the volatility in commercial real estate securities (URE: long; SRS: short). I have a tendency to play URE both long and short as a result of it’s recent share price being under $4.00. However, more conservative traders should consider SRS as a short position.

Joe Eqcome.



On May 24 11:00 AM Alan Young wrote:

> Thanks for this fine overview. Would it be possible for you to post
> the average premium/discount within each sector? That change from
> week to week is of considerable interest.
>
> With regard to CAF, a week or so ago it was sporting a PREMIUM of
> over 30%! It's finally coming back to earth.
>
> With regard to real estate, I believe you mean that TRADERS (not
> investors) should consider URE and its inverse, SRS. Unless you are
> asserting that REITs are going to rally again?
>
> Thanks

May 26 08:56 AM

[Dan Plettner:]

Joe

I certainly concur that the actions initiated by BIF’s management in late ‘08 were intended to benefit insiders at the expense of majority shareholders. As you may know from my latest article, I have been on conference calls with the SEC on this matter. You have mentioned they (insiders) may just “shoot themselves with a smoking gun,” an action I am confident already occurred.

I find merit in your “house money” thesis, but actions taken going forward which finally restores shareholder value would be akin to management “shoot(ing) themselves with a smoking gun.” If anything, the ultimate determination to restore shareholder value would lend some credence to the inference made by one Board Member on April 24th that they were taking (have taken) a patient approach toward the prospect of a shareholder friendly tender offer (or similar).

Item 4 on SEC Form SC 13D/A filed May 20th suggests that the motive of the recent purchases was not voting control, rather recognizing the availability of funds to create value for shareholders. This too is consistent with Joe’s “house money” thesis.

Regarding further shots from a “smoking gun”, you could seen an alternate utility of recent insider acquisitions (relevant new voting issues to further benefit other Horejsi Family Interests in Private Companies and BTF). Also, failing to restore shareholder value for BIF simply because a similar prospect is not possible for BTF would be an ongoing demonstration that BIF is not being managed for BIFs own benefit. Finally, investing funds into risk assets now in contrast with Stewart Horejsi's April 24th stated investment thesis (market will breach early March lows) could serve as the greatest smoking gun shot of all.

Joe and I share the view against a staggered board. To vote “no”, shareholders can call 800-992-2856 or contact their own broker and make clear their wish to vote “Against” on “Proposal 1". Shareholder who already voted may change their vote. Your vote is very time sensitive.

Disclosure: Long BIF, most recent acquisition today May 26th (so far only a partial fill of limit order)


On May 26 08:36 AM Joe Eqcome wrote:

> Dan
>
> On its face, it appears the actions initiated by BIF’s management
> (“insiders”) in late ‘08 may be intended to benefit insiders at the
> expense of majority shareholders.
>
> Those actions include a staggered board, a suspended dividend and
> a cessation of new investments post a successful rights offering.
> All this curiously was enacted prior to the significant, systematic
> purchase by insiders of BIF’s stock at significantly lower prices.
>
>
> We’ll all be curious to see what actions BIF’s management will take
> post completion of their share acquisition program with regards to
> reinstatement of the dividend and deployment of funds for investment.
> They may just shoot themselves with a smoking gun.
>
> With respect to a staggered board, I believe this would not be in
> the best interest of the majority of shareholders (vote “No”). As
> someone once said, in the investment business, there’s either a conflict
> of interest or there’s no interest. The key is to manage the conflict.
>
>
> I believe there are currently no checks and balances with regards
> to the potential conflict of interest of the insiders’ ownership
> (control person) and management of BIF being the same. The ability
> to summarily replace the entire board by a super-majority action
> (2/3’s) should provide some protection to shareholders as well as
> management.
>
> Joe Eqcome (I have a small ownership position in BIF)
>
> On May 24 01:10 PM Dan Plettner wrote:

May 26 10:51 AM