CEFs Up for the Week; Insider Buying at Boulder Growth Surges

The 13 closed end fund (CEF) types on average increased 3.3% the holiday shortened week ending 5/29/09. The S&P 500, as measured by the SPDR S&P 500 ETF (SPY), registered a slightly stronger performance of 3.9%. On an aggregate, unweighted basis, the weekly price increase for 641 CEFs was 3.1%. The Claymore CEF Index registered an increase of 3.9% for the week.

CEFs’ aggregate, unweighted current distribution yield is 8.5% and is trading at a 6.8% discount. The Eqcome CEF Fear Index continued to move lower: prices increased 1.2% greater than their related NAVs. This is consistent with an 11.4% plunge in the CBOE Volatility Index (VIX) which rises when the market declines. While in the stock market the past is never prologue, in the absence of surprisingly poor economic news, the equity markets appear to be poised to move higher.

CEF Weekly Performance: With regards to CEF fund type performance, investors gobbled up risk and spat out conservatism. High Yield, World Equity, Special Equity and Preferred Funds posted strong gains; Debt funds—particularly muni funds were pretty much abandoned as last week's inconsistent Treasury auctions roiled the debt market.

Premium/Discount Changes: Included in the graph above is the related average fund type percentage change in the premium/discount (“prem/disc”) from the previous week. The weekly changes in the fund types’ prem/disc do not necessarily follow the same pattern as the price appreciation. This is because share price and NAV per share are independent and don’t move in tandem.

A good illustration is the fact that muni bonds show little price appreciation last week yet their discount contracted (from 8.5% to 6.9%). This was probably a result of the NAV declining greater than the share price due to higher interest rates as a result of last week's Treasury auctions; this may have had a negative impact on their underlying asset values. It was the opposite in the case of special equity funds (SpecEqFnds). SpecEqFnds showed both a strong share price appreciation while the discount actually widened as NAVs’ increased faster than the share price. This probably due to the fact that a significant portion of the special equity funds are commodity-like plays which has been enjoying good near-term price appreciation.

Weekly Comparisons: For sake of weekly comparison, both the performance of the S&P 500 and the VIX illustrated an overall stronger tone for equities. The uneven results of government auctions of debt securities created uncertainty in debt valuation as interest rates surged. The debt segment of the ETF market posted mixed results: Vanguard Total Bond (BND), iShares Muni fund (MUB) and iShares mortgage backed securities fund (MBB) registered price changes of 0.2%, -1.1% and -0.5%, respectively. The commodity segment of the markets demonstrated strong performance with Gold (GLD) advancing 2.2%, while oil, as measure by the US Oil ETF (USO), surged again 8.0% as a weak US dollar, hopes of a nascent global economic recovery and inflationary fears crept back into investors’ consciousness. Commercial real estate, as measured by Vanguard Real Estate Investment Trust ETF (VNQ) advanced by 6.9%.

CEF High & Low: For the sake of data points, Van Kampen High Income Trust II (VLT) quadrupled it share price last week. But no cigars; its price performance was related to a 1:5 reverse share price split affected at the close of business on May 22^nd. One of the worse performers of the week was Engex Inc. (EGX), a CEF that invests in new and emerging companies. It was down 14.8%.

CEF Focus for the Week: The focus CEF for the week continues to be Boulder Growth & Income Fund Inc. (BIF), up 3.1% last week. Insider buying continued to surge in May. On May 15^th, Horejsi Trust No 1B (considered a “control person”) had purchased an additional $1.3 million of BIF; on May 22^nd, it increased to $2.5 million; by May 29^th, the total for May was over $3 million. Horejsi Trust now owns 4,927,674 shares or approximately 19.3% of BIF.

Since the beginning of 2009, Horejsi Trust has increased it position 1.2 million shares for an approximate cost of over $5 million newly committed money. BIF is currently selling at a 20% discount when at the same time last year it was selling at a 1.24% premium. At the risk of being repetitive, consistent insider buying of shares with newly committed dollars is one of the best metrics for predicting future stock price appreciation.

Additionally, while you’re waiting, on an equity basis, 30% of BIF’s portfolio is invested in Berkshire Hathaway “A” and “B” shares. (I own a small position in BIF and may add to that position.)

Disclosures: Long SPY and BIF

Comments

[Dan Plettner:]

Joe, was it your intent to adequately discuss the relevance of insider buying of BIF? Given the mention in your article's title and your historically thorough writing style, I was very surprised that you didn't really discuss the unique details pertinent to BIF market participants.

How do you perceive the insider buying surge to relate to the 2nd Shareholder Vote Adjournment, Control Issues, and the 'Manipulation or Hallucination' story that you previously authored?

Personally, with analysis of those topics, I could reasonably see BIF trading at a 15-20% premium some time next year, with the related funds (BTF, FF, DNY) then trading at a 30%-40% discount.

Disclosure: Long BIF (added to pre-existing long position today)

Jun 01 11:46 AM

[Joe Eqcome:]

Dan

Thank you for your comment.

I try to be somewhat disciplined with my CEF market segment reviews. I have a very limited mission that I try to restrict it to two pages. That mission is to: 1) provide a top-down overview of what’s going on in the CEF market sectors; 2) try to discern if there are any major trend developing for the time period selected; 3) compare it to other related performance metrics; 4) end with an investable idea.

So, my intent wasn’t to explore in-depth the relationship of the insider buyers at BIF, but to provide the underlying reasoning for the investment idea portion of the article. (That is not to say that there isn’t significant intrigue with regards to the interrelationships of the CEFs you noted above and the related managements and insiders. In fact, you have done a yeoman’s job of chronicling it.)

I find that it actually takes more time than one imagines for a investment idea like BIF to gain traction. I, like you, think this stock has “legs” and I’m willing to wait. There’s an old adage in real estate business, “buy at the perimeter and sell when they meet you.” I’m buying BIF and I will be selling it when everyone else figures I what we know; or, if I uncover a flaw in my logic.

A detail analysis of BIF’s insider issues is subject for a different article.

Joe Eqcome



On Jun 01 11:46 AM Dan Plettner wrote:

> Joe, was it your intent to adequately discuss the relevance of insider
> buying of BIF? Given the mention in your article's title and your
> historically thorough writing style, I was very surprised that you
> didn't really discuss the unique details pertinent to BIF market
> participants.
>
> How do you perceive the insider buying surge to relate to the 2nd
> Shareholder Vote Adjournment, Control Issues, and the 'Manipulation
> or Hallucination' story that you previously authored?
>
> Personally, with analysis of those topics, I could reasonably see
> BIF trading at a 15-20% premium some time next year, with the related
> funds (BTF, FF, DNY) then trading at a 30%-40% discount.
>
> Disclosure: Long BIF (added to pre-existing long position today)

Jun 01 09:36 PM

[anarchist:]

The question I have about BIF is "will BIF ever resume the dividend?".

Jun 02 09:13 PM

[anarchist:]

My question above was covered in your May 17 article. If 30% of BIF is invested in Berkshire Hathaway then where does the dividend come from since neither BRK.A or BRK.B pays a dividend?
Thanks

Jun 02 09:23 PM

[Joe Eqcome:]

Anarchist

By definition closed end funds (CEFs) must distribute their net investment income and capital gains on an annual basis or its equivalent. The only way it can obviate this regulatory requirement is to pay taxes on the income and gains or offset gains with carry forward losses. While from time-to-time, the former, may make sense on a special situation basis, it would be in direct conflict of the purpose of a CEF which is a conduit by definition and would be subject to shareholder protest.

BIF does Berkshire Hathaway; it also owns other stocks that do pay dividends. In fact, 25% of its total portfolio it REITs that are conduits and pay dividends. Also, any realized gain in the appreciation of Berkshire’s stock held by BIF would be subject to distribution requirements.

I would submit that if BIF reinstated its dividend that was suspended last year, the stock would respond positively. One would presume that the insiders that currently own 20% of the fund recognize that fact. I thing it is reasonable to assume that dividend will be reinstated; just went would be subject to loss carry forwards and the not so transparent agenda of the insiders who own the management company that advising BIF.

Joe Eqcome



On Jun 02 09:23 PM anarchist wrote:

> My question above was covered in your May 17 article. If 30% of BIF
> is invested in Berkshire Hathaway then where does the dividend come
> from since neither BRK.A or BRK.B pays a dividend?
> Thanks

Jun 03 12:36 PM