CEF Volume Trends May Portend Their Appreciation

Conclusion: Closed end funds’ (CEFs) stock volume trading patterns may indicate that the CEF market segment may be heading towards a period of moderately sustained price appreciation.

Volume Counts: Price and volume are two basic building blocks of technical analysis. Non-technical investors have a tendency to focus mostly on price changes and give share volume short shrift. This article reviews the volume characteristics of the CEF market segment for any clues with respect to its price direction.

CEF Volume: The chart below compares the volume and price index of the Eqcome CEFBig10 (CEFBig10). The CEFBig10 is a CEF index constructed in a similar fashion to that employed by S&P’s Investment Committee in constructing the S&P indices. It provides investors a diversified participation in the CEF market sector. (See report: A Poor Man’s CEF Portfolio that Performs (5/27/09).)

The chart demonstrates the unweighted average CEFBig10 Price Index compared to the 5 day moving average of the total volume plotted inversely. What the chart illustrates is a tendency for CEF volume to increase during periods of CEFs share price declines; the volume tends to recede during periods of CEF share price appreciation. This was particularly evident during period of Sep ’06 to Oct ’08 (rectangle “A”).

During the subsequent time period (Nov ’08 to Mar ’09) share volume became highly volatile (rectangle “B”). This was a period of great investor confusion; the markets were in a process of seeking their bottoms. CEF investors were whipsawed during this period as the CEF market segment was making, what appeared to be, a double bottom.

This latter period (rectangle “B”) has been followed by a period of reduced volume volatility and a rise in CEF prices. While there is always a possibility of a further CEF price downturn, it would seem investors may be heading into a period of relative stability with the potential for further advances in CEF share prices.

CEFs Vs SPY Volumes: As investors would expect, the volume volatility of the CEF market segment would be less than that of the equity market in general. This would be due to the income (yield) nature of the investment, its diverse fund types—which include fixed income, its heavily retail oriented investor base and its limited liquidity.

The following chart illustrates the 5 day moving average of the CEFBig10 versus that of the S&P 500, as measured by the SPDRs S&P 500 ETF (SPY). As demonstrated, there appears to be a relationship between the two; (R^2=.45).

CEFs Volume Volatile Less: The CEF market segment’s share volume is less volatile than the equity market as measured by SPY. The CEF spread between its high and low daily volume percentage changes was approximately 25% less than SPY from Sep ’06 to Mar ’09. This was also true of their respective standard deviations of daily volume changes.

During the period from Sep ’06 to Mar ‘09, the SPY experienced 69 daily volume percentage changes from the previous trading day of plus-or-minus 15%. This is compared to 40 for the CEFBig10 over the same period. During the market’s bottoming process (Nov ’08 to Mar ’09) SPY experienced 7 daily volume percentage spikes while the CEFs experienced 4.

Disclosure: I own all the stocks in the CEFBig10 Portfolio: ADX, CSQ, CHY, ETG, EVV, PPR, PHK, AWF, NUV, EQI.

Comments

[Baboon:]

Why would anyone want to invest in CEFs? As it was well demonstrated last year their income is a fiction. As for the total return etfs are much better products since they don't have this gap between nav and price that rises with the volatility.

Jun 27 09:59 AM

[mavericks:]

Author is just talking his book. CEF's are in bubble mode currently. All time high premiums on many I follow as small investors chase yield in tough times. Contrarian indicator?

Jun 27 10:49 AM

[esanto2:]

As baby boomers retire the demographics favor CEF's. The NAV's are generally still at hefty discounts to their share prices and as more investors seek income and underlying asset values continue to increase as the market recovers, CEF's will trade at premiums....Not discounts.

Jun 27 01:26 PM

[mavericks:]

Many equity, non-leveraged, high yield CEF's I see are at hefty premiums already, not discounts. Smarter to buy a correlating ETF and use a similar strategy such as covered-calls yourself. Eliminate 100 bps in fees, achieve a higher yield and have better control. Small investor's are at the mercy of the institutional fund holders and market makers when they decide to take these funds back to a discount.


On Jun 27 01:26 PM esanto2 wrote:

> As baby boomers retire the demographics favor CEF's. The NAV's are
> generally still at hefty discounts to their share prices and as more
> investors seek income and underlying asset values continue to increase
> as the market recovers, CEF's will trade at premiums....Not discounts.

Jun 27 01:58 PM

[Baboon:]

CEFs earned income is not greater than one of comparible etfs. The rest is distributed to investors as return of capital. It means that the baby boomer receive their own capital as income . I am sure they can withdraw money for income off their capital on their own. No need to pay high fees to the fund managers for getting back their own capital. Besides the distribution yield can be cut at any time especially if the underlying assets decline in value. That renders those products a junk status in my book. Another failed structured product invented by Wall Street to get money from small retail investors.


On Jun 27 01:26 PM esanto2 wrote:

> As baby boomers retire the demographics favor CEF's. The NAV's are
> generally still at hefty discounts to their share prices and as more
> investors seek income and underlying asset values continue to increase
> as the market recovers, CEF's will trade at premiums....Not discounts.

Jun 27 05:46 PM

[klarsolo:]

There are still many good CEFs available at very nice discounts. NFJ for example still trades at a 20 % discount. So do GLO and GLQ. All three have outperformed the S&P since inception. I'd pick them over ETFs any day of the week.

Why do you care if funds return capital when you can buy them at huge discounts? If they distributed all their capital back to you at once you'd instantly realize the discount as a gain. What's wrong with that?

Jun 27 08:02 PM

[esanto2:]

All the ones I follow (QQQX, ETY, EOI, IAE, BGY, EOD, ) with the exception of energy IRR, are at 10-20% discounts and are professionally managed using strategies I could never do even though I was a broker with AG Edwards for 20 years. I could set up my own managed covered call writing program and maybe get slightly better returns but don't want to invest the time necessary to make it work. I do reinvest capital gains distributions back into the same CEF's but like buying into professionally managed portfolios of high quality stocks at discounts using option strategies to inhance income. Fees are mitigated by the discounts.


On Jun 27 01:58 PM mavericks wrote:

> Many equity, non-leveraged, high yield CEF's I see are at hefty premiums
> already, not discounts. Smarter to buy a correlating ETF and use
> a similar strategy such as covered-calls yourself. Eliminate 100
> bps in fees, achieve a higher yield and have better control. Small
> investor's are at the mercy of the institutional fund holders and
> market makers when they decide to take these funds back to a discount.
>

Jun 27 09:01 PM

[Baboon:]

They are all ok because they are all total return funds. It means that they are not so much for the retirees as for the people that still grow their capital. But I believe that the asset allocation etfs ( pca, pto ) are better choices since they don't have this premium/discount factor so it's much easier to track the performance of your portfolio relative to the benchmark. If for example the benchmark index fell 37% last year and your cef fell 50% you don't need to scratch your head and try to figure out that it underperformed the benchmark because of the increased discount to nav. It's ok to buy them at 20% discount but do you want to sell them at 20% discount?


On Jun 27 08:02 PM klarsolo wrote:

> There are still many good CEFs available at very nice discounts.
> NFJ for example still trades at a 20 % discount. So do GLO and GLQ.
> All three have outperformed the S&P since inception. I'd pick
> them over ETFs any day of the week.
>
> Why do you care if funds return capital when you can buy them at
> huge discounts? If they distributed all their capital back to you
> at once you'd instantly realize the discount as a gain. What's wrong
> with that?

Jun 28 08:34 AM

[Baboon:]

On Jun 27 08:02 PM klarsolo wrote:

If they distributed discount to the shareholders in any form they wouldn't have the discount because market would have priced them differently.

> Why do you care if funds return capital when you can buy them at
> huge discounts? If they distributed all their capital back to you
> at once you'd instantly realize the discount as a gain. What's wrong
> with that?

Jun 28 08:46 AM

[klarsolo:]

That's not true. Look at LCM: decent fund (nothing outstanding), and a good chunk of its dividend is return of capital. And yet it trades at a nice discount.

The closed-end fund space is fascinating: really good funds can be had a nice discounts, while crap trades at premiums. People truly seem to turn off their brains when buying stuff like PGP and PHK at over 50 % premiums.


On Jun 28 08:46 AM Baboon wrote:

>
>
> If they distributed discount to the shareholders in any form they
> wouldn't have the discount because market would have priced them
> differently.

Jun 28 12:30 PM

[klarsolo:]

I like PCA, PAO, and PTO, but due to the crisis they haven't caught on yet. They are very good one-stop shop vehicles.

On Jun 28 08:34 AM Baboon wrote:

> They are all ok because they are all total return funds. It means
> that they are not so much for the retirees as for the people that
> still grow their capital. But I believe that the asset allocation
> etfs ( pca, pto ) are better choices since they don't have this premium/discount
> factor so it's much easier to track the performance of your portfolio
> relative to the benchmark. If for example the benchmark index fell
> 37% last year and your cef fell 50% you don't need to scratch your
> head and try to figure out that it underperformed the benchmark because
> of the increased discount to nav. It's ok to buy them at 20% discount
> but do you want to sell them at 20% discount?

Jun 28 12:32 PM

[Baboon:]

I don't know what you mean by a good chunk of money but clearly the market does not price in it's expiration. Otherwise the discount should go down to 0 the closer fund gets to it's expiration. So there is something with the fund that you don't understand. And that's another problem of any structured products. Anyway you won't get a chance to realize the fund's discount as a return of capital unless it's management decides to do so.


On Jun 28 12:30 PM klarsolo wrote:

> That's not true. Look at LCM: decent fund (nothing outstanding),
> and a good chunk of its dividend is return of capital. And yet it
> trades at a nice discount.
>
> The closed-end fund space is fascinating: really good funds can be
> had a nice discounts, while crap trades at premiums. People truly
> seem to turn off their brains when buying stuff like PGP and PHK
> at over 50 % premiums.

Jun 28 12:51 PM

[klarsolo:]

I think do understand this fund pretty well. LCM has no expiration data. AFAIK only a very small number of CEFs have a defined expiration data (less than five).

LCM is a straightforward convertibles & high yield fund. Every quarter a good portion (at least half) of its dividend is return of capital. Well, to be precise, it's not always return of capital; it's a managed distribution policy, so in bad times it's ROC and in good times it's distribution of capital gains.

But in both cases you get $ 1 of ROC or gains for $ 0.8 because of the discount. A good deal for me. If you think otherwise you're free to stick with ETFs.
I, however, like buying decent funds at handy discounts, especially when I know that in boom times the discount has a good chance of narrowing substantially.


On Jun 28 12:51 PM Baboon wrote:

> I don't know what you mean by a good chunk of money but clearly the
> market does not price in it's expiration. Otherwise the discount
> should go down to 0 the closer fund gets to it's expiration. So there
> is something with the fund that you don't understand. And that's
> another problem of any structured products. Anyway you won't get
> a chance to realize the fund's discount as a return of capital unless
> it's management decides to do so.

Jun 28 03:11 PM

[Baboon:]

If you get $1 of ROC for $0.8 then the discount should decrease over time until the fund expires ( pays off all it's capital to the shareholders ). I hope you realize that they can't pay you ROC forever. If it's not the case and discount does not decrease over time then there is obviously something with the fund's distributions that at least makes no sense to me. Unless you know the answer to the question: how come it's traded at the discount if "a good chunk of its dividend is return of capital"?


On Jun 28 03:11 PM klarsolo wrote:

> I think do understand this fund pretty well. LCM has no expiration
> data. AFAIK only a very small number of CEFs have a defined expiration
> data (less than five).
>
> LCM is a straightforward convertibles & high yield fund. Every
> quarter a good portion (at least half) of its dividend is return
> of capital. Well, to be precise, it's not always return of capital;
> it's a managed distribution policy, so in bad times it's ROC and
> in good times it's distribution of capital gains.
>
> But in both cases you get $ 1 of ROC or gains for $ 0.8 because of
> the discount. A good deal for me. If you think otherwise you're free
> to stick with ETFs.
> I, however, like buying decent funds at handy discounts, especially
> when I know that in boom times the discount has a good chance of
> narrowing substantially.

Jun 28 04:31 PM

[Baboon:]

I think I know the answer to this question: the fact that the fund is traded @20% discount does not mean that you are getting paid $1 for $0.8. The management might decide to keep $0.2 on the side ( as a reservoir ) and pay you $0.8 for $0.8 at best. The last $0.2 have to be payed out only to the shareholders if the management decides to close down the fund. They may be paid as one last payment right before the asset liquidation and they don't have to be paid slowly over time as you suggest. The decision to liquidate discount is with the fund's management only.

Jun 28 05:23 PM

[klarsolo:]

This really isn't this complicated. We're talking about a managed distribution policy, which pays out the average anticipated appreciation of the fund per year. In very good years the fund will appreciate more than what it pays out and build up gains, which will then be distributed in bad years like 2008. The goal is not to spend down the fund and eventually liquidate it, but to provide income.

If a fund trades at 80 % of its NAV, you do get $ 1 of assets for $ 0.80 of your money. To me that's a good deal, especially compared to mutual funds, where with load fees and stuff you may end up paying $ 1.05 for $ 1 of assets.


On Jun 28 05:23 PM Baboon wrote:

> I think I know the answer to this question: the fact that the fund
> is traded @20% discount does not mean that you are getting paid $1
> for $0.8. The management might decide to keep $0.2 on the side (
> as a reservoir ) and pay you $0.8 for $0.8 at best. The last $0.2
> have to be payed out only to the shareholders if the management decides
> to close down the fund. They may be paid as one last payment right
> before the asset liquidation and they don't have to be paid slowly
> over time as you suggest. The decision to liquidate discount is with
> the fund's management only.

Jun 28 06:57 PM

[klarsolo:]

With CEFs you cannot always come up with rational explanations for the discounts or premiums. It is always a number of different possible reasons + x, the mystery reason.

There simply is no way to rationally explain why Cornerstone funds trade at horrendous premiums even though all they do is self liquidate over time. Or why Pimco-Funds such as PGP and PHK trade at 50 % premium to NAV, even though they do not have a good track record and also don't even pay any higher dividends than some other funds trading at discounts.

There is a lot of irrationality in this sector. If you know your stuff, this is good for you. If you don't, you can easily be taken to the cleaners.

Jun 28 07:06 PM

[Baboon:]

Who told you that? What makes you think that 100% of nav is distributed? You are misleading yourself into thinking this way. Discount/Premium has nothing to do with fund's distribution policy. This is not that complicated.


On Jun 28 06:57 PM klarsolo wrote:

> If a fund trades at 80 % of its NAV, you do get $ 1 of assets for
> $ 0.80 of your money.

Jun 28 07:19 PM

[klarsolo:]

I really don't understand what you mean. If a fund is available in the marketplace at 80 % of its NAV, then you do buy assets worth $ 1 for $ 0.80.

Ordinarily this shouldn't have anything to do with the distribution policy, but in practice you often see that funds sink to much greater discounts once the distribution has been cut. Case in point is NFJ.


On Jun 28 07:19 PM Baboon wrote:

> Who told you that? What makes you think that 100% of nav is distributed?
> You are misleading yourself into thinking this way. Discount/Premium
> has nothing to do with fund's distribution policy. This is not that
> complicated.

Jun 28 07:40 PM

[klarsolo:]

Granted, you may never realize the difference between where the
fund is trading at and what the true NAV is. Is this what you mean?

Of course the discount may never close and the NAV may never be distributed. This goes without saying. But at least here you have the *chance* that it may happen. With mutual funds or ETFs you don't have that chance.

And even if the discount doesn't ever close, you still have a benefit to mutual funds. If a fund trades at 20 % discount, all else equal, you get a higher dividend while incurring the same NAV risk. If a mutual fund and a CEF have identical holdings, with the CEF you get a higher dividend due to the discount, regardless of whether that discount shrinks or not.


On Jun 28 07:19 PM Baboon wrote:

> Who told you that? What makes you think that 100% of nav is distributed?
> You are misleading yourself into thinking this way. Discount/Premium
> has nothing to do with fund's distribution policy. This is not that
> complicated.

Jun 28 07:47 PM

[Baboon:]

What I am saying is that how come the market does not see the bargain where you claim to see it? How come the market does not scoop up the shares of the fund for 20% sure profit and this way narrows the discount. You say that's because the cefs' markets are irrational, I say that's because there is something with the fund's distributions that the market disagrees with you that the fund is a bargain. You can buy all the cefs in the world that are trading at the huge discounts to their nav's and still lose money. Besides you don't want to deal with the irrational markets when the time comes to sell.

Jun 29 06:23 AM

[klarsolo:]

Baboon, it looks like you're one of the guys that if he sees a $ 20 note on the street he'll say that it can't possibly be a $ 20 note because somebody else would have already picked it up.

In a way you're right: all CEFs have a normal, regular discount that factors in what you say. For LCM this is around 12 % if you look back to not so panicky times. Once the markets panic, these discounts widen, sometimes dramatically. This has nothing to do with fund-idiosyncratic facts, but with market fears.

Look at CHW, a decent Calamos fund. The discount used to be around 8-10 %. It widened to almost 30 % last fall, went back down to 5-10 % in January, then widened out again to almost 30 % in March, and then shrank from that level to 3 % a few weeks ago. Now it's back down to around 10 %. The fund's NAV in the meantime moved more or less in line with the general markets, and there were no distribution cuts or anything. Explain this rational. It's just fear & greed, nothing fund idiosyncratic. There are dozens of similar examples.


On Jun 29 06:23 AM Baboon wrote:

> What I am saying is that how come the market does not see the bargain
> where you claim to see it? How come the market does not scoop up
> the shares of the fund for 20% sure profit and this way narrows the
> discount. You say that's because the cefs' markets are irrational,
> I say that's because there is something with the fund's distributions
> that the market disagrees with you that the fund is a bargain. You
> can buy all the cefs in the world that are trading at the huge discounts
> to their nav's and still lose money. Besides you don't want to deal
> with the irrational markets when the time comes to sell.

Jun 29 07:21 AM

[esanto2:]

Many hedge funds used high "yield" (more accurately high distributions) CEF's as collateral for their leveraged derivitive activities.....When the market collapsed they were forced to liquidate their holdings including the CEF's. Slowly the public is coming back and discounts are shrinking and net asset values are recovering with the markets. As I stated earlier the good quality CEF's will trade at premiums as confidence from small investors increases.


On Jun 29 07:21 AM klarsolo wrote:

> Baboon, it looks like you're one of the guys that if he sees a $
> 20 note on the street he'll say that it can't possibly be a $ 20
> note because somebody else would have already picked it up.
>
> In a way you're right: all CEFs have a normal, regular discount that
> factors in what you say. For LCM this is around 12 % if you look
> back to not so panicky times. Once the markets panic, these discounts
> widen, sometimes dramatically. This has nothing to do with fund-idiosyncratic
> facts, but with market fears.
>
> Look at CHW, a decent Calamos fund. The discount used to be around
> 8-10 %. It widened to almost 30 % last fall, went back down to 5-10
> % in January, then widened out again to almost 30 % in March, and
> then shrank from that level to 3 % a few weeks ago. Now it's back
> down to around 10 %. The fund's NAV in the meantime moved more or
> less in line with the general markets, and there were no distribution
> cuts or anything. Explain this rational. It's just fear & greed,
> nothing fund idiosyncratic. There are dozens of similar examples.
>

Jun 29 02:15 PM

[Baboon:]

On Jun 29 07:21 AM klarsolo wrote:
My argument against CEFs regardless of the specific CEFs is following:

1. Investors want to avoid income cefs because their yield is fictitious as the real earned income often is supplemented by ROC which can be cut at the worst time in a down market. So in case a retiree does not want to spend it's principal ROC would be a problem.
2. Investors want to avoid total return cefs as their discount might rise significantly with the rising market volatility so investor does not want to find out that his portfolio is short by $15K relative to the index on $100K initial investment after the market collapse.

Etfs are much better choice for the retirees as well as for the people who still grow their capital. Take this for what it's worth.


> Look at CHW, a decent Calamos fund. The discount used to be around
> 8-10 %. It widened to almost 30 % last fall, went back down to 5-10
> % in January, then widened out again to almost 30 % in March, and
> then shrank from that level to 3 % a few weeks ago. Now it's back
> down to around 10 %. The fund's NAV in the meantime moved more or
> less in line with the general markets, and there were no distribution
> cuts or anything. Explain this rational. It's just fear & greed,
> nothing fund idiosyncratic. There are dozens of similar examples.
>

Jun 29 06:49 PM

[Joe Eqcome:]

Mavericks,

You claim that CEFs are in a bubble mode. So, I’m making the heroic assumption that this claim is based on your follow up sentence that states CEFs are trading at “all time high premiums….” Of course, this is notwithstanding your implied notion that anyone who invests in CEFs is stupid.

Setting aside for the moment CEF investor stupidity, unless you’ve developed a valid and reliable model for valuing CEFs NAVs that is different than the one we mortals are employing, there is no empirical evidence to support your claim--none whatsoever on an industry-wide basis. I'm sure anyone of us can point to islolated situations where premiums are perplexing. Case in point is PHK.

Of course if you have support for you industrywide claim, we would all be appreciative if you could provide us the backup work.

There is a saw in the investment business, “There are two kinds of statistics, the kind you look up and the kind you make up.” Sound to me you’re trafficking in the latter.

Oh, by the way, I’m not “taking my book”. I’d love to see your proof for that claim.

Joe Eqcome

On Jun 27 10:49 AM mavericks wrote:

> Author is just talking his book. CEF's are in bubble mode currently.
> All time high premiums on many I follow as small investors chase
> yield in tough times. Contrarian indicator?

Jun 29 06:58 PM

[klarsolo:]

The first argument can also be applied to ETFs to some degree. ETFs don't have a managed distribution policy, but when times get tough, the stocks inside the ETF will cut their distribution and that cut will be passed through.

Regarding the second statement, if you're not forced to sell, you do not have to worry about a rising discount in bad times. You know that once things settle down you'll have a good chance of getting that extra-underperformance back.

CEFs give you access to some asset classes and strategies that so far do not have an equivalent in ETFs. Sometimes you even get them at steep discounts. Instead of thinking in black and white terms ("CEF's are bad, ETF's are good"), be flexible.


On Jun 29 06:49 PM Baboon wrote:

>
> My argument against CEFs regardless of the specific CEFs is following:
>
>
> 1. Investors want to avoid income cefs because their yield is fictitious
> as the real earned income often is supplemented by ROC which can
> be cut at the worst time in a down market. So in case a retiree does
> not want to spend it's principal ROC would be a problem.
> 2. Investors want to avoid total return cefs as their discount might
> rise significantly with the rising market volatility so investor
> does not want to find out that his portfolio is short by $15K relative
> to the index on $100K initial investment after the market collapse.
>
>
> Etfs are much better choice for the retirees as well as for the people
> who still grow their capital. Take this for what it's worth.
>

Jun 30 07:47 AM

[Baboon:]

On Jun 30 07:47 AM klarsolo wrote:

> The first argument can also be applied to ETFs to some degree. ETFs
> don't have a managed distribution policy, but when times get tough,
> the stocks inside the ETF will cut their distribution and that cut
> will be passed through.

That's exactly the point. There is no advantage in the managed distribution policy over the passive distributions. The fund managers are not worth the fees they are charging for managing the distributions since they are going to cut the distributions in a down market anyway.

> Regarding the second statement, if you're not forced to sell, you
> do not have to worry about a rising discount in bad times.

Why would someone volunteer to restrict himself with the timing of being in or out of the market or specific asset class? Another reason: since the discount to nav might increase dramatically during unfavorable conditions the cef portfolio gets very risky to hold as a collateral. Disadvantages of holding cefs compared to holding etfs considerably outweigh the rewards. I am yet to hear from you advantages of cefs over etfs if any.

Smart investors should think always about risks before the rewards.

Jun 30 10:59 AM

[klarsolo:]

Baboon, for retirees there is much to like about a managed distribution policy (even though they could create one themselves with some work).

People buying CEFs at steep discounts effectively increase the dividends they can get paid based on the underlying assets.

Example: NFJ:
NAV is at $ 14.8.
Market price around $ 11.8.
Distribution: $ 0.6 per year

Distribution as a % of NAV: 4 %.
Distribution as a % of market price: 5 %

You just increased your distribution by 1 %. The only additional risk you have to accept is the fluctuation in the discount to NAV. For buy and hold investors (and retirees) a worthwhile trade-off.

And I do like the access to asset classes and strategies currently not available in the ETF space, especially in the fixed income world. For example, there is no levered loan ETF yet.

I'm not saying CEFs are always better than ETFs. They are not. But neither are ETFs always better than CEFs. However, if this is what you want to keep believing, feel free to do so. CEFs are a unique animal and not for everyone.

Jun 30 11:50 AM

[mind_geek:]

CEF's provide leverage and higher yields that ETF's cannot do. These strategies explain the higher management fees. If your a retiree, then a levered CEF may not be your cup of tea. 1 thing about ETF's I dont like is that they tend to be more manipulated by the institutions and follow market trends. Income CEF's are more readily available for a truely non-US correlated investment portfolio. ETF's tend to follow the herd mentality and catch the same cold the US has, even if its supposed to diversify away from it. (EEM is a glaring example)

Stack any income (world, Muni, Multisector) ETF against GIM, TEI, ACG, AWF, NUV and you'll be hard pressed to find an equal. Stock CEF's however dont seem to perform as well over the long term as thier ETF cousins and I personally stay away from them regardless of discount.

You can get the same income diversification from multi-sector funds like LSBRX or LSFIX, but if your more of a trader, your subjected to short term trading fees and penalties. Both funds however have a great track record.

Disclosure: I own all of the investments mentioned above.

Jul 08 03:23 PM

[mind_geek:]

correction.. I dont own LSFIX. It has a $3 mil minimum investment, maybe in another 100 years I could afford it! Meant to say TEGBX.

Jul 08 03:32 PM

[topshelf:]

I'm really glad I read this article and all the comments [ excellent "debate" guys ]. You all seem to be much more informed re:CEF's, so I have a comment and question, I hope someone can respond to.
This clip explains why I invested in CAF:
""""CEFs give you access to some asset classes and strategies that so far do not have an equivalent in ETFs.""""

Last year I was looking for an investment vehicle to get into the China A-Shares. I found CAF and no other choices. Fact is I didn't know if it was a CEF or ETF, I just wanted in.
What I'm puzzled about is the "Retained" Divi. What happens to this? Suppose someone sold, though they were Holders when that Divi/Earnings were made. I'm not selling, just curious.

I did receive $1.83 on Jan 16, but there is over $2 in "Retained" Earnings, after MS deducted the taxes...so what happens to this? Do I just wonder when they decide to pay this?

Here is some info:

EX-DATE RECORD DATE PAYABLE DATE -------- ----------- ------------ 07/09/08 07/11/08 07/15/08

The Morgan Stanley China A Share Fund, Inc. (the "Fund"), advised by Morgan Stanley Investment Management Inc., is a closed-end management investment company seeking to achieve capital growth through investments primarily in A-Shares of Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges.

The Morgan Stanley China A Share Fund, Inc. (the "Fund"), advised by Morgan Stanley Investment Management Inc., is a closed-end management investment company seeking to achieve capital growth through investments primarily in A-Shares of Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges.
============
[ i added the asterisks ]
The Fund has elected to retain a portion of its realized capital gains for the tax year ending December 31, 2008 ***because of issues relating to the Fund’s ability to repatriate funds from China***. The Fund will pay the required federal corporate income taxes on these gains.

Per share estimates of the Fund's retained capital gains and corresponding federal corporate income taxes paid are as follows:



Per Share

Capital Gain Retained
$ 2.1199
Federal Income Taxes Paid by Fund
$ (.7420 )
Net Capital Gain Retained
$ 1.3779

=============


On Jun 30 07:47 AM klarsolo wrote:

> The first argument can also be applied to ETFs to some degree. ETFs
> don't have a managed distribution policy, but when times get tough,
> the stocks inside the ETF will cut their distribution and that cut
> will be passed through.
>
> Regarding the second statement, if you're not forced to sell, you
> do not have to worry about a rising discount in bad times. You know
> that once things settle down you'll have a good chance of getting
> that extra-underperformance back.
>
> ****CEFs give you access to some asset classes and strategies that so far do not have an equivalent in ETFs*****. Sometimes you even get them
> at steep discounts. Instead of thinking in black and white terms
> ("CEF's are bad, ETF's are good"), be flexible.

Jul 19 09:23 AM