CEF Weekly Review: Real Estate Extends Gains

The 13 closed end fund (CEF) types on average were up 2.5% for the week ending 9/18/09. On an aggregate, unweighted basis, the weekly average price increase for 627 CEFs was up 2.3%. The weighted 49 CEFs as of 9/18/09 comprising the Claymore CEF Index registered an average increase of 3.1% for the week. The S&P 500, as measured by the SPDR S&P 500 ETF (SPY), registered an increase of 1.9%.

The 627 CEFs’ aggregate, unweighted current distribution yield is 7.1% and is trading at a 4.2% discount (7.3% versus 4.4% the previous week, respectively). Year-to-date, CEFs on average have extended their price appreciation to 46.8%. (Click Here for YTD CEF Performance.)

The Eqcome CEF Fear Index continues to project an almost giddiness on the part of CEF investors. The unweighted average price change was up 2.3% versus 0.2% for the related NAV. The CBOE Volatility Index (VIX), which typically moves inversely with the stock market, was down 1.0% as the S&P 500 (SPY) logged in an advance of 1.9%. The VIX traded down on Wednesday to its lowest level in more than a year and finished the week tame.

CEF Weekly Fund Type Performance: This week was an extension of the previous week with investors willing to take on more risk by abandoning fixed income for equities. This was clear as equity-oriented fund types outperformed the average while fixed-income underperformed.

SpecEqFnds again took the fund type leadership spot advancing 4.4%. This is after advancing the same the previous week. Real estate funds, which represent 42% of the SpecEqFnds category, surged 6.8% on top of the 6.3% rebound the previous week. (This was consistent with the real estate ETF (VNQ) which surged 8.5% for the same period.) Much of that gain was driven by the proposed merger of the Cohen & Steers’ real estate CEFs which advanced an average of 11.1%. RLF, RWF and RPF is proposed to be merged into RQI in the 4Q.

LoanPartFnds advanced 3.9% for the week. This fund type is receiving more attention as investors are looking for ways to protect themselves against inflation. Many of the CEFs in this fund type hold floating rate assets. However, these stocks are not a secret. The 3 senior secured floating loans CEFs (EFR, EVF & EFT) are all trading at sub 7% yields. Interestingly, PrefStkFnds also demonstrated strong performance, up 3.7%. This is in the face of two banks failing this week and taking the total to 94 this year.

Price/NAV Weekly Spreads: The Price/NAV spreads (PrcNAVSprd) moved in the general direction of the price movement, i.e. price changes exceeded related NAV changes and visa versa. Exceptions to this trend were SingleStMuniFnds and NatlMuniBndFnds where NAVs advanced greater than their relative price. This was also true for HiYldBndFnds funds.

CEF Spread Changes: In many cases the best performing CEF in terms of price change is the same one that has experienced the greatest positive change in its PrcNAVSprd. DCA Total Return Fund (DCA), a real estate oriented CEF, experienced the greatest positive spread a 7.7% and advanced 10.1% for the week. However, it was Cohen & Steers Advantage Income Realty Fund (RLF) that advanced the greatest with price appreciation at 11.6%. Yet, RLF’s PrcNAVSprd was a negative 0.6%. The difference is that DCA invests in real estate debt and preferred stock, while RLF invests in real estate equities.

(A positive spread between the change in price and NAV could be viewed unfavorably subject to other metrics. This is because the stock has advanced greater than its underlying NAV. All things equal, they should move in tandem. The opposite would also be true.)

Rebounding from last week greatest positive PrcNAVSprd (10.0%), Eaton Vance California Municipal Income Trust (CEV) logged in a 7.9% negative PrcNAVSprd. CEV ended up second from the bottom in term of price performance, off 3.8%. Nuveen Maryland Dividend Advantage Municipal Fund (NFM) occupied the bottom spot. It was off 5.3% and experienced a negative PrcNAVSprd of 7.3%.

Market News: Investors should keep their eyes focused on the US dollar (USD). US dollar is playing an important and confounding role in asset class performance. The relaxed US monetary policy has been accompanied by low interest rates and the potential for future inflation. As a result, investors are making different bets on the same data.

The weak USD has caused income investors to seek higher yields in fixed income alternatives to treasuries. (Almost 90% of the mutual fund inflow has gone into bond funds.) Alternatively, the weak USD has driven commodity prices higher on fears of inflation—which longer term should cause bond prices to fall. Finally, as the dollar is considered a save haven, equity investors are interpreting the weak dollar as a more relaxed equity environment sending the stock market higher. They all can’t be right. The difference may just be a matter of timing.

The near-term investment environment is a tough call. Economic events will be dominated by a raft of political decisions yet to be formulated. (Click Here for Next Week’s Economic Calendar.)

ETFs: (Click Here for ETF YTD sector performance.)

CEF Insider Trading: Insider trading in CEFs picked up steam for filings as of September 15^th. The biggest acquisition was 300,000 shares of MCG Capital Corporation (MCGC). These shares were acquired by Gavin Saitowitz, a Managing Member of Springbok LLC, at an average cost of $3.04 per share for a total cost of $912,000. This brings Mr. Saitowitz indirect ownership to 1,011,551 shares. Springbok, Soundpost Partners, LP and Lyrical Partners, LP, collectively own 9.9% of the shares and constitute a group.

Mr. Saitowitz recently became a director of MCGC. This was a result of an agreement with MCGC and the settlement of pending litigation between Springbok and MCGC. The accord includes a standstill agreement through MCGC’s 2010 annual shareholders meeting (June).

MCGC is an internally managed, non-diversified, CEF that elects to be regulated as a Business Development Company (BDC). It focuses on financing and advisory services to U.S. middle market companies. With the capital markets opening up, there may be a greater opportunity for small private equity firms to realize greater value.

There was some small initial insider position established in the month in NPI, KYN and RNP. In each case the insider was BofA which has a 10% position in each. The transactions appeared as “house keeping”. The bank was both buying and disposing of stock in the same names. In the case of NPI, Paul Brennen, a vice-president and assistant secretary added 1,000 shares for a total of 3,222.

Dan Neidich, a director of GAM, continued to add to his position accumulating another 500 shares at $23.47 per share for a total of 16,800 shares. (Click Here for Insider Summary.)

CEF Distribution Announcements This Week: Below is a table of this week’s CEF distribution announcements with prospective ex-dividend dates. (The list is not intended to be all inclusive. While reasonable care was taken in its construction, please confirm its accuracy independently prior to making an investment decision based on this table.)

CEF Focus for the Week: One CEF that I’ve recently run across—on which I may not have the whole story—is BlackRock Broad Investment Grade 2009 Term Trust (BCT). So, I could use some help here in clarification.

It’s my understanding this is a trust of investment grade fixed income securities that is scheduled to terminate on or about December 31, 2009. The trust on termination will return $15 per share to its holders. BCT is currently trading at $12.30, a 1% discount to its NAV.

Follow me here. So, if one can buy the stock currently at $12.42 per share and receive $15 per share at the end of this year (2009), then the net gain would be $2.58 per share. This would be a 20.8% annualized return. Since my holding period is only 3 months the return per holding period would be 83%!?

This lands it in the “too good to be true” category. There may be a terminal cost of winding down the Trust or holding costs that might subsume the net payout. If anyone knows anything about this situation please post a comment.

Disclosures: Long SPY, GAM & GLD; I currently do not own BCT.

Comments

[Joe Eqcome:]

Follow Up on BCT

In a conversation with Blackrock with regards to BCT, its original objective was to liquidate the CEF at the original issue share price of $15 per share at the end of 2009. However, this was not a guarantee.

The trust will be liquidated now on or about October 30, 2009 at NAV--which is now approximately $12.42 per share.

Assuming you buy 200 shares of BCT at the prevailing price of $12.25 per share and pay a commission of $10 per share your average cost would be $12.30 per share. Assuming you get approximately $12.42 per share liquidation distribution, the liquidation payment would represent a $.12 per share increment over your embedded cost.

This would be a return on your money of less than 1% for the holding period of approximately a month and a week. However, the distribution would be a return of capital, i.e. you wouldn’t have to pay taxes on the increment distribution.

There are too many moving parts and a low projected return for this to be an interesting arbitrage. I’m sure there will be some liquidation costs that might reduce the liquidation distribution.

The stated objective of returning to investors their original IPO invested capital of $15 per share and then placing a caveat that they just might not seems a little misleading. A more accurate and honest objective would have been, "protection of the original shareholders' invested capital".

And they didn't even do that--let alone investors getting back their original $15 per share.

Yes, Virginia, it was too good to be true.

Joe Eqcome

Sep 21 01:58 PM

[AlexL.:]

After having read the fact sheet and several press releases from BlackRock regarding BCT, I believe that the $15 to be returned to shareholders at the maturity of the trust (they announced on June 3rd that final distribution will take place on Oct 30th) was solely based on the initial offering price of the fund. The main objective of the fund was capital preservation (i.e. the $15 NAV), which it looks like they were unable to achieve as 9/18 NAV was $12.42. Doesn't look like there is much to get excited about on this one.

Once again, thanks for the comperehensive CEF coverage...

Sep 21 06:05 PM

[AlexL.:]

Man I think I need to refresh my page more often... totally missed your comment before posting.


On Sep 21 01:58 PM Joe Eqcome wrote:

> Follow Up on BCT
>
> In a conversation with Blackrock with regards to BCT, its original
> objective was to liquidate the CEF at the original issue share price
> of $15 per share at the end of 2009. However, this was not a guarantee.
>
>
> The trust will be liquidated now on or about October 30, 2009 at
> NAV--which is now approximately $12.42 per share.
>
> Assuming you buy 200 shares of BCT at the prevailing price of $12.25
> per share and pay a commission of $10 per share your average cost
> would be $12.30 per share. Assuming you get approximately $12.42
> per share liquidation distribution, the liquidation payment would
> represent a $.12 per share increment over your embedded cost. <br/>
>
> This would be a return on your money of less than 1% for the holding
> period of approximately a month and a week. However, the distribution
> would be a return of capital, i.e. you wouldn’t have to pay taxes
> on the increment distribution.
>
> There are too many moving parts and a low projected return for this
> to be an interesting arbitrage. I’m sure there will be some liquidation
> costs that might reduce the liquidation distribution.
>
> The stated objective of returning to investors their original IPO
> invested capital of $15 per share and then placing a caveat that
> they just might not seems a little misleading. A more accurate and
> honest objective would have been, "protection of the original shareholders'
> invested capital".
>
> And they didn't even do that--let alone investors getting back their
> original $15 per share.
>
> Yes, Virginia, it was too good to be true.
>
> Joe Eqcome

Sep 21 06:08 PM

[Joe Eqcome:]

Another BCT Update:

I received an e-mail on my website from "FM" regarding this BCT distribution. It was very helpful and posed some additional questions.

FM points to a press release on 6/3/09 from BCT regarding the distribution for BCT. In the press release, BCT states BCT will make its final liquidating distribution on or about October 30, 2009, as opposed to the end of 2009—as previously noted.

https://www2.blackrock...

The press release goes on to state, a special distribution in connection with the Trust's liquidation will be made to shareholders of record 10/15/09. This special distribution is for $.531949 per share.

FM points out with a flat price to discount, the special distribution would generate, and I quote, "about 5.3% for 1 month if you believe the NAV will stay flat. Could be better in NAV improves. Still not bad when you annualize."
This makes it a little more interesting.

I guess the threshold question with regards to the special distribution is: wouldn't such a distribution just lower the liquidating NAV by a similar amount? If so, in the final analysis, a shareholder might just be getting a $.53 per share distribution in a separate distribution.

The final liquidating distribution might be the pre-special distribution NAV less the special distribution? Assuming the NAV doesn’t change that much, the cumulative distribution would represent the current NAV or about $12.42 per share as of 9/18/09? Don’t know?

If the special liquidation distribution is separate and apart from liquidating NAV then this might be interesting as FM suggests.

Again, thanks FM for the "heads up".

Joe Eqcome

Sep 21 08:22 PM

[Joe Eqcome:]

Here' a hyperlink to the BCT press release mentioned above. It didn't see to take above.

https://www2.blackrock...

Joe Eqcome

Sep 21 08:25 PM

[Joe Eqcome:]

BCT's special distribution of $.531 per share will go to reduce the NAV and therefore will reduce the liquidating distribution by a like amount.

As a result, the current NAV is approximately what shareholders will likely get as a liquidating distribution--it just will come in two parts.

Joe Eqcome

Sep 22 12:36 PM