Two Closed End Funds at Irrationally High Prices

Includes: CLM, CRF
by: SL Advisors

By Simon Lack

Occasionally developments in financial markets can be amusing. Take two closed end funds run by Cornerstone Advisors for example. Cornerstone Strategic Value (NYSEMKT:CLM) and Cornerstone Total Return (NYSEMKT:CRF) have both succeeded in driving their premium to NAV to stratospheric heights through regularly returning capital to investors through distributions. CLM’s monthly distribution of $0.14 is return of capital, creating a “distribution yield” of around 14%. CRF’s is around $0.12 per month, also 14%.

Closed end funds are bought on the basis of distribution yield – the hapless owners of these securities must think these funds are creating gold out of lead, because their holdings of large cap stocks (XOM, JPM, GOOG, GE etc.) are worth a premium to NAV of 59% (in the case of CLM) or 65% (CRF). Naturally such financial alchemy is deserving of an expense ratio north of 2.5% for each, although Morningstar reports that over the past three years they’ve generated -1% (CLM) and -4% (CRF) of excess return compared with the S&P500, the benchmark that best fits their returns.

But the managers of Cornerstone do at least have a sense of humor. They’re allowing their investors to buy more overpriced shares through a 1 for 3 rights issue. Some might deem this an insult to their intelligence, but clearly demand is there, and who can blame Cornerstone for exploiting the many individuals whose limited financial knowledge propagates this state of affairs (there are no institutional owners filing 13Fs). They’ve found a way to create gold out of lead – albeit for the management rather than their investors.

One has to chuckle at their chutzpah.

Disclosure: No positions

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