Even good financial journalists can at times cover Closed-End Funds in a naive manner. Randall Forsyth stood in for Alan Abelson and touted Claymore Dividend & Income Fund (DCS) in the high profile “Up & Down Wall Street” distributed August 21st for the Barron’s August 23rd print edition. I am reminded of Barron’s mention of Gabelli Global Health and Wellness (GRX) late last year which at the time drove GRX shares to a lower discount.
Here Barron’s devoted six paragraphs to Forsyth’s DCS idea, and only in the final sentence of the 5th paragraph was “one negative” highlighted: “the fund’s 2.35% expense ratio”. Although the piece observes that the NAV “has basically shadowed the Dow”, it ignores a huge hazard common to Naïve Closed End Fund investment theses. With insufficient demand for an expensive product that shadows the broad market, discounts can naturally widen in the absence of Activism.
A year ago there was an Activism rationale for owning DCS, which ran to completion. With closing price discounts as high as 31.42% in September and 32.27% in October, and twice within 10 basis points of 36% in November of 2008, Activists had the opportunity to accumulated sizable positions in DCS. Fund Governance and Activists ultimately arrived at an In Kind Tender, which provided an 88.91% fulfillment rate. The in kind tender expired at 11:59 p.m. EST on Monday, January 4, 2010 and the primary benefit to small retail investors required selling on the open market in advance. Participation in an in kind tender is only practical for larger institutional investors with economies of scale. Such narrow summary pales in comparison to a peer's more colorful discussion of In Kind Tenders here on Seeking Alpha.
In my view, the Barron’s piece was particularly naive in not only ignoring why DCS trades at a discount, but also in ignoring that the Activism story, which is over, was the reason why DCS discount once narrowed. Having exited, Activist Investors appear highly unlikely to revisit DCS within the next 5 or 10 years. And, for that to ever happen, DCS would likely needs to first drop back to dramatic discounts.
I prefer long positions in Closed-End Funds. But, I patiently waited and actually shorted DCS, short once having reason to believe the primary buying force induced by Barrons had run its course. I am not suggesting people short-sell DCS, nor any Closed-End Funds. I'm nobody's Financial Advisor, and shorting is a very small portion in my own overall blending of styles. But, I do not expect DCS' discount to narrow over time. DCS traded more than 235 thousand shares on Monday, August 23rd on what I perceive as a Barron's-induced, ill-advised buying force.
Over time, I don't believe that call will hold water to the true dynamics of DCS. As recently as August 11th, DCS traded at a 17% discount on less than 30 thousand shares. That had been only a portional revisiting of the discount magnitude predating the presence of Activism. Near the same time, DCS lost an advantage I think it once had, redeeming some cheap borrowing in the form of Auction Rate Preferreds (“ARPs”) it had issued. One might today observe a less-savvy shareholder base in a fund company with less structural ability to try to make up for the high expenses.
None of my words are intended to disparage Barron’s, which I read, or Randall Forsyth. I research Closed-End Funds because doing so is challenging even for smart people. I believe that the detail orientation and challenges inherent to Closed-End Fund research create inefficiencies, and thus opportunities. I love Closed End Funds and my long positions are far more substantial in size than my short positions. Although I often sell my long positions in Closed-Ends like GRX when Barrons mentions them, it is nothing personal. And yes, when appropriate I will even sell short into a price believed based on an ill-advised buying force.
Disclosure: Author is short DCS and currently long the exchange traded preferred class of shares of GRX, GRX-A. Author is currently contemplating price-sensitive exit of GRX-A position. Author licenses trading data to Covestor, for its investable models. Covestor is a Registered Investment Advisor (“RIA”) licensing Dan Plettner's data to create models for its clients. In addition to receiving royalties from Covestor, Dan receives income for securities research. Dan is not a Registered Investment Advisor, nor an employee of Covestor. Inquiries must be directed to Covestor Investment Management Client Services.
Disclosure: short DCS, long GRX-A