Once a week I research closed-end funds to hold, sell, or buy. In this article I highlight five closed end funds which investors should sell immediately. The evidence is rock-solid and the CEFs are on rocky ground, poised for a significant nose dive.
Cornerstone Total Return (CRF)
CRF has provided investors a 5-year total annualized rate-of-return of (-11.9%). The fund's performance provides adequate guidance to sell CRF and search for a better alternative. The S&P 500 index has provided a .3% total annualized rate-of-return over the same period.
CRF is presently trading at a 55% premium to net-asset-value (NAV). Cornerstone operates closed end funds which earn profits by charging a percentage of assets under management. The annual expense ratio is excessive at 2.36%. The higher the assets under management (AUM), the higher the operator's profits. Cornerstone could file a CRF secondary on any given day, and this CEF would plummet in value. Traders could simply short sell CRF and buy the CRF-secondary shares near their true NAV.
CRF's SEC N-2 Filing, dated March 31st, 2011, indicates a very ordinary portfolio structure. The N-2 provides insight into CRF's ownership of blue chip stocks, and closed end funds. All assets are Level 1, explicitly stating CRF does not have any positions which are potentially mispriced to substantiate the 55% premium to NAV.
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Gabelli Utility Trust (GUT)
The Gabelli Utility Trust (GUT) is the second CEF to sell immediately. There are zero positive reasons to own this fund. Gabelli's quick fund fact sheet, dated December 31st, 2010, highlights the rationale to sell this CEF today. The fund is a plain vanilla utility trust that was selling at a 19.1% premium on December 31st. To be clear, this means investors were paying 19.1% more than fair value.
Investing goals are to buy assets at a discount to their value. The investor is doomed to fail if they pay more than fair value to start their investment decision process.
The March 31st, 2011, SEC N-2 filing indicates ordinary utility and energy equities. The fund has close to 100% Level 1 assets, although there is one Level 3 position which appears to lack any value.
The fund has the following negative attributes:
- 21.88% effective leverage,
- high 1.91% annual expense ratio,
- 25.04% premium to net asset value
Investors should sell any closed end fund which is trading at a 25.04% premium to the actual value.
DNP Select Income (DNP)
If an investor owns DNP Select Income (DNP), they will do themselves a favor by selling the fund as soon as possible. The fund's history did show a 4.5% annualized total rate-of-return compared to an S&P 500 .3% annualized total rate of return over the same time frame. The time frame is from January 31st, 2007 through July 22nd, 2011.
The DNP SEC N-Q, dated March 31st, 2011, shows the current holdings which do not indicate any holdings worth noting, nor any significant variance from standard closed end funds.
DNP contains the following negative CEF attributes, which collectively signal to the average investor to "sell immediately":
- a high annual expense ratio, 2.19%, with assets under management approaching $3-billion,
- effective leverage of an extremely high 34.14%,
- an excessive 23.92% premium to net asset value
Investors are not well served buying or holding a fund with such a high leverage rate and selling at a near 25% premium to NAV. Investors can find a great number of better substitutes in which to invest their money.
Sprott Physical Silver Trust (PSLV)
Sprott Physical Silver Trust (PSLV) is one of the few ways to own physical silver in an equity format. There are alternatives, however, to provide a better substitute to PSLV. The fund displays basic fund attributes that make this equity indefensible to own. Sprott Asset Management, as of March 31st, 2011, held 15,224,615-PSLV shares.
Sprott's SEC 20-F filing shows the fund lacks anything worthy of a 22% premium to NAV. The Sprott website shows the simplicity of the holdings. Sprott holds silver in a bank vault and the silver is audited. Metal investors are conscience of their metal's value and know there isn't any reason to pay 122% of silver bullion's value so the silver can be stored by a 3rd party.
The Sprott Physical Silver Trust (PSLV) began trading on October 29th, 2010, and has had an excellent run as silver bullion has broken out on the upside during this time. There is a difference in owning silver bullion at fair market value versus market value plus 22%. Owners of PSLV should sell their holdings immediately. Sprott will issue a secondary offering and the current PSLV shares will drop closer to their NAV. The present scenario is a supply versus demand issue.
PIMCO Strategic Global Govt (RCS)
PIMCO Strategic Global (RCS) should be sold without hesitation. PIMCO is a premier and preeminent fixed income shop. This fund, however, lacks credibility as an interesting investment.
PIMCO Strategic Global contains the following negative attributes:
- 53.18% effective leverage,
- a 15.35% premium to net asset value
The fund has outperformed the S&P 500 over the past 5 years. RCS has achieved an 8.7% annualized total rate-of-return compared to an S&P 500 .3% annualized total rate-of-return over the same timeframe.
The fund has $840-million assets under management. The annual expense ratio is reasonable with 1.42% fee. The fund's premium to net asset value explicitly is a warning sign and should be reason to liquidate RCS ownership.
The SEC N-2, as of April 30th, 2011, lists the stock equities and the Government Sponsored Entity (GSE) holdings. The fund's premium is a barrier to ownership consideration. Investors are well advised to liquidate their fund holdings. An investor paying a 15% premium to NAV is immediately put in a difficult position upon purchase. Sell RCS and buy a fund at a discount to NAV.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.