I believe that the Alpine Total Dynamic (AOD) closed-end fund is poised for both a dividend cut and underperformance relative to the S&P 500 index during 2012. Here are four reasons to avoid AOD at all costs. I strongly encourage investors to look at other closed-end funds for their portfolios.
1. Historical Performance
Besides AOD, Alpine manages two other closed-end funds - Global Dynamic Dividend (AGD) and Global Premier Properties (AWP). This article focuses on AOD only. AOD did an initial public offering (IPO) in early 2007. The net asset value (NAV) following the IPO was $20 less $0.90 per share (sales load) for a total of $19.10 per share. Since this time, AOD has paid out $7.73 per share in dividends. The NAV as of December 28, 2011 is $4.77. Thus, AOD has lost: ($7.73 + $4.77) - $19.10 = -$6.60 per share over its lifetime, which represents a -35% decrease relative to the IPO NAV.
To put these performance metrics in perspective, the monthly closing price of the S&P 500 (SPY) of February 2007 was 148.29. From February 2007 through December 2011, the unadjusted closing price of SPY was normalized by a factor of 0.133 in order to perform an "apples-to-apples" comparison with AOD's NAV (Multiplying 0.133 by 148.29 yields a value of 19.10). On December 28, 2011, the normalized closing price of SPY was $16.78. Between January 2007 and December 2011, the total normalized dividends paid out by SPY was $1.59 per share. Thus, the total normalized return for SPY was ($1.59 + $16.78) - $19.10 = -$0.73 per share. Although the return is negative, SPY fares much better than AOD, with just a -4% decrease. SPY has been a far better investment than AOD over this five-year period.
2. Dividend History
In a recent SA article where I expressed concerns over AOD, a few readers had responded that AOD does not have a history of cutting dividends. Getting the AOD dividend history requires a little legwork, but is still do-able. If you go to the Alpine website and browse the material published for AOD, you will find a chart showing the cumulative dividends paid out since inception. This style of chart masks the AOD dividend cuts. Nowhere on their website do they provide a dividend history, which I find to be very atypical. I pulled my data from Yahoo's historical data for AOD.
There have been two dividend cuts in AOD's history. The first happened in March of 2009 where the dividend was cut from $0.18 to $0.12 per share. The second occurred in July of 2010, and the dividend decreased to its present day value of $0.055 per share. The current dividend is almost 70% lower than its post-IPO dividend of $0.18 per share.
3. Precipitous NAV decrease
Since AOD's IPO, the NAV has decreased by a best-fit rate of -$0.27 per month, as shown by the line-of-best-fit below.
The trend in NAV is no doubt significantly influenced by the rapid NAV decrease over the first 20 months. If these months are removed and the trendline is computed, the NAV decrease is still negative with a value of -$0.034 per month (see below).
One of the more common arguments I have heard people use to justify owning AOD is that their purchase price of AOD lies significantly below NAV. As of December 28th, the market price was $0.43 below NAV. Using the rate of $0.034, it can be shown that this 43 cent premium can be wiped away in about 12 months time. In short, a market price purchase below NAV is no match for time.
4. Day-to-day Underperformance
I have followed AOD for a while, but never have owned any of it. One observation I have made is that AOD underperforms the S&P 500 on market "up" days, but decreases more than the S&P 500 on "down" days. In 2011 to-date, there have been 133 days in which the S&P 500 increased (i.e. "up" days), and 119 in which the S&P 500 decreased (i.e. "down" days). Of the 133 "up" days in 2011, SPY outperformed AOD on average by 0.22% per day. While AOD beat the SPY on market down days, the outperformance was minimal. AOD outperformed SPY by an average of -0.007% on market "down" days. These are not characteristics of a CEF that I would want in my portfolio.