When it comes to Closed-End funds (CEFs), having a well-known and trusted name as a fund sponsor can have a big impact on a fund's market price and can mean the difference between a fund trading at a premium to the fund's Net Asset Value (NAV) or trading at a discount. Though I don't necessarily like this valuation metric because it tends to be more emotionally driven and often overrides more important valuation measures such as NAV performance, still one has to be aware that in the world of CEFs, a fund sponsor name can make a big difference.
Perhaps no other fund family gets more of a boost from its name than the PIMCO funds. Part of that may be because fixed-income bond funds have performed much better than equity funds over the past year and PIMCO is the undisputed leader in fixed income funds, even though some of their most popular funds did not have particularly good 2011s. Still, many of the PIMCO municipal, corporate and high yield bond CEFs trade at premium prices over their NAVs because of the PIMCO name, and a couple as high as 65% to 75% premiums over their NAVs. I will let others debate whether that is a contrarian indicator but I will say that if even a portion of assets invested in bond funds (mutual funds, ETFs, etc.) shifts over to equity funds, then 2012 could be an exceptional year for high yielding equity closed-end funds.
Why the Gabelli funds?
And if equity CEFs have an exceptional year after a terrible 2011, and so far in 2012 they have, then I believe the Gabelli funds might be a main beneficiary because what PIMCO is to bond funds, Gabelli can be to equity funds. Gabelli, under the corporate name GAMCO (GBL), is a trusted name in the investment world and is known primarily for its US equity research. No other fund sponsor of closed-end funds takes as much pride in its stock picking ability and if you go to the fund's annual reports, you will see how many pages are devoted just to discussing individual stocks. Whereas many equity CEFs from other fund families take a passive index fund approach to investing and focus mainly on income, not so with most of the Gabelli funds. Many of the funds list capital appreciation as the primary objective with income as a secondary objective.
Gabelli has a long history with Closed-End funds, much longer than most fund sponsors. One fund, the Gabelli Equity Trust fund (GAB), has been in operation since 1986. The fund's portfolios include mostly US based stocks with little fixed-income or bond exposure. Add to that the fact that most of the funds also use leverage and you can see that if there is a shift from bonds to equities, then leveraged stock funds should have a very good year.
1-Year Fund Performances
Gabelli manages both open-end mutual funds and 10 closed-end funds, though this article will only focus on their CEFs. The following table lists out the 10 Gabelli CEFs sorted by their 1-year total return performance through January 31, 2012.
The first thing you will notice about the Gabelli funds is that there is a wide variation in performance. Part of that is because leverage tends to accelerate positive and negative performances and part of that is because the Gabelli funds have a wide variety of investment styles. This has also given the funds a wide range in valuations, from a -17% discount to a +45% premium. Some of the funds, I believe, make better investments than the others and I'll go over each one.
Brief Fund Descriptions
- The Gabelli Utility Trust fund (GUT) had a great 2011 riding on the back of a strong US utility sector but GUT's excessive premium pricing over the years combined with a utility sector that is lagging so far in 2012 makes GUT a difficult fund to recommend.
- As its name implies, the Gabelli Healthcare and Wellness Trust fund (GRX) focuses on healthcare stocks though surpisingly, the fund's biggest sector is in food stocks. GRX's primary investment objective is long term growth of capital. The only negative to GRX is that it appears to be on an annual distribution schedule and in fact, has had only one significant distribution in its history, just this last April. This is probably why the fund trades at a very wide -17% discount since most income investors in CEFs look for a more frequent and reliable distribution schedule. Still, GRX had a solid 2011 and has performed well historically even with its perpetually wide discount. If Gabelli could establish a more even distribution schedule, say quarterly, then I believe GRX would reduce its discount significantly.
- The Gabelli Global Utility & Income Trust fund (GLU) is a non-leveraged global utility fund. The fund is probably the least risky as well as the least exciting of the funds and should just follow the direction of the global utility sector, which in 2011 at least, was better than most.
- The Gabelli Dividend & Income Trust fund (GDV) is the largest of the funds by asset size at $1.93 billion and includes a portfolio of mostly well known large cap US stocks. Though GDV is one of the funds which lists total return as its primary objective instead of capital appreciation, the fund pays a relatively low 6.1% market yield. This low yield tends to compete with other yield oriented investments which probably contributes to the fund's -10.4% discount. Still, GDV is attractive and with a 24% leveraged portfolio, may be due for another distribution increase in 2012, like it had in 2011.
- The GDL fund (GDL) is an interesting fund as its investment objective is to invest in merger arbitrage transactions and, to a lesser extent, corporate reorganizations. This results in a higher use of leverage at 32% and much higher expense ratio at 4.4% since arbitrage usually involves shorting securities which may have dividends. This is a market neutral strategy that doesn't seem to appeal much to individual investors and GDL's discount has remained in the -10% to -15% discount range for most of its existence.
- The Gabelli Global Gold & Natural Resource fund (GGN) and the Gabelli Natural Resource, Gold and Income fund (GNT) both invest primarily in gold, metals, energy and commodity related stocks. Both GGN and GNT use minimal to no leverage and instead use an option-income strategy to earn income to pay for their large distributions. This makes more sense than trying to leverage up more volatile sectors such as gold and commodity stocks. Both funds take advantage of their portfolio volatility by selling covered-call options on 100% of the notional value of their individual stock positions, albeit at higher out-of-the-money strike prices. The 100% option coverage brings in plenty of option premium to cover distributions while allowing the fund's stocks to have room to appreciate. Though as option-income funds, income is listed as the primary objective ahead of capital appreciation, in reality, both these funds market prices trade with more volatility than the others. There's also alot of overlap in the fund's top holdings of gold and metal stocks so it really comes down to which fund is more undervalued. I like GNT, which came public a year ago on January 27, 2011 and sold off along with commodities as the year progressed. As is often the case with new CEF issues, the fund's $20 market price began at a premium to its $19.06 NAV and sold off to a discount, as wide as -12% in late December. Both funds have recovered nicely so far in 2012 but will be dependent on a strong gold and commodity sector. Both funds also pay monthly distributions which is an attractive feature for option-income funds.
- The Gabelli Equity Trust fund is perhaps the best known of the Gabelli funds and is similar to GDV in its large cap stock portfolio approach but with a focus more on growth sectors. Thus, GAB's primary objective is capital appreciation with current income as a secondary objective. GAB adheres to a 10% NAV distribution policy and after a solid NAV performance in 2011, GAB raised its distribution twice and now offers a 12.1% yield based on its current quarterly distribution.
- The Gabelli Convertible and Income Security fund (GCV) is the only Gabelli fund that has a significant amount of fixed income securities in its portfolio with 26% in convertible securities, 26% in US Treasuries and 48% in stocks as of 9/30/2011. Still, using 24% leverage allows the fund to offer an enhanced yield that most investors won't find in other balanced equity/bond funds.
- The Gabelli Multimedia Trust fund (GGT) recently dropped "Global" from its name so I'm assuming the fund will concentrate even more on stocks of US based multimedia and entertainment/broadcasting companies. Like GAB, GGT also has growth of capital as its primary investment objective and also has a 10% NAV distribution policy each year. Though GGT did not have a particularly good 2011, it raised its dividend in the 4th quarter to adhere to its 10% NAV distribution policy and offers a perhaps unrealistic 16% current yield. I'm also a little confused why the fund has such a high expense ratio at over 3%.
The bottom line is that in a strong up market, funds that use leverage can significantly outperform the broader market averages. CEFs are attractive as leveraged funds for additional reasons; 1) They often trade at discounts to their NAVs, 2) They tend to offer higher distribution yields with the potential of distribution increases and 3) Fund managers don't have to worry about share redemptions which can impact their use of leverage.
For investors looking for leveraged funds with little fixed-income or bond exposure, the Gabelli funds are about as pure a play as you will find. My favorites are GAB, GRX and GNT (option-income), though I would urge investors to review all of the fund's investment strategies as leverage can increase the volatility of even the lower risk funds.
Final note: The Gabelli funds use auction rate and fixed rate series preferred shares for their leverage borrowings. The fixed rate preferreds currently have higher interest payment liabilities than the auction rate preferreds which may impact those funds which use a higher percentage of fixed rate preferreds.
To learn more about the Gabelli funds, go to www.gabelli.com/