Actionable Items:
- Highest Positive Spread: Gabelli Utility Trust (GUT)
- Lowest Negative Spread: Invesco Value Muni Income Fund (IIM)
- Focus Stock of the Week: Royce Micro-Cap Trust (RMT)
- Last Week s Focus Stock: ING Infrastructure, Industrial and Materials Fund (IDE)
CEF Weekly Review: On average, the 13 closed-end fund (CEF) types registered a share price decrease of 2.0% for the week ending 3/16/12. The PowerShares CEF Income Composite (PCEF), an ETF that invests in taxable income CEFs, decreased 1.7% for the week. PCEF is up 5.6% YTD on price appreciation. Currently, PCEF's trailing twelve months' yield is 8.1%. The S&P 500 advanced 2.4% during the week on an uptick in share volume (see below). The S&P 500 is up an impressive 11.7% YTD.
The Eqcome CEF Fear Index was significantly elevated for the week on the downside. The average CEF unweighted price decreased 3.3% while the average related NAV dropped 0.5%. This week the VIX slipped 15.1% to 14.52 and represents its lowest level since July 2007.
According to ETF Profit Strategy Newsletter, historically, a VIX below 15 has been a prescient "sell signal". Investors should brace themselves for potentially "down day" this week (see adjacent chart).
CEF Weekly Fund Type Performance: The contrast between the equity markets and the CEF market sector were stark this week. While the DJIA and the broader S&P 500 generated their best weekly gains of the year, the CEF market sector was dragged down 2.0% by the miserable performance of its fixed-income fund types.
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Both the state and national munis were both significant contributors to this underperformance with an average share price decline of 6.0% and 6.6%, respectively. (We cautioned our clients late last week regarding "peak pricing" for the leveraged muni CEFs and earlier this week we issued a report entitled, "Heads-Up Closed-End Fund Muni Investors") Muni CEF performance was significantly worse than the iShares S&P National Muni Bond ETF (MUB) which was off by 1.4%.
Despite the significant weekly gains in equities, the equity-oriented CEFs share price performance was mute with GenEqFnds and WrldEqFnds registering small relative gains of 0.9% and 0.4%, respectively. SpecEqFnds registered an average price decline of 0.4% as the fund type was bifurcated by the strong performance of financial CEFs and the drag of energy and material CEFs.
Weekly CEF Winners and Losers: One of the CEFs with the greatest positive PrcNAVSprd* for the week was Gabelli Utility Trust . GUT's share price advanced 1.2% while its NAV per share declined 1.4% generating a positive PrcNAVSprd of 2.7%.
GUT, as the names implies, invests in products, services or equipment for the generation or distribution of electricity, gas and water. GUT is trading at its 52-week premium high of 47.5% to its NAV. Its average 52 week premium has been 31%. GUT generates an annualized monthly yield of 7.4%, all of which is a return of capital.
GUT's total net assets are $227 million with 23% of the portfolio leverage with auction market preferred shares. Its largest holding is a $9.0 million position in El Paso Corporation (EP) representing 10.2% of GUT's portfolio.
EP's shareholders have approved a merger with Kinder Morgan for a combination of cash stock and warrants valued at 30.37 per share-a 47% premium over its pre-merger stock price. With EP's stock trading at 29.10, most of that premium is already reflected in GUT's NAV. With the stock having gone ex-dividend March 14th, on a cursory basis, it seems toppy.
The CEF(s) with the greatest negative PrcNAVSprd for the week was Invesco Value Muni Income Fund . IIM's share price was down 12.5% while its NAV was down 1.5% generating a negative PrcNAVSprd of 11.0%. The stock, which trades on an average 3 month daily volume of 75,300, saw its average daily volume for the week of increase by 50%. It experienced successive daily downticks in its stock price.
IIM currently trades at an annualized monthly yield of 5.8% and as a result of its recent share price decline, it now trades at a discount of 2.8%. Its portfolio is $416.3 million and while it's structural debt (balance sheet) represents approximately 20% of its leverage, its hedged positions bring its effective leverage to 31.3%.
The carnage in the muni CEF funds this week took no prisoners.
CEF Focus Stock(s) for the Week:
Our focus stock for the week is Royce Micro-Cap Trust . RMT, as the name implies, it invests in micro-cap stocks that are usually under $250 million in market capitalization, but greater than $50 million (Nano-caps). These are typically companies in their early stages of growth.
Growth Prospects: Given their small size and the tendency for young companies to introduce new business models, this is a very complex and inefficient market sector. Investors should buy a package of such stocks. This strategy would allow an investor the opportunity to recover from a particular investment if it does not "pan out". Such a disappointment can be more than offset by winners in the portfolio. (A failed idea can go to zero, but a good idea has the sky as its limit, e.g. Apple.)
Treacherous Territory: Given the specific skills to analyze and buy these stocks, we recommend that you employ an experienced advisor. Royce & Associates, LLC, the advisor of the fund, has 35 years of small-cap and micro-cap experience.
RMT trades at a 13.4% discount and at an annualized quarterly yield of 5.6% (stock just went ex-dividend March 2nd.) RMT has total assets of $370 million and is leveraged 17% with a $60 million cumulative preferred share issue at an annual dividend rate of 6.0%. The stock has a 3 month average daily volume of 65,000 shares.
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Micro-caps have a tendency to lead in a recovery as expectations are that smaller companies will benefit from the upturn in a material fashion as its denominators on all its metrics are small and comparisons are significant. At the peak in cycles they have a tendency to lag as the larger caps pick up steam.
The adjacent chart compares the iShares Russell Microcap Index (IWC). As depicted, RMT's performance has significantly lagged that of the ETF that is comparable both in assets and trading volume. YTD performance for RMT is 5% stock price appreciation and a 7% increase in NAV. This is below the 10.9% and 10.7% for IWC on comparable benchmarks, respectively. On any significant market correction, we would be adding to our position in RMT.
Last Week's Focus Stock(s): Our focus stock last week was ING Infrastructure, Industrial and Materials Fund . Fears of a global economic slowdown led by China and Brazil rippled through the market last week and negatively impacted WrldEqFnds such as IDE.
IDE trades at an 8.0% discount to NAV and currently generates an annualized quarterly yield of approximately 10.0%. IDE recently declared its quarterly distribution of $0.450 per share with an ex-dividend date of April 2nd and a payment date of April 16th.
IDE's portfolio is approximately $400 million with no leverage and consists mostly of large cap stock with a large dollop of energy related investments. It holds position in CenterPoint Energy, Schlumberger and National OilWell Varco.
IDE finished the week on its high advancing 2.6%.
