I'm a little late for my first quarter review of high yielding equity based closed-end fund (CEF) performances but I was away on an extended spring break and so this review covers up until last Friday, April 13th, 2012.
After the shellacking that most CEFs saw in 2011, there was bound to be a bounce in the new year and most funds saw excellent market price appreciation through the first quarter of 2012. The last two weeks however have seen a backtrack along with the markets, particularly for global and commodity focused equity funds and the question now after the initial bounce is where do we go from here?
One concern I have is that many fund's Net Asset Value (NAV) performances have not kept up with their YTD market performances. This may be fine for funds which started the year at wide discounts and have seen their NAVs at least keep pace with their benchmarks, but for many funds, their market prices have skyrocketed past their underperforming NAVs. This has created some buy and sell opportunities according to my analysis and I'll go over those below but first, lets take a look at the year-to-date market price and NAV performances of all the high yielding equity based CEFs available to investors to see where we stand.
YTD Equity CEF Performances
Table 1 lists in descending order the best Market Price performances of all equity CEFs YTD. Funds in green outperformed the S&P 500 while funds in red underperformed. NOTE: Most funds would not have the the S&P 500 as their benchmark since many funds are global and/or have fixed income investments in their portfolios, but it is still the most widely recognized index for comparison. I have also included "red" flags in columns for funds which may have overly large premiums, NAV yields or expense ratios.
The funds are also color coded by their income strategy in which blue is for option-income funds, orange is for leveraged funds and olive is for dividend harvest funds. If you are unfamiliar with how these fund's income strategies work, you can read up on them here.
And finally, only the top 35 or so funds are shown in each table due to limited screen shot space. If you would like to receive the full spreadsheet tables you can email me requesting the information. You will need Excel 2007 or a later version to open the file.
Table 1: Funds sorted by Market Performance
Table 2 below lists in descending order the best NAV Performances of all equity CEFs YTD. Here the number of funds that have outperformed the S&P 500, shown in green, keeps dwindling. Again, this is due mostly to the strong relative performance of the domestic market indices like the S&P 500 and the Nasdaq and the relative underperformance of the overseas markets as well as in commodity and utility sectors, of which many of these funds focus on. Also keep in mind that all fund performances include distributions added back year-to-date but not re-invested.
Table 2: Funds Sorted by NAV Performance
If you look closely at these two tables, a couple trends appear. First, the best market price performances tend to come from the option-income funds (blue) whereas the best NAV performances are dominated by the leveraged funds (orange). Leveraged funds tend to do better in strong market environments so this should not be a surprise, whereas many of the option-income funds have pure stock equity portfolios and I'm guessing that investors are hoping to take advantage of a shift from fixed-income to pure stock based funds.
However, this trend has created some overpriced funds in my opinion, particularly if the markets continue to be defensive, and the best way to identify those are to see which funds have the biggest differences in market price performances vs. NAV performances. Table 3 lists in descending order the funds which have the largest differences between their market price performance and their NAV performance. Funds over 5% are shown in red and those less than 5% are shown in green, though no funds are shown in green due to the limited screen shot. I used 5% but this should not necessarily be a cutoff indicator for over or undervalued funds since many funds started the year at exceptionally wide discounts and their depressed market prices were due to catch up with their NAVs, particularly funds which have had solid NAV performances.
Table 3: Funds Sorted by Difference Between Tables 1 and 2
Overvalued Equity CEFs
Based on a proprietary evaluation model which rates each fund (not shown) by their long and short term NAV performances, discount/premium level, NAV yield and income strategy among other criteria, some funds have moved into the severely overpriced category in my opinion. Many of these are among the top red listed funds in Table 3. They include:
BlackRock EcoSolutions Investment Trust (BQR) - Up 26% YTD though its NAV is up only 7.7%. Now at a 4.4% premium. There may be a reason why this fund has performed so well YTD but I don't see it.
Gabelli Gold, Natural Resources and Income Trust (GGN) - Up 16.3% even though its NAV is negative on the year. Now at an 12.4% premium.
Gabelli Natural Resources, Gold & Income Trust (GNT) - As much as I like the Gabelli leveraged funds, and I picked GNT as a fund to own back in February, both GGN and GNT have gotten ahead of themselves. Now at a 4.5% premium.
Alpine Global Dynamic Dividend fund (AGD) - I'm still at a loss how anybody buys this fund at a premium based on its history. Up 18.8% YTD and now at a 9% premium though its long term NAV performance is among the worst of all equity CEFs.
Except for AGD, many of these overvalued funds are commodity (energy, gas, materials) and metals (gold, silver, etc.) based and a quick reversal in those sectors could support these funds. Still, it might make more sense to own the commodity and metal sector ETFs at this point and sell your own covered-call options for income since BQR, GGN and GNT all use an option-income strategy.
Herein lies the most difficult part of evaluating equity CEFs since tracking historical NAV performances, discount/premiums levels, NAV and market yields can tell you which funds may be under or overvalued but it won't tell you which fund's NAVs will outperform going forward. CEFs are unique in the sense that their income strategies are designed to excel in different market conditions. Most leveraged funds do much better in strong up markets whereas the more defensive option-income funds will outperform in flat to even down markets.
Earlier this year, I advised investors to overweight the leveraged funds in anticipation of a better overall equity market in 2012 after recommending the more defensive option-income funds in 2011. Though 2011 did strongly favor the most defensive option-income funds, most fund's market prices were still thrown out and most CEFs ended the year at the widest discount levels since the market lows in early 2009. 2012 has certainly seen a rebound in most CEF market prices and even if much of the low hanging fruit has been picked for a lot of CEFs, there are still some very attractive funds in both the leveraged and option-income categories based on my analysis.
Undervalued Equity CEFs
Gabelli Healthcare and WellnessRX Trust (GRX) - In an article dated February 1 on the Gabelli funds which you can read here, I suggested that if Gabelli established a recurring distribution schedule for GRX, that the fund should narrow its ridiculously wide -16% discount. Then on March 5, Gabelli adopted a $0.10/share quarterly distribution policy for GRX beginning in June. Though that resulted in a relatively low 5% annualized market yield and investors may have been disappointed, I think there is a lot of room to increase this distribution going forward and for a pure equity leveraged fund whose NAV is up 12.7% YTD and yet is still at almost a -14% discount (see Table 2), I believe GRX is an exceptionally undervalued fund.
Nuveen Tax-Advantaged Dividend Growth fund (JTD) - Another leveraged fund that is severely undervalued based on its strong 9.4% NAV performance YTD and -10.2% discount (see Table 2). JTD is 30% leveraged and includes about 24% of its portfolio invested in preferred securities for income and to lower volatility. The other nice feature about JTD is that the rest of its portfolio is invested only in U.S. based large-cap stocks. JTD has gotten exceptionally hard hit in April and I believe is due for a rebound.
Eaton Vance Enhanced Equity Income fund (EOI) and the Eaton Vance Enhanced Equity Income fund II (EOS) - Nobody likes these funds and that's why I like them. Two monthly pay option-income funds that have the best NAV performances of all the Eaton Vance option-income CEFs YTD and yet trade at -14% discounts. Yes, historically, EOI and EOS have been NAV laggards and after another distribution cut in March, everyone has just about given up on these two funds. I like them from a pure value play and with a relatively low 50% option coverage on their U.S. equity only portfolios and an even more manageable NAV yield with the distribution cuts, investors can pick up a relatively high windfall 9.8% market yield on EOS and a 9.6% market yield on EOI.
The tables shown above can be an extremely valuable starting point for investors to identify over and undervalued equity CEFs. Again, if you would like to see the full tables with all the equity CEFs included, you can email me and I will send them to you in an Excel spreadsheet format.