Seeking Alpha
Value, special situations, debt
Profile| Send Message| ()  

I have previously published performance analysis of closed-end fund IPOs in 2009 and in 2010. Almost always, the market performance for each new fund is worse than its NAV performance. This normally occurs because the NAV premiums from underwriting fees are replaced by discounts below NAV or a reduced premium within six months.

In most cases, the underwriting syndicate tries to earn their fees and avoid embarrassment by supporting the stock price for about three months. But recently the underwriting support period seems to be shrinking.

On February 24, 2012, there was an IPO for the Virtus Global Multi-Sector Income fund, Inc (VGI). This is an attractive asset class now and demand is high, but investors should have purchased other existing global bond CEFs instead of this IPO. The underwriting syndicate supported the stock price near $20 for a little over a month. But then the support was apparently dropped starting on April 5.

Take a look at this chart from cefconnect which plots the market price and NAV for VGI since inception.

VGI has dropped persistently the last few weeks by about 7% from 19.95 to 18.52. Ironically, the net asset value of VGI has held up fairly well since inception, falling only slightly from 19.06 to 19.01. The NAV total return has actually been slightly positive since a dividend of $0.117 per share was paid out earlier this month.

I have previously mentioned a research paper "A Liquidity-Based Theory of Closed-End Funds" that tries to develop a rational liquidity-based model to explain why investors are willing to buy a closed-end fund at a premium at the IPO price when they know that it may soon fall to a discount.

They reason that many closed-end funds hold illiquid, hard-to-trade underlying assets. Retail investors would find it very difficult to trade these assets directly, so they are willing to pay a premium to avoid the large illiquidity costs, especially if there are no equivalent no-load funds available for those assets.

But in the case of VGI, this theory does not really apply. There are several other attractive multi-sector global bond closed-end funds available at a discount to NAV. For example, I have previously written about (MMT) which is still available at a discount.

Now that VGI has dropped considerably from its IPO price, it is worth tracking in a watch list. But there may be an "overhang" later this year when investors who purchased VGI at the IPO price sell it for a tax loss. For this reason, even though I like the VGI investment approach, a much better to buy VGI will likely come later this year.

Here are some stats on VGI:

Virtus Global Multi-Sector Income Fund

  • Total Assets: 299 MM Total Common assets: 214 MM
  • Annual Distribution (Market) Rate= 7.58%
  • Last Regular Monthly Distribution= $0.117 (Annual= $1.404)
  • Advisor Expense Ratio: 0.95% of managed assets
  • (Note: Too early to get total fund expense ratio)
  • Discount to NAV= -2.79%
  • Average Credit Rating: Ba/Baa

VGI Fixed Income Sector Allocation (as of 03/31/2012)

High Yield Corporate32.47%
Investment Grade Corporate21.70%
Yankee Bonds- High Quality11.73%
Bank Loans10.43%
Emerging Market- High Yield8.42%
Non-US Dollar6.56%
Non-Agency Commercial MBS3.15%
Asset Backed Securities2.61%
Non-Agency Residential MBS2.16%
Taxable Municipals0.77%

Source: Another Closed-End Fund IPO Bites The Dust