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Actionable Items:

  • Highest Positive Spread: Morgan Stanley Frontier Emerging Markets Fund (FFD)
  • Lowest Negative Spread: BlackRock EcoSolutions Investment Fund (BQR)
  • Focus Stock(s) of the Week: Solar Senior Capital Ltd. (SUNS)
  • Last Week's Focus Stock: None

CEF Weekly Review: On average, the 13 closed-end fund (CEF) types registered a share price decrease of 0.4% for the week ending 5/11/12. The high-low spread (average percentage price change difference between the highest and lowest fund types) registered this week was +3.0% versus +2.4% the previous week.

The PowerShares CEF Income Composite (PCEF), an ETF that invests in taxable income CEFs, was flat for the week. PCEF is up 5.6% YTD on price appreciation. Currently, PCEF's trailing twelve months' yield is 8.2%. The S&P 500 decreased 1.1% during the week. The S&P 500 continues to lose altitude but has retained a gain of 7.6% YTD.

CEF Weekly Fund Type Performance: The broad S&P 500 struggled to move higher but was beaten back by Euro confusion regarding the direction of economic policy arising from recent regime changes in France and Greece. This was compounded by the "bomb shell" late-Thursday over J.P. Morgan's (JPM) trading losses and the implications for derivative trading and banks' profitability.

The relative stability of the U.S. financial sector and the preeminent position of JPM were shattered with Moody's subsequent downgrading JPM. This just adds to investors' concerns over the global financial infrastructure in light of restructuring and recapitalization of European banks.

A similar pattern from the previous week evolved for the CEF market segment as the equity markets slumped. With the exception of WrldIncFnds, most of the fixed-income sectors posted modest gains. NatlMuniBndFnds advanced 0.7% followed by LoanPartFnds, USMrtgBndFnds and InvGrdBndFnds all declining 0.1% incrementally. The odds of another round of quantitative easing seem to have been enhanced-particularly if the financial sector comes under increased pressure in the wake of J.P. Morgan trading gaffe.

The emotional nature of investors pouring into these fixed-income sectors is demonstrated by the positive PrcNAVSprds* they've generated as the percentage change in their price exceeds the related change in their NAV.

WrldEqFnds again posted last with another decline of 2.3% on top of the 1.4% the previous week. ConvtSecFnds declined 1.6% for the week directly behind WrldEqFnds. ConvtSecFnds would seem to be a compromise between fixed-income and equity in an uncertain equity markets' environment. We've seen a consistent pattern of funds inflow into hybrid mutual funds as a way investors can play both assets classes. However, ConvtSecFnds trade more like equity fund types than fixed-income.

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Weekly CEF Winners and Losers: One of the CEFs with the greatest positive PrcNAVSprd* for the week was Morgan Stanley Frontier Emerging Markets Fund. FFD's share price advanced 6.9% while its NAV per share declined 1.5% generating a positive PrcNAVSprd of 8.4%.

After the market closed last Friday, FFD's advisor recommended that the fund convert to an open-end fund. The stock had consistently been trading on average at a discount of over 10% over for the past 3 years. By "open-ending" the CEF, the stock would trade at its NAV. There was significant volume in the stock on Monday with 159,000 shares being traded for a stock that typically trades on average 6,350 shares daily. The stock is currently trading at a discount of 5.7%.

One of the CEF(s) with the greatest negative PrcNAVSprd for the week was BlackRock EcoSolutions Investment Fund . BQR's share price declined 5.5% while its NAV increased 1.4% generating a negative PrcNAVSprd of 4.1%.

BQR trades at an annualized quarterly distribution yield of 10.1% and at a slight premium of 0.3%. As the names implies, BQR seeks to invest in "new energy", water resources and agriculture companies (feel good investments) and utilizes an option strategy to help generate distributions. BQR's distributions are mostly a return-of-capital.

BQR has historically traded at a slight premium. But from July of last year, it fell into a relatively deep discount touching 11.4% in November of last year. It crossed over into a premium in February this year. Since its IPO in 2007, its NAV has declined 50.8% as a result of paying out its capital.

CEF Focus Stock(s) for the Week: Solar Senior Capital Ltd. . is a BDC (Business Development Company) and it primarily invests in senior secured loans, including first liens, unitranche, and second lien instruments. It trades at an annualized monthly distribution yield of 7.0% and a price-to-book of 0.9. SUNS has assets of $187 million with minimal debt.

What has drawn our attention to SUNS is the insider buying of its CEO, Michael S. Gross. Mr. Gross (the "other" Mr. Gross) purchased another 2,000 shares this week at $16.47 per share. This brings his direct holdings to 92,540 shares. However, since March of last year, Mr. Gross has purchased 592,640 shares at a cost of $11.5 million. Five hundred thousand (500,000) shares were purchased in another entity and was deemed beneficially owned by Mr. Gross.

SUNs is owned by the Goldman Sachs Small Cap Value A fund as well as John Hancock Small cap fund Equity A fund. First Trust Specialty Finance (FGB), a CEF, position in SUNS represents 5.9% of its investment portfolio.

The CEF focus stock section of this article is to "highlight" stocks of interest that may deserve further study.

Last Week's Focus Stock(s): None


[*] All things being equal, price and NAV should move in tandem. A price movement greater than the NAV generates a positive PrcNAVSprd and may be interpreted as negative on a near-term basis and indicate that the stock is overvalued relative to its NAV which in theory is the stock's intrinsic value. The opposite would be true for a negative PrcNAVSprd.


Source: CEF Weekly Review: Strong Headwinds