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Many retired investors are looking for high income. Because of this, many US equity CEFs tend to pay out high distributions. But these high distributions may come at the expense of reducing the fund's net asset value over the longer term.

There has been a lot of discussion on the closed-end fund message boards about "good return of capital" versus "bad return of capital". I believe that any return of capital can be good if the discount to NAV is high enough, since you are recovering some of the discount to NAV.

While I do track return of capital for tax purposes, I believe it is even more important to monitor a fund's total return. This is the best way to tell if a fund management has truly created value.

Since closed-end funds use different amounts of leverage, it is best to look at a funds "risk adjusted" return. The Sharpe ratio is commonly used to measure risk adjusted returns, although several other measure can also be used (e.g. Alpha, Treynor, Sortino etc).

If you run a screen on all closed-end funds and rank by the three year Sharpe ratio, you will find mainly fixed income funds appearing at the top of the list. But for purposes of this report, I wanted to focus on US equity closed-end funds.

The highest rated US equity fund over the last three years has been John Hancock Tax-Advantaged Dividend Income Fund (HTD). It had a three-year Sharpe ratio of 2.12. The S&P 500 index had a Sharpe ratio of only 1.21 over the same time period.

HTD is a US equity closed-end fund with about $720 million in assets under management. The fund seeks to provide a high after-tax total return from current income and capital appreciation by investing in dividend paying common and preferred stocks.

Under normal market conditions, HTD invests at least 80% of total assets in:

- Common stocks paying qualified dividends (QDI)

- Preferred stocks paying qualified dividends (QDI)

HTD offers two potential sources of tax-advantaged income:

- qualified dividends (max 15% tax rate)

- capital gains from stock price appreciation (max 15% tax rate)

Along with the three year Sharpe ratio, I also looked at the 5 year NAV total return which includes the 2008 bear market period:

S&P 500 annualized 5 year return= -0.20%

HTD annualized 5 year NAV return= +4.93%

John Hancock Tax-Managed Dividend Income is a US equity closed-end fund with about $720 million in assets under management. The fund seeks to provide a high after-tax total return from current income and capital appreciation by investing in dividend paying common and preferred stocks.

Under normal market conditions, HTD invests at least 80% of total assets in:

- Common stocks paying qualified dividends (QDI)

- Preferred stocks paying qualified dividends (QDI)

HTD offers two potential sources of tax-advantaged income:

- qualified dividends (max 15% tax rate)

- capital gains from stock price appreciation (max 15% tax rate)

The HTD portfolio is about 60% domestic with some global exposure.

This was the top five sector breakdown as of Apr. 30, 2012:

Utilities59.09%
Financials24.48%
Energy9.95%
Telecommunications5.17%
Other1.13%

Asset mix as of Apr. 30, 2012

CountryAllocation (%)
Common US Stocks53.83
Preferreds39.35
Foreign Stock6.16
Cash & Cash Equiv0.74
Corporate Bonds0.29
Other swaps/options-0.37

Calendar Year NAV Performance (before taxes)

2005+3.52%
2006+24.29%
2007-5.25%
2008-30.76%
2009+30.93%
2010+20.88%
2011+22.17%
YTD+3.94%

John Hancock Tax Advantaged Dividend Income pays monthly

  • Ticker: HTD
  • Total Assets= $1.07 Billion Market Value= $727 Million
  • Annual Distribution (Market) Rate= 6.71%
  • Fund Expense ratio= 1.03%
  • Discount to NAV= -7.83%
  • Average 52-week Discount= -7.26%
  • Portfolio Turnover rate= 16%
  • Average Daily Volume= 106,000
  • Average Dollar Volume= $1.78 Million
  • Effective Leverage: 32.42%
  • Current Monthly Distribution= $0.0985


Top Ten holdings on Apr. 30, 2012

StockAllocation (%)
Wells Fargo Pfd-J3.32
OGE Energy2.99
Spectra Energy2.86
Integrys Energy2.82
CH Energy2.78
Oneok, Inc.2.64
DTE Energy2.62
Met Life Pfd- B2.34
FirstEnergy2.31
Progress Energy2.28

Fund Management

HTD is managed by a team of six portfolio managers at John Hancock Asset Management and Analytic Investors, LLC the Fund's subadvisers.

The current discount to NAV as of May 16 is -7.83% which is close to the 52-week average discount of -7.26%. The 1-year discount Z-statistic is -0.48, which means that the current discount to NAV is about 0.5 standard deviations below the average discount over the last year.

Because of the recent market correction, this may be a good time to buy HTD as a long term core US holding in a US equity portfolio. It is fairly liquid. A more active swing trader may want to wait for the discount to NAV to get to 10% or more.


(Graph from finviz.com)

Source: U.S. Equity CEF With Top 3 Year Risk-Adjusted Performance