Keep an Eye on Madison/Claymore Covered Call CEF

The Madison/Claymore Covered Call and Equity Strategy CEF (MCN) has been around since July of 2004 and has been somewhat of a stinker, earning the "coveted" 1 Star Rating from Morningstar. I have been screening a universe of potential investment funds that will provide solid income with a relatively conservative strategy. In spite of its pathetic Morningstar score, this CEF currently trades at an approximate 10.50% discount from its share price and may be a worthy candidate for the income oriented investor that needs a fund that will juice total returns once the market regains a bullish mode.

MCN is designed to allocate at least 80% of its total assets to an integrated investment strategy in which the Fund invests in a portfolio of equity securities and covered call options on a portion of the equity securities held in the portfolio. The Fund invests at least 65% of its investments in equity securities in large cap issues that meet the Fund Manager's selection criteria, which is discretionary.

This CEF is trading at/near its historic low compared to the 200 day moving average and charts well for a rise in price. The stock trades at $10.84 per share and averages daily volume of approximately 43,000 shares. The current distribution rate is a hefty 12.18%. Dividends have remained steady at 33 cents per quarter. MCN has an expense ratio of 1.25% of total assets.

Prime institutional shareholders include First Trust Portfolios, L.P. with over 6% of all shares outstanding. Others of note include UBS Securities (UBS), Farris Baker Watts Incorporated, Merrill Lynch (MER), Wolverine Management and Van Kampen Asset Management

The portfolio itself, as of late February, had as its top holdings United Healthcare, American Eagle (AEO), Cisco (CSCO), Bed Bath and Beyond (BBBY), Williams Sonoma (WSM), Capital One Financial (COF), Kohls (KSS), Wells Fargo (WFC), Yahoo (YHOO) and eBay (EBAY). Out of favor today, but probably amongst the early beneficiaries in the first leg of a new bull market. Almost all of the portfolio is held in domestic securities, with 75% in large cap and 25% in mid-cap and ETF Indexes. Covered call options are written to the tune of about 7% of that total, which likely fluctuates.

This CEF at present is not a Fund I would throw cash into. MCN is a CEF I will be following, knowing that it is undervalued, produces a high and stable dividend, and should be an interesting opening act when the bulls decide to start their play.

Full Disclosure: Author does not hold a position in MCN.

Comments

[mavericks]

MCN's NAV performance has been pretty mediocre on a longer term basis. I would stick with the IQ Investment Advisor funds. My favorite is DPD which emulates the DJIA. Pays monthly which is an advantage since it won't drop too much when it goes ex-div. I also trade around BEP & BEO which can be big movers up & down and will terminate in 2010. QQQX has the most upside since it is tied to the QQQQ's and trades at the biggest discount. All of these are covered-call funds...some use indexes, others write calls on individual positions. EBI & ETW are my favorites in other fund families and both give you international exposure. There are others I follow but after alot of trial and error, I feel these have the best risk/reward. Like stocks though, you've got to pick your spots.