Today I was planning to review another sector of the high-yield, closed-end fund universe. The article would have been a followup to the recent Limited Term Closed-End Funds article published a few weeks ago. However, when I opened up my return tracking database, I was struck by the consistent and attractive returns provided by most high-yield CEFs over the last year. The number of under-performing funds was a very small percentage of the total, so I thought I would highlight the group of underachievers.
I have put together a database of high-yield, closed-end funds. My criteria were a distribution yield of 6% or greater and at least $250 million of assets. There is some flexibility in the criteria to include interesting funds not quite up to the standards. The list consists of 102 CEFs which I have divided into 12 sub-sectors.
I use spreadsheets to determine fund returns for the various time periods. The returns are calculated from the Yahoo Finance adjusted share prices and from the day I open up the spreadsheet. For example, today -- August 9 -- the one year returns were calculated since August 10, 2011. Individual fund data pulled from CEFConnect.com.
Underachievers List and Discussion
Duff & Phelps Global Utility Income Fund Inc (DPG) provided a total return of 3.1% over the last year, about 4% below the fund's dividend yield. The other four funds in the Utilities category produced returns from 18.5% to 44%. DPG currently trades at a 2% premium to NAV.
Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (WIW) and Western Asset/Claymore Inflation-Linked Securities & Income Fund (WIA) have under-performed in the Investment Grade Bonds category. The two funds posted one-year returns of 6.6% and 4.1% respectively compared 14% to 22% returns for the other funds in the category. The lower performance is probably due to the investment objectives of these two funds in relation to the bond market conditions for the last year. Both funds are trading at a 10% discount to NAV.
Dreyfus High Yield Strategies Fund (DHF) Returns for high-yield bond CEF's sizzled over the last year, with the rest of the funds in the category producing returns of 26% to 38%. The 16.4% one-year return plus the 19% premium to NAV share price put this Dreyfus fund in the underachiever camp.
Alpine Total Dynamic Dividend Fund (AOD): total return: +2.8% and Nuveen Global Value Opportunities Fund (JGV) loss of 5.6%. These Foreign Equity funds were at the bottom of the pack of the worst overall CEF sector. The other eight funds in the sector posted returns from 11% to 23%. JGV was one of just three funds open for a full year with a negative return.
Blackrock Resources & Commodities Strategy Trust (BCX) posted a total return of 0.34% over the last year, with the 10% dividend rate just covering the 9% share price drop. The Gabelli Global Gold, Natural Resources & Income Trust (GGN) put up a negative 5.3% total return for the last year in spite of a 12% distribution yield. These two Equity Sector specific CEF's were at the bottom of the largest category - Equity Sector - of funds where 14 of the 24 funds put up gains of 14% to 51% for the year. The remaining funds in the group produced returns in the high single to low double-digit range.
ING Risk Managed Natural Resources Fund (IRR) is listed in the Covered Call Equity category, but the fund has performed more in line with the natural resources focused funds listed above. IRR is down 5.2% for the last year. This fund proves the point that a covered call strategy is not enough to overcome a down market. IRR has one of the highest dividend yields on the list at a 12% distribution rate. The fund currently trades at a 6% discount to NAV.
The point of this list of doghouse closed-end funds is that when the majority of investments in a class are doing well, not many things feel worse than owning a laggard. The median return for high-yield CEFs was 20% for the last year. Investors who own the funds discussed here may not be aware that their investments severely under-performed their peers and some re-evaluation of the investment potential of certain funds could be a good idea.
Some investors may look for under-performers to revert to the mean. I think that funds which don't make money in the good years are going to have even more trouble when things get tougher. Of course, sector specific funds are dependent on sector results. Which is another reason to stick with broad-based funds if you are trying to pull some nice yields and a portion of capital gains out of your closed-end fund investments.