Trading Closed-End Funds - An Update 9 comments
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Six months ago, I wrote about a way of screening closed-end funds (CEFs), and my testing of the system at marketocracy.com.
That article, A System for Trading Closed-End Funds, rates CEFs by dividing the discount by the expense ratio. So, higher is better (high discount divided low fees). The system also requires insider buying, to get a qualitative valuation of the fund. The test-fund continues to outperform the S&P 500, beating the index by 4% in the last 6 months.
Marketocracy maintains a public page, which shows performance and stats such as beta, turnover, etc. Here is the chart:
click to enlarge images
The fund of CEFs is the thick orange line. The green, olive, and blue lines are the S&P 500, DJIA, and NASDAQ 100 respectively. The purple line is Marketocracy’s M100 index.
Perhaps the most interesting feature of the system is what I think of as the Return on Sweat-Equity [ROSE]. The ROSE is the ratio of your returns to how much work you have to do to get those returns. Buy-and-hold investing requires a low investment of sweat-equity, whereas day-trading requires a lot of sweat-equity. If the returns are the same, then buy-and-hold will have a higher ROSE. Pretty simple.
This system for trading CEFs has a pretty high ROSE. Typically, I check the portfolio once a month or less. The beta (volatility) is usually below 1 and the annual turnover is around 50%. Those of us who enjoy investing, but do other stuff like hold jobs, are very interested in beating the indices on ten hours a week or less!
Coincidentally, the top buy of the Marketocracy gurus in the last week is SWZ--a CEF specializing in Switzerland. It qualifies as a buy in this system as well. Here's a current list of some (not all) CEFs that have high discounts relative to their expense ratios (fees), and recent insider buying. I’ve included the Morningstar rating when available, although it isn’t part of the system.
Investing in funds tends to use a “top-down” or macroeconomic approach to investing, and this is no exception. That is also conducive to earning a high ROSE, as one can “research” some macroeconomics simply by keeping up with the daily news.
Disclosure: I own SWZ, MXF, ECF.
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This article has 9 comments:
There's more detail about the system in the original article (this article is an update). Briefly, the fund never buys a CEF with a fee/discount ratio under 5 or no insider buying in the last year. Discounts have widened quite a bit since I first started testing the system, so now it is easy to find fee/discount ratios of 10 or more.
Kevintx is right about a nice feature of foreign funds. The Swiss Fund (SWZ) gives you access to Roche and Nestle, two blue chips that US investors can only trade in the Pink Sheets. The Swiss Fund also has a policy have not hedging currency, so it's an indirect way of buying the Swiss Franc (a traditional safe haven).
What is your opinion of Central Securities (ticker CET)? It has a low expense ratio and high discount to NAV. Their top holding is Plymouth Rock which is private. It is a solid company, but the lack of liquidity might add to the CET discount.
Making it a ratio seems to distort the importance of the fee, no?
As for dividing vs. subtracting, the answer is that I don't know. It's just a different system. As calclay says, a ratio of discount/fee prioritizes low fees, compared to simply subtracting the fee from the discount.