Earlier this year, I highlighted BP Prudhoe Bay (NYSE:BPT) and Whiting USA Trust I (NYSE:WHX) in the royalty trust sector. These trusts were trading well above their true value. The reason for this? Ben Bernanke and uninformed retail investors. Ben Bernanke has continued to print money and lower interest rates requiring investors to take on more risks to find sufficient yield. Some retail investors or their advisors are putting money in stocks/trusts that appear safe on the surface, but without the needed minimal research could end up wreaking havoc on their portfolio.
Barron's recently wrote a piece on closed-end funds trading well above their NAV, in some cases more than 60%. These closed-end funds highlighted by Barron's included PIMCO High Income Fund (NYSE:PHK) and Pimco Global StocksPLUS & Income Fund (NYSE:PGP).
Another family of Closed-End Funds are also trading well above their NAV and give you 90% of their dividend as a return of capital, not investment income. Roughly 10% of the dividends they pay investors are net investment income. All this company is doing is taking in capital through rights offerings and showing a juicy dividend yield which is in a way, fictitious, and taking management fees from investors' money. On top of that, investors are buying at significant premiums to NAV that are shocking and will most definitely lead investors to lose money over the long run.
The name I'm looking at specifically today is Cornerstone Progressive Return Fund (NYSEMKT:CFP). This closed-end fund is trading at a 19% premium to its June 30th, 2012 NAV of $4.93. Looking into SEC filings investors could see that historically the majority of their 18.6% dividend is a simple return of capital. Investors are blindly buying what they think is a true 18.6% dividend. CFP currently pays a .091/share dividend every month, and their true NAV is now likely below 4.75/share now as of Sept 30th, 2012.
Any investor buying CFP or any other closed-end fund will most certainly lose money over time if they are buying them at a significant premium to their NAV. Retail investors should do 5 minutes of homework before investing in closed-end funds and they will be able to decide whether or not the fund trades at a premium. Who in their right mind would want to pay $120 for something worth $100? It's already hard enough to win in the market for individual investors.
Currently, PHK and PGP have started to crater off of the Barron's piece written this weekend. I believe investors are starting to realize what they have invested in, and are getting out while they still can at a premium to NAV. A short in CFP or the other overvalued closed-end funds wouldn't be a bad idea. Shares of CFP should be trading under $5 and closer to their NAV.
Disclosure: I am short CFP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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