I have spent several hours this past week researching Closed-End Funds (CEFs) that might be viable candidates for inclusion in the Protected Principal Retirement portfolio. Admittedly, I have not found many "compelling values"; however, there are three that have attracted my attention.
The portfolio has been light on commodity related investments, covered calls and global assets, and the three CEFs that emerged as result of my research fit the bill.
Blackrock Resources & Commodities Fund (NYSE:BCX) is one of the few closed-end commodity funds possessing a highly skilled (my opinion) management team, paying a reasonable dividend and providing fairly wide diversification across a broad range of commodities.
EV Tax-Managed Global Fund (NYSE:EXG) is one of many covered call funds offered by the Eaton Vance fund group. The fund holds a diverse group of large cap stocks and relies on covered call writing as a means of generating dividends.
The final fund, Cohen & Steers Global Income Builder (NYSE:INB) holds a combination of equities, preferred stocks and other funds, and uses an option strategy as a means to increase the dividend yield.
Since we are not exactly comparing apples to apples with these three portfolio candidates, the following comparisons were made using similar closed-end fund metrics. Much of this data was taken from CEF Connect.
BCX seeks a high level of current income through exposure to a wide range of commodity-related companies. Capital appreciation is also a fund goal.
Discount/Premium - As of Friday's (10/19) close, the fund trades at an 8.75 percent discount to current net asset value (NAV).
Annual Expenses - Current annual expenses are 0.84 percent and the discount to expense ratio is 10.4 (When the discount is ten times or more than annual fees I consider it to be very positive).
Present Yield - The fund yield is currently 9.87 percent and the yield on the NAV value is 7.3 percent.
Dividend - BCX pays a quarterly dividend of $.35, of which $.30 or 85 percent is return of capital.
Performance - The price of BCX has increased 15 percent year-to-date, while its NAV has increased 6.5 percent over this same period. The fund has returned 7.3 percent on NAV over the past 12 months. However, over the past three months, the NAV increase has exceeded the price increase.
Over the past year, the price of BCX has increased by 8.0 percent. As this is a relatively new fund, there are no three year or five year performance data.
Portfolio Turnover - The annual turnover rate for this fund is 27 percent.
Investment Mix/Portfolio Holdings - As of July 2012, BCX was 95 percent invested in equities. Its predominant holdings consisted of master limited partnerships (MLPs), chemicals, fertilizers, mining companies, and physical gold exchange traded funds (ETFs).
The goal of EXG is to seek both capital appreciation and current income, predominantly through implementation of an options strategy.
Discount/Premium - At the close on 10/19, EXG traded at a 13.9 percent discount to NAV.
Annual Expenses - The fund's expenses are currently at 1.05 percent. The discount to fee ratio is 13.2.
Present Yield - EXG has a yield of 10.94 percent, with a yield on the NAV of 9.4 percent.
Dividend - EXG pays a quarterly dividend. The most recent quarter's rate was $.244, of which $.174, or 70 percent was return of capital. Beginning with the March 2012 quarter, the fund's dividend was cut from $.284. This was in line with the dividend policy followed by many other covered call CEFs.
Performance - Year-to-date the price of EXG has appreciated by 18 percent, and the NAV increased by 13 percent over this same period. Over the past 12 months, the fund has returned 16.7 percent on NAV. The NAV has been increasing since June of this year.
During the past year, the EXG stock price has increased by 19 percent; for the past three-year period, the increase has been one percent, and for the past five years, the price increase has only appreciated one percent. Remember, the five-year period includes the market declines of 2008 - 2009.
Portfolio Turnover - The annual turnover rate for EXG is 53 percent.
Investment Mix/Portfolio Holdings - The fund has a 97 percent equity position, and 99 percent of funds are invested globally. Portfolio holdings include primarily large cap stocks, spread among the energy, telecom, pharmaceuticals and beverage sectors.
The INB fund seeks a total return combined with a high yield, focusing on large cap stocks while also utilizing various options strategies to enhance current income.
Discount/Premium - The current price is at a 7.5 percent discount to NAV.
Annual Expenses - Total annual fees are relatively high - currently 2.01 percent. The discount to fee ratio is 3.73.
Present Yield - INB's current yield is 10.52 percent, and the yield on NAV is 9.74 percent.
Dividend - INB pays a quarterly dividend of $.28, of which $.23, or 82 percent is return of capital.
Performance - So far, in 2012, INB is up 24 percent, and the NAV has increased by 16 percent over this same period. During the past 12 months, the fund has returned 21 percent on NAV.
For the past year, the price of INB has appreciated by 30 percent; for three years, the return has been 10 percent; and for five years, it has been just one percent. The market declines of 2008 - 2009 have also weighed heavily on the fund's five-year returns.
Portfolio Turnover - Annual portfolio turnover is presently 56 percent.
Investment Mix/Portfolio Holdings - The fund is 89 percent invested in equities, four percent in preferred stocks and five percent in investment funds. About half is invested in the United States, 16 percent in Europe and 14 percent is Asian countries.
Its portfolio consists of global large cap stocks, utilities, global real estate, preferred stocks and closed-end funds.
When evaluating CEFs for inclusion in the Protected Principal Retirement portfolio, we look at four things: does the CEF sell for a decent discount to NAV; what is the ratio of the discount to annual fees; what is the current yield when compared to NAV; and how high are the expense ratios. Of course all other metrics are factored in, but these four are considered primary.
The following table presents a comparison of our candidates based upon our four primary criteria:
|Discount To NAV||8.75%||13.9%||7.5%|
|Discount To Fee Ratio||10.4%||13.2%||3.7%|
|Yield To NAV||7.3%||9.4%||9.7%|
All three of our candidates sell at a decent discount to NAV. We look for a discount to fee ratio of 10 or more, and in that respect, INB is the weaker of the three. All provide a solid yield when compared to NAV, and annual expenses for both BCX and EXG are quite reasonable for a CEF.
Since the markets have recently increased in volatility, we are reluctant to add any stocks or funds at present. However, both BCX and EXG are high on the list of potential additions to the Protected Principal Retirement portfolio on any significant market pullback.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Additional disclosure: The information presented in this article does not constitute a buy recommendation. It is provided solely for informational purposes, and to assist readers in evaluating these stocks.