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  • Arbitrage Alert! Closed-End Funds At Divergent Valuations [View article]
    Thanks for the comments @U2DNA - I believe you're correct on both counts. However, I still view the secondary as a negative for BME. While the secondary issuance can't, by itself, drive the fund to a discount it can greatly lower the odds that the premium will rise further, and increase the odds that it moves from the +8% to a +6 or +4 or +2.

    On the anti-dilution, you're mathematically correct that it will boost NAV returns by a few basis points but that doesn't matter much to shareholders - price returns are what puts food on the table. I'll concede that boosted NAV returns may add to investor attraction to BME, and therefore to willingness to pay a premium, but at +0.16% (using your assumptions) it's rounding error.

    Aug 23, 2015. 10:08 AM | Likes Like |Link to Comment
  • Arbitrage Alert! Closed-End Funds At Divergent Valuations [View article]
    @gwashn, @bale002: BME has been borrow-able recently, though I agree that it's not as of this moment. Of course, @bale002, being currently long BME you have a built in way to "short" it. Why not just augment a THQ position with some IHE or XPH to get the added pharma exposure, if that's your goal?
    Aug 21, 2015. 12:53 PM | Likes Like |Link to Comment
  • In Search Of Income: Municipal Bond CEFs (Part II) [View article]
    Turnover is typically quite low so I don't think the duration or other measures will drift that materially from reporting dates. The two I spot-checked are both around 15% per year.
    Jan 21, 2015. 08:07 PM | 1 Like Like |Link to Comment
  • In Search Of Income: Municipal Bond CEFs (Part II) [View article]
    Hi @williasp, thanks for your comments. You're correct that the NAV increase has been because of a recent trend in interest rates - or more precisely, because of a recent trend of *anticipated* interest rates (the yield curve). I'm not taking a position on future direction of rates or rate expectations. Rising rates would hurt NAVs. My only point was that good times of the recent past have kept UNII figures generally solid, providing some amount of cushion to maintain distributions, though I agree that this is fairly insignificant in the grand scheme.

    Discounts certainly could widen if sentiment is pummeled. However, long run averages for muni discounts (aggregated across the ~150 funds) is about -2.9%, and that metric was positive as recently as Mar 2013. Current discounts of -7.4% in aggregate are on the wider end of the historical range.

    Jan 21, 2015. 12:24 PM | 1 Like Like |Link to Comment
  • In Search Of Income: Municipal Bond CEFs (Part II) [View article]
    Thanks @Scooter. There are many attractive segments of CEF-land, but I think munis are one of the most under-appreciated.
    Jan 20, 2015. 04:25 PM | 1 Like Like |Link to Comment
  • In Search Of Income: Municipal Bond CEFs (Part I) [View article]
    Thanks @Scooter for reading. What @Jerbear said. Risk of muni bond default is not zero, but I believe is generally overhyped in the press. My guess is that in a national fund you'd have pretty small exposure to the two states you mention (<15%? just a guess) so right away the armageddon scenario risk is limited.

    If default risk concerns you, stick with a higher credit rating muni fund (will highlight several of those in the follow-on article). Even within the least creditworthy states, there can be solid bond issues.
    Jan 12, 2015. 03:43 PM | 1 Like Like |Link to Comment
  • In Search Of Income: Covered Call CEFs (Part II - Specific Funds) [View article]
    @Scooter, I'm not actually certain, but here's my guess: it's current assets minus current liabilities from their balance sheets as a percent of net asset value. If that is the case perhaps it's some indication of ability to cover immediate obligations but I don't find it incredibly meaningful.
    Jan 9, 2015. 11:27 AM | Likes Like |Link to Comment
  • In Search Of Income: Covered Call CEFs (Part II - Specific Funds) [View article]
    Hi @gerald, good questions. Here are some thoughts:
    (1) It's actually more accurate to say that low *expected* volatility is bad for covered call CEFs because it reduces the premium they generate. Low *realized* volatility is good because it means the option the fund sold for $X ended up being worth less than $X. I haven't worked out the math on exactly the VIX level (which is expected vol) is required to maintain a certain level of income, but I would start with a quick and dirty black scholes calculation (http://bit.ly/1FxBr4E) to get an idea of how much income would be generated from a certain combination of volatility, frequency of option rolling, percent out of the money, etc... According to this what-if calc, a monthly issue of calls 2% out of the money on the whole portfolio would generate 18% per year on 20% volatility (projected). Of course, there will be times when the option settles in the money and will lead to realized losses. As you can see it's all possible to model but depends on the assumptions

    (2) A sideways market is where the buy-write strategy will most significantly outperform a buy-and-hold portfolio. Technically, a raging bull market will lead to greater profits than a dead flat market, but you will likely underperform a plain equity strategy so you won't have that warm glow that comes from knowing you're up XX% while the market is flat. Optimal range would be just slightly less than the distance out of the money the particular buy-write strategy uses. So if 2% out of the money each month, then you'd love if the market never moved more than 2% in a given month.

    (3) Watch UNII and changes in UNII (see http://bit.ly/1FxBsFS for a smart explanation of these accounting measures). This is used by many to try to spot risk of dist cuts before they occur. There are no guarantees in investing so I wouldn't confer immunity on anyone. The dist cut risk come from NAV that falls far enough that there are no longer sufficient assets to write calls against to generate enough income. A reason that many are (rightly) concerned about ROC, so called "destructive ROC" is that if a fund pays a distribution which is unsustainable from that fund's strategy and net assets, the distribution will be covered out of ROC which will eat away at NAV causing the asset base to dwindle which therefore makes it even harder to generate sufficient income on a shrinking asset base.

    Long answer to a short question, but an important one.
    Jan 8, 2015. 11:57 PM | 1 Like Like |Link to Comment
  • In Search Of Income: Covered Call CEFs (Part II - Specific Funds) [View article]
    Yes I think so. The taxation analysis doesn't really figure into the funds selected here since (to repeat myself) those are very subject to change year to year, and really are not permanent attributes of the funds. Please don't GNT or NFJ to be all ROC forever...

    So since recent effective tax rate isn't part of the selection criteria, it doesn't change the selection to be in a tax deferred/free account.

    Side note: holding CEFs including these in IRAs is generally a very wise move.
    Jan 8, 2015. 02:14 PM | 1 Like Like |Link to Comment
  • In Search Of Income: Covered Call CEFs (Part II - Specific Funds) [View article]
    Keep an eye for the muni article in the next week or so. I agree that distribution stability is a big deal, in my opinion mostly because fund investors think it's a big deal and therefore send prices in a tailspin when cut.

    Similar to my comment above in reply to @AlanS9, I think of managed distribution policies as the mechanism that leads to "stable" distributions and I view with some unease. I see an analogy to central banks that try to peg their currency to another stable currency (think Argentinian Dollar). Leads to extremely stable exchange rates until the rate fix collapses spectacularly.

    The relevant point is that funds which invest in equity and pretend there is *no* volatility in earnings by paying a level distribution will eventually need to cut, and when they do the pain will be much worse than if the fund allows the distribution to vary over time in response to market conditions. My $0.02, and no I don't avoid all funds with managed distribution policies, I just stay vigilant.

    PS - I'm not familiar with the Wells Fargo list. Is that something public or proprietary to their private wealth clients? Any pointers would be appreciated.
    Jan 8, 2015. 02:10 PM | 2 Likes Like |Link to Comment
  • In Search Of Income: Covered Call CEFs (Part II - Specific Funds) [View article]
    Yes, covered call strategies excel at sideways markets so if that's your macro view then CC CEFs are a reasonable way to get equity exposure. ETJ appears to be a well balanced, well managed choice
    Jan 8, 2015. 10:46 AM | 1 Like Like |Link to Comment
  • In Search Of Income: Covered Call CEFs (Part II - Specific Funds) [View article]
    I personally don't put much importance on it. I do think *other* investors attach great (too much) significance to it so I'm inclined to think you pay an unjustified premium for managed distributions.

    Managed distribution policies also lead to infrequent but very painful and disruptive changes to distribution rates. Investors just plain freak out when the managed distrib is lowered. For that reason, I look much more carefully at UNII and earnings coverage ratios of funds with managed dist policies to make sure I don't get run over with widespread panic following a dist policy change
    Jan 7, 2015. 07:03 PM | 2 Likes Like |Link to Comment
  • In Search Of Income: Covered Call CEFs (Part II - Specific Funds) [View article]
    Alas, if only these were totally far fetched or worst case tax rates. I have clients here in California that face tax rates even more extreme than these (33% is not the max federal rate and 10.3% is not the max CA rate!).

    Regardless, your mileage may vary based on location, bracket, etc... The point of the (shocking) analysis is more to illustrate how widely the effective (current) tax rate varies based on fund distribution policy. Of course, it's pay now or pay later to a great extent, but at least investors should understand what they're getting
    Jan 7, 2015. 03:10 PM | 1 Like Like |Link to Comment
  • In Search Of Income: Covered Call CEFs (Part I - Sector Analysis) [View article]
    Yes. They're also good actively traded vehicles for those who want to play the discount capture game (I do) but can be good set it and forget it holdings as long as you choose wisely. Actually I would never advocate "forget it" but keep an eye on what's happening in the space and make sure you're still getting what attracted you to the fund in the first place. My $0.02
    Jan 7, 2015. 02:01 PM | Likes Like |Link to Comment
  • In Search Of Income: Covered Call CEFs (Part I - Sector Analysis) [View article]
    Thanks @wkirk. Yes, I agree on muni funds being quite attractive on a tax equivalent yield basis. Look for a future article on muni funds (specifically California funds, where many of my clients are located)
    Jan 7, 2015. 01:59 PM | 1 Like Like |Link to Comment
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