Joe Eqcome

Closed-End Funds: Hugging the Flat line

Thanks. I'll check it out.


On Nov 16 07:17 PM starvin sargent wrote:

> Hey Joe, What is behind the 4th quarter lagging performance and the
> late Dec bounce that has happened in recent years in CEF's? The only
> explanation I can find is fund managers i.e. smart money EOY selling
> / buying. It is almost a dance to shake down the prices and re buy
> or something odd. Please also consider a special article on buy write
> CEF's IRR and GGN seem like good performers, especially the volatility
> of IRR verses the underlying stocks volatility

Closed-End Funds: Hugging the Flat line

For those that haven't seen the movie, “Other Peoples Money” with Danny DeVito and Gregory Peck, I recommend it as instructive regarding ADX conversion to an AcETF.

It challenges the notion that what may seem “feel good” and "sentimental" is not always in the best interest of the stakeholders.

The Compelling Case for Converting Adams Express into an Active ETF

It sounds like we may be in agreement on the facts. A conversion of ADX to an AcETF would generally be good for the existing shareholders and not necessarily good for the management of ADX. As a result, management would fight to prevent this from occurring.

It seems your central concern is regarding the prospects of
ADX as an investment post conversion.

My contention is twofold: 1) the company is run for the benefit of the shareholders and not that of the management; 2) Let the market determine whether or not ADX is deemed a good investment post-conversion by informed investors buy and selling the shares.

Are you suggesting that shareholders shouldn’t seek to maximize their value both near-term and short-term because ADX’s assets might dissipate initially due to a turnover of investors?

Maybe ADX’s persistent selling at a discount is the markets’ signaling that it’s dissatisfied with its future prospects and doesn’t see the discount narrowing. By converting ADX to an AcETF we’re allowing free market forces to determine its value.

If you haven’t, I recommend that so see the movie, “Other Peoples Money” with Danny DeVito and Gregory Peck. It challenges the notion that what may seem “feel good” and sentimental is not always in the best interest of the stakeholders.

I have nothing against the management of ADX. In fact they have done a reasonably good job. It’s the independent directors who have been more interested in protecting management then it has its shareholders.


On Nov 15 06:32 PM scum1bag wrote:

> Well, your arguments support the fact that an ETF conversion is very
> positive for investors - I totally agree.
>
> But let me ask you this, Joe: when the discount goes to 0% after
> ETF conversion, how much more of the stock will you buy then? I'm
> sure you wont sell since you are such a big fan of the conversion,
> right? Investors wont lose interest, right?
>
> I dont know RYJ at all, but I know market practice is for liquidation
> into a fungibility event when a security has been at a steep discount.
> Management don't want this. Now I don't know the Adams Express guys
> and maybe I hang in the wrong circles but sadly I don't know many
> managers that place their fiduciary duty above saving their business
> if they can get away with it.

The Compelling Case for Converting Adams Express into an Active ETF

You make an interesting point regarding the dissipation of assets of RYJ post-conversion.

RYJ's net assets declined from $241 million in FY (Aug) 2007 to $197 million in FY 2008, off 18%. At the end of FY 2009, post the conversion, its net assets had plunged to $40 million, off 80%.

However, we may not be comparing apples with apples. RYJ is not an actively managed ETF. It is no more than the sub-set of the recommended stock list of Raymond James research that are rated Strong Buy 1 (“SB-1”).

As a regional brokerage firm their list could be somewhat parochial, i.e. investment banking clients and small cap companies. So, its appeal may be limited and cyclical. (Remember, RYJ was launched near the peak of CEF IPO activity.)

Secondly, for participation in this list in the form of an ETF you’re being charged a fee of 0.75% for what I can probably get for free being a Raymond James’ client. Shareholders just voted with their feet.

Thirdly, even despite the fact of substantially lower net assets, RYJ's stock price has performed in line with the changes in the underlying portfolio holdings.

The only disadvantage is that there is less liquidity in the stock. However, that was more than adequately compensated for by the increase in market valuation upon conversion.

ADX is much larger, has generated a consistent track record and has a dedicated team focusing on portfolio management with a more realistic expense ratio for their effort.

If the portfolio does initially dissipate then that’s the results of free market forces, informed investors buying and selling.

The independent directors need to ask themselves if their exercising their fiduciary responsibility to its owners (shareholders) to maximize their value.

Let them make their case why a conversion to an AcETF is not a good idea for enhancing shareholders value. If it’s for the reason you articulated, i.e. it would dissipate net assets and fees to the management, then it wouldn’t be a good enough reason.

On Nov 13 04:00 PM scum1bag wrote:

> Joe, if you want to pressure on them to liquidate, at least be honest
> about the situation. Your point 2 is false - the fund is likely to
> liquidate to a material degree as investors dump it post the conversion
> pop. Check out RYJ's volume post conversion, its dead now. Its great
> for investors, terrible for management, and CEF managers have a habit
> of digging their heels in as you well know.

PIMCO Global StocksPLUS & Income Fund Looks Overvalued

In the comment above, I intended to say: "level II & III assets". I apologize for the error.

PIMCO Global StocksPLUS & Income Fund Looks Overvalued

The historically unsupportable CEF premiums you note are illustrative of the pricing bubble being built by a continuation of the Fed’s zero interest rate policy. I understand and support their policy but note the aftershocks it could produce.

The Fed's zero funds rate policy has driven down these CEFs' cost of capital to tenths of a percent. As a result it has allowed for unprecedented spreads between the asset yield and the cost of capital.

This spread translates into attractive, but unsustainable, distribution yields accessible by retail buyers in a low yield environment. This retail buying of these high yields is driving the share price up and unmooring it from NAV. So, there is a disconnection between the two and the creation of a valuation bubble.

As I argued here before, unsuccessfully, in the case of the Pimco CEFs, Pimco’s managements are the ones valuing the NAV on level I & II assets in their CEFs. They’re presumably the best in the business and they’re telling you that the stocks are overvalued! Nature speaks; it is we who fail to listen.

However, investors have been emboldened by the Fed's declaration of a continuation of this policy. Nonetheless, once rates begin to rise, these CEF stock prices will plunge like Kamikaze pilots on to the decks of the retail investor.

Remember, financial suicide is not illegal.

CEF Weekly Review: Ping Pong, Anyone?

In the final analysis the shareholders own the companies in which they invest and should be operated for their benefit. For concerned shareholders not to agitate for a higher valuation is a dereliction of their rights. (Not everyone trades this stock on price variations. In fact, most of the shareholders are probably “buy and hold”.)

Shareholders need to continue to legitimately challenge management to seek demonstrable ways of adding value, or outside influences (raiders) will bring to bear that challenge by removing management in favor of their own interest and that interest may not be aligned with the remaining shareholders’ interest.

I believe not enough pressure is being placed on ADX’s management to close its persistent 12%-15% discount in a portfolio of highly-liquid large cap securities.

Shareholders should seek a resolution for ADX for a trigger mechanism that after a certain time period if the discount remains at 10% (or another legitimate discount) ADX should institute a in-kind tender offer, much like Tri-Continental, so shareholders can at least realize some of the discount in the secondary markets.

I believe a fear of a loss of management fees and potentially a loss of management's jobs would place a new urgency on focusing on getting the value up from this persistent, dismal discount. Let me also note there’s been paltry insider buying by management in ADX. So, apparently, they agree that the discount will persist in the future.

This doesn’t have to necessarily end up in the liquidation of ADX; it could end up in higher valuation for the shareholders and ADX remaining a closed-end fund.

That would make us all happy.
On Nov 08 08:25 PM jse17 wrote:

> “Joe, Leave ADX Alone!”
>
> As mentioned in response to your earlier “attack” on ADX, its P/D
> figures generally correspond to and are often better than similarly
> positioned CEFs. Additionally, as the previous poster mentions, the
> fund’s management is solid if not spectacular. Moreover, it does
> not require a finance Nobel Laureate to formulate a buy/sell protocol
> on this or any CEF.
>
> In the end, all cancers commit volitional suicide by consuming their
> afflicted host! Opening all CEFs is analogous in character!

CEF Weekly Review: A Good Scare

I believe a CEF must pay out its net investment income (NII) and capital gains annually or pay an excise tax if they do not have offsetting losses.

Currently, BIF has $.01 per share in undistributed net investment income losses. For the first 6 months (5/31/09) BIF net investment income per share was break even. Depending on its net investment income for the 2nd half, it may pay a distribution in December. I would be suprised if they reinstated a managed distribution policy.

DNY has approximately $.16 per share in undistributed net investment income.


On Nov 01 03:16 PM Jonquil wrote:

> Is there any indication when BIF and/or DNY will resume paying dividends?

CEF Weekly Review: A Good Scare

I agree with most of your points. (Its weighted alpha is 19.0 versus a CEF market segment average of 43. Yes, you’re paying a fee on PEO; but you’re also getting it at an 11.1% discount.) However, the attraction here is the narrowing of the discount through activist intervention.

Earlier this year I authored an article entitled “The Case for Tender, Liquidation or Conversion of ADX” joeeqcome.web.officeli.... ADX’s discount at that time had an average monthly discount of 13.4% since the end of 2003. My case was essentially the discount has been persistently and unreasonably larger and ADX's board should do more than occasionally buy back some of its stock. It should consider a liquidation or conversion to an open-ended fund (mutual fund or managed ETF) to maximize shareholder value.

I believe the large discount is the attraction to the stock and it will become increasingly difficult for ADX to prevent an activist investor from at least attempting to close the discount in the next 12 months.

I also hyper-linking a study entitled “Activist Arbitrage: A Study of Open-Ending Attempts of Closed-End Funds”. finance.wharton.upenn.edu/~itayg/Files/cefactiv... A key variable in guiding activist arbitrageur is the fund’s discount from its NAV. There empirical results suggest that a one percentage point increase in the discount is associated with a 0.66 percentage increase in the probability of an attack in a given year.

Following an attack by an activist arbitrageur, the discount shrinks or disappears if the fund is open-ended, so that overall activist arbitrage is found to have a substantial effect on CEF discounts.

I believe ADX is as good a target for an active arbitrage as any other CEF candidate. Whether it will take place is speculative. But if you play by the numbers, the odds are favorable.

Anyhow, I’m being paid to wait. It clearly not an stock for everyone.

Joe Eqcome

On Nov 01 10:55 AM frogmatic wrote:

> ADX seems to trade at a permanent discount of around 15%; their long-term
> alpha is indistinguishable from zero; and its energy "exposure" is
> only 11% of the portfolio (compare to 21% consumer and 13% financials).
> Not to mention you're paying for two levels of management fees for
> the position in PEO. I'm not sure what the attraction would be relative
> to, say, an straight investment in SPY.

A Cyclical Guide to CEF and ETF Investing

I found that chart on the Morningstar CEF blog. It was provided by a blogger named Camois (sp). He is a very knowledgeable observer of the CEF market segment and is a frequent contributer.

You can probably track him down the by going to the Morningstar CEF blog and querying Camois with regards to the chart.

I also have a similar chart that was put together by S&P. I don't think it’s as good as the one above, but if you're interested let me know and I'll make it available.

Joe Eqcome

On Oct 28 08:55 AM Innocex wrote:

> Great job Joe as always, thanks for your efforts... I am curious
> what your sources were for the graphic depiction of the stock market
> sectors’ response to a normal cyclical economic contraction and expansion?

Profiting with a Dividend Avoidance Strategy

A clever observation. Thanks

Joe Eqcome

CEFs Report Mixed Messages

The insiders' chart above was from a previous week. The following is a hyperlink to this week's insiders' chart.

joeeqcome.web.officeli...

I apologize for the error.

Joe Eqcome

CEF Weekly Review: Expect Increased Volatility

Thanks. I didn't know they had such an index.

Joe Eqcome

PPM Claims Liquidation Is in the Best Interests of the Fund

You may not be aware of this, but a group of large CEF sponsors/advisors got together and hired a computer hacker (I think it was a Russian) to create a word processing algorithm that drops the last word in the phrase: "would not be in the best interests of the Fund".

That last word is "Advisor".

Joe Eqcome

ETFs Take the Lead: Will Mutual Funds Fade Away?

Russell

For me there are two issues regarding ETFs overtaking mutual funds.

The first is the index (ETFs) versus active management (mutual funds) argument. An article in today’s WSJ intimated that on a risk adjusted basis most actively managed mutual funds lag behind their indexes over time. Not a pretty picture. Score one for ETFs.

But threshold issue may be the success of newly minted, actively managed ETFs which are just being rolled out.

If actively managed ETFs provide comparable returns of mutual funds in some of the major investment categories for those seeking active management, then why would you want to own a mutual fund?

All things being equal, the ability to trade ETFs during the day is a compelling feature over mutual funds.

I guess the other question is: what is the complexity and cost of converting a mutual fund to an ETF?

Maybe if you can’t beat them, you join them.