Joe Eqcome

CEF Weekly Review: Wall of Worry

Candidly, I think that if that’s your logic regarding the justification of a managed distribution policy, the fund should be completely liquidated so investors get all their capital back immediately as opposed to dribbling it out in a return of capital portion of its distribution.

A 15% discount is a compelling for liquidation--particularly if its been persistent. This partial payout of capital is only for the benefit of the advisor who continues to generate fees. However, the fund’s shareholders suffer as the fund gets smaller the expense ratio become larger, the liquidity becomes less and valuation will continue to deteriorate.

If the trustees had the shareholders best interest at heart they should liquidate the fund. But, as we all know, the trustee are usually beholding to the CEF sponsors.

Joe Eqcome


On Oct 05 10:00 AM User 153012 wrote:

> Re your csp "eating your young" comment on managed distribution:
> would you rather have principal payments immediatly marked down 15%
> on receipt by the fund, or have that payment in your hands, at 100%,
> to invest where you please? The new policy was adopted at the urging
> of the fund's largest shareholder.

CEF Weekly Review: Wall of Worry

I agree with your assertions--particularly, regarding the complexity with respect to this Buy/Write sector.

I believe the option premium is only recognized for GAAP purposes on expiration as opposed to being amortized over the life of the option contract. So, were probably not getting an accurate read of net investment income portion of the distribution on an interim basis.

So, you'd have to interpolate the net investment income to address your issue of matching investment earnings with the interim distributions. This would be difficult.

Other alternative would be to look at undistributed net income number. If it’s a negative number then you’d be possibly closer to having a portion of the distribution being return of capital—albeit, no guarantee.

How much reliability would you place on the Section 19 reports for the character of the distribution?

Any help here would be appreciated. It is a complicated area as you suggest.

And as a result it may be inefficient.

Joe Eqcome


On Oct 05 04:37 AM GlobalTrekker wrote:

> For the ETW distribution yield, I think it would be most useful to
> track the actual income of the fund. That, combined with its annual
> return, would give the best idea of true yield. For the buy/writes,
> even the return of capital is a confusing measure.

ETFConnect Is No More

If there is truth in jest, you're the funniest guy I know.

Joe Eqcome

Why Choose Low Yield over High Yield Stocks?

The underlying assumption of your thesis is that lower yielding stocks with greater dividend growth rates would sell at a higher future stock valuation. This share price appreciation would offset the initially higher cash dividends of companies with higher dividend growing at a slower rate. This is a reasonable assumption for long-term investors for the examples you've provided.

In your example, both for a 5 and 10 year holding period, assuming the stock’s value at the end of the holding period is based on the last year’s dividend divided by the now current yield, investors are better off owning low yielding, higher growth dividend stocks. They have higher IRR's. (Interestingly, this is also holds true if the yield proportionately declines 50% or increase 100%.)

If however, the yields of lower, higher yielding stocks do not change proportionately, due to a specific set of economic or financial circumstances, it is possible higher yield, lower growth stocks could do better.

This would be the case if the higher yielding lower growing stocks were selling at a greater discount to their intrinsic value than the lower yielding stocks due to investors’ risk assessment.

If that discount for the higher yielding stocks at some future point were to narrow as risk assessment eased, it would impact their yield multiple favorably relative to the low yield, high growth stocks.

The other case where high yield, low growth stocks may do better is in very short holding periods. This might be the case in the trading of high yielding stocks in the face of a sharp easing in risk assessment or declining interest rates. In this case, you may get a near-term spike in the share price.

However, for long-term investors, lower yielding, higher growing dividend stocks may be a better choice.

The key in either case is to focus on their respective free cash flows.

Joe Eqcome

CEF Weekly Review: Real Estate Extends Gains

BCT's special distribution of $.531 per share will go to reduce the NAV and therefore will reduce the liquidating distribution by a like amount.

As a result, the current NAV is approximately what shareholders will likely get as a liquidating distribution--it just will come in two parts.

Joe Eqcome

CEF Weekly Review: Real Estate Extends Gains

Here' a hyperlink to the BCT press release mentioned above. It didn't see to take above.

www2.blackrock.com/web...

Joe Eqcome

CEF Weekly Review: Real Estate Extends Gains

Another BCT Update:

I received an e-mail on my website from "FM" regarding this BCT distribution. It was very helpful and posed some additional questions.

FM points to a press release on 6/3/09 from BCT regarding the distribution for BCT. In the press release, BCT states BCT will make its final liquidating distribution on or about October 30, 2009, as opposed to the end of 2009—as previously noted.

www2.blackrock.com/web...

The press release goes on to state, a special distribution in connection with the Trust's liquidation will be made to shareholders of record 10/15/09. This special distribution is for $.531949 per share.

FM points out with a flat price to discount, the special distribution would generate, and I quote, "about 5.3% for 1 month if you believe the NAV will stay flat. Could be better in NAV improves. Still not bad when you annualize."
This makes it a little more interesting.

I guess the threshold question with regards to the special distribution is: wouldn't such a distribution just lower the liquidating NAV by a similar amount? If so, in the final analysis, a shareholder might just be getting a $.53 per share distribution in a separate distribution.

The final liquidating distribution might be the pre-special distribution NAV less the special distribution? Assuming the NAV doesn’t change that much, the cumulative distribution would represent the current NAV or about $12.42 per share as of 9/18/09? Don’t know?

If the special liquidation distribution is separate and apart from liquidating NAV then this might be interesting as FM suggests.

Again, thanks FM for the "heads up".

Joe Eqcome

CEF Weekly Review: Real Estate Extends Gains

Follow Up on BCT

In a conversation with Blackrock with regards to BCT, its original objective was to liquidate the CEF at the original issue share price of $15 per share at the end of 2009. However, this was not a guarantee.

The trust will be liquidated now on or about October 30, 2009 at NAV--which is now approximately $12.42 per share.

Assuming you buy 200 shares of BCT at the prevailing price of $12.25 per share and pay a commission of $10 per share your average cost would be $12.30 per share. Assuming you get approximately $12.42 per share liquidation distribution, the liquidation payment would represent a $.12 per share increment over your embedded cost.

This would be a return on your money of less than 1% for the holding period of approximately a month and a week. However, the distribution would be a return of capital, i.e. you wouldn’t have to pay taxes on the increment distribution.

There are too many moving parts and a low projected return for this to be an interesting arbitrage. I’m sure there will be some liquidation costs that might reduce the liquidation distribution.

The stated objective of returning to investors their original IPO invested capital of $15 per share and then placing a caveat that they just might not seems a little misleading. A more accurate and honest objective would have been, "protection of the original shareholders' invested capital".

And they didn't even do that--let alone investors getting back their original $15 per share.

Yes, Virginia, it was too good to be true.

Joe Eqcome

Make Money with Closed-End Fund Activism

OOOpps,

The hyperlink to the first study was cut off for some reason in my comment above. I think this one might work.

finance.wharton.upenn.edu/~itayg/Files/cefactiv...

If that doesn't work, you can go to my website and look under the tab "Academic Papers" where you can find it.

Sorry for the inconvenience.

Joe Eqcome

Make Money with Closed-End Fund Activism

Gwailo

Thank you for your invitation to extend your analysis with reference to “activist” investing in CEFs. It’s a great article; interesting question.

I’ve hyperlink the following articles that address the issue on both ends of the spectrum.

The first one is: Activist Arbitrage: A Study of Open-Ending Attempts of Closed-End Funds.” from Duke. finance.wharton.upenn.edu/~itayg/Files/cefactiv...

The authors content that CEF discounts attract activist arbitrageurs, but these discounts shrink in anticipation of an activist arbitrageurs’ attack.

Importantly, the ability of the activist to ultimately close the gap between the price and NAV is the CEF’s governance. While you might be able to “rattle the cage” and get some concessions from current management—like a tender offer at a lower discount, replacing the management of CEF at the board level is a proxy issue and the activist investors should be willing to take this on. The authors go on to observe that the 1992 proxy law reform gave outsiders additional flexibility to wage proxy contests.

The other article is: “The Use of Tender Offers to Address Closed-End Fund Discounts.” www.claymore.com/docs/...

This is a non-academic article that might have some bias as it was written by the folks at Claymore who sponsor CEFs. Their study suggests that while the tendering of shares, as a way to fend off “activists”, might be productive both before and after the tender offer, the median change after one year was a negative 1.5% “returning the fund to where they started.

They go on to conclude: “However, even if effective (the tender offer), it frequently introduces the negative effect of a higher expense ratio and less liquidity. Furthermore, the discount is rarely eliminated and occasionally, it even widens.

So, is following an “activist” CEF investor(s) a smart strategy? If such investors are well-capitalized and willing to take on a proxy fight to remove the present management and liquidate or convert the CEF to an open end fund, the answer may be yes.

If the CEF governance is too onerous, then maybe this is just “greenmail” attempt. At best it’s a short term trade, or, at worst, you’re being played by such activist investors as their exit strategy is based on you bidding up the price of the shares.

Another activist group that's worthy of mention is Horejsi Group with interest in BIF, BTF, DNY where they are actually the managers. The also are involved in a proxy fights with SRO and SRQ.

It’s an interesting topic. Thanks for your thoughts.

Joe Eqcome

PIMCO High Income Fund: A Swan Song

All Smiles

I find you’re your reference to your mythical service on the Santa Maria with Columbus an accurate analogy for your investment philosophy—particularly with regards to PHK for two very specific reasons:

1) The Santa Maria was the slowest of Columbus’ vessels;
2) The ship later ran aground and was lost off present-day Haiti.

Here’s wishing you safe passage to your ultimate destination.

Joe Eqcome

On Sep 16 06:20 PM All Smiles wrote:

> OOOPs.
>
> PHK closed up +4.6% ($10.20) today on volume 52% above the average
> daily volume for the last 3 months.
>
> Sure looks a lot like a short squeeze to me.
>
> When you may have been born doesn't have anything to do with making
> or losing money.
>
> Back when I was sailing with Christopher Columbus I learned not to
> go to the bathroom over the windward rail of the Santa Maria.
>
> Windward is the direction from which the wind is blowing at the time
> in question. The side of a ship that is towards the windward is the
> weather side. If the vessel is heeling under the pressure of the
> wind, this will be the "higher side".
>
> I have also learned not to fight the Fed or the Tape.
>
> Being short anything in Corporate Debt or Preferred Stock since the
> panic lows in October and March is like going to the bathroom over
> the windward rail.
>
> Yes everyone is crazy to pay such a premium for PHK, but the NAV
> is still rising and so is the Market Price. You just can't ignore
> the momentum in this market sector.
>
> Once again, I bought PHK at below NAV
>
> 10% of current position on 9/29/2008 @ 8.61
> 27% of current position on 10/8/2008 @ 5.95
> 60% of current position on 11/3/2008 @ 5.29
>
> I now have a 117% total return on this position but it was not looking
> pretty when the final lows were being put in during March.
>
> PHK has traded at a 23% premium ($3.40) on 3/9/2009 to a 75% premium
> ($6.31) on 4/8/2009. I hindsight, I wish I hadn't worried so much
> about the premium and paid a 75% premium on 4/8/2009 @ $6.31.
>
> PHK is one of the few CEFs that has not cut their monthly distribution
> rate. PHT is another that has not cut the distribution rate. Both
> are trading at a higher premium to the net asset value than their
> peers because of management and the stability in the distribution
> rate.
>
> Our annualized distribution yield on PHK at cost is +31%.
>
> I was almost certain that this distribution rate would have been
> cut when Bill Gross took over this CEF in 2009. I am pleased, and
> surprised, that he has maintained the monthly distribution.
>
> The only shock that could possible have PHK trade at or near NAV
> would be a cut in the monthly distribution rate which would be a
> buying opportunity for those that missed this boat.
>
> I also wasn't willing to pay the premium for PHK and was worried
> about a distribution cut so began buying NCZ at a discount to NAV
> as follow
>
> 9% of current position on 10/14/2009 @ 5.75
> 6% of current position on 11/5/2009 @ 5.20
> 30% of current position on 3/24/2009 @ 3.65
> 51% of current position on 3/24/2009 @ 4.07
>
> I have a 107% total return on this position.
>
> More importantly the annual distribution yield at cost is +27%.<br/>
>
> I expected as much as a 40% cut in the monthly distribution rate
>
> and NCZ did cut the distribution rate from .119 in October 2008 to
> .085 in Feb 2009 (-29%).
>
> I expect that NCZ could be one of the first CEFs to raise their distribution
> rate over the next year as the convertible and preferred markets
> continue their recovery from the panic lows caused by Dr. Doom (Phd
> Rubini) in March when he was all over the TV saying that all the
> banks were technically insolvent and should be nationalized. Thanks
> Dr Doom for a panic low so that I could buy these cheap in March.
>
>
> I also bought HWN on 5/20/2009 at $14.30. I have a +30% total return
> on this one at today's close while the S&amp;P is up +16% over the
> same period.
>
> HNW has cut the monthly distribution rate in March, 2009 from .22
> to .19 (-14%) and again in August from .19 to .16 (-16%) and it has
> still outperformed the S&amp;P.
>
> There is a sunami of money still stuck in T bills , money market
> funds, and CD at less than 2% annual yields that are finally realizing
> that the "world has not ended" and they wish they had payed a 23%
> premium for PHK in March or a 75% premium in April.
>
> When I sailed with Chris on the Santa Maria I also learned to sail
> with the wind and that most ships rose in the harbor when the tide
> came in and declined in the harbor when the tide went out.
>
> The full moon low tide was reached in March, 2009.The tide is coming
> in and who knows how high the NAV for these Corporate Bond and Preferred
> Stock Funds CEFs will rise as the sunami of low yielders jump on
> board the Corporate Debt and Preferred Stock ship which has set sail.
>
>
> I an not smart enough to call a top but I am riding this incoming
> tide.

PIMCO High Income Fund Cannot Support Its Share Price

Jim Walsh

I want to address your more specific contention that PHK’s valuation is subject to a dysfunctional high yield market. This is the basis of your reasoning that NAV is not a valid measurement during this period of time.

If that were true, the valuation risk should be systematic. All high yield CEFs, as PHK is classified both by the WSJ and ETFConnect, would be subject to this phenomenon. Therefore all such funds should be bias toward a premium. I believe this is not the case.

There are 66 high yield funds in my data base. The average discount is 2.4%. Additionally, the standard deviation (SD) is 9.6%. For the purpose of this example, let’s say 10.0%. All but two of the 66 fall within the 2 SD’s which should constitute 95% of the population.

One of the two falling beyond 2 SD’s that would is Pioneer High Income Trust (PHT) at a 18.3% premium which would place it just a little above the 2 SD of 17.9%.

Therefore, PHK trading at a 47.8% premium is almost 5 standard deviations from the mean. This would mean that PHK has a 0.3% of being part of this peer group.

There are several explanations for this. The first and most popular with your crowd is that Bill Gross has a secret sauce that he will apply to PHK. The second is that PHK is really something other than its classification. The third is Pimco has either a faulty or a superior valuation mechanism relative to its peer group. Or, that it is just plain overpriced.

Let me deal with the possibility that PHK is something else. Recently, PHK announced that it would change it policy reduce it’s 80% holding in high yield to 50% so it would be able to own more rated bonds.

The fact that it has recently changed it investment policy mitigates the contention that PHK’s valuation is a function of a dysfunctional high yield market. Rated paper is more efficiently priced as the markets are more liquid.

Additionally, if you were to now compare it to the CEF fund type “Other Funds” which include high yield funds you wouldn’t be in any better position. Statistically this group’s mean is 1.4% and the SD is 13.7%.

However, PHK would no longer be lonely in the “Other Funds” Group. Because it sister fund PIMCO Global StocksPLUS&Income (PGP) is classified as such. PGP is currently trading at a 63.6% premium. Now, if you just strip out the high yield CEFs in “Other Funds” you’d really get depressed.

So, let’s cut through this. The superior valuations are not a function of a dysfunctional high yield market it’s the “Pimco Effect”. To the extent they can justify these valuation with performance will be played out in the marketplace.

To the extent Pimco can beat these statistical odds it should make them eligible for the Noble Prize in Economics.

Joe Eqcome

On Sep 10 04:07 PM Jim Walsh wrote:

> I manage and invest for several portfolios with the objective of
> income and can find many leveraged Investment Company CEF's that
> yield 10 to 12% APR today investing in much less risky instruments
> than PHK does to get 14%. Looking at NAV's in a disfunctional market
> is folly. If PIMCO does no trades, uses no credit default swaps or
> hedging, and suffers defaults rates greater than the great depression
> with no recovery of capital, a Share price of 10.32 might be justified.
> I think PIMCO is a bit more sophistocated than that!! Bill Gross
> was chomping at the bit to dive into what he called the opportunitiy
> of a Century in the fixed income realm. I saw the look on his face.
> Like a cat that just swallowed a mouse!! My money is on Bill Gross.

PIMCO High Income Fund Cannot Support Its Share Price

You might want to go back and count the comments that were concurring.

The only difference was those who disagreed were more verbose as their ox was being gored. That's entirely understandable.

My only purpose is raise consciousness for those who maybe chasing yield. As I've said, I'd be happy to be proven wrong. It's just no one has been able to demonstrate it empirically.

However, I eagerly look forward to your detailed analytical rebuttal.

Joe Eqcome




On Sep 11 08:09 PM searcher wrote:

> Well, Joe, it's pretty obvious that there's a whole lot of folks
> that aren't impressed with your analysis. Clearly, they're riding
> with Bill in this satanic vehicle.

PIMCO High Income Fund Cannot Support Its Share Price

gordonq

There are many factors that constitute a change in NAV.

Your analysis would be accurate if you were to strip out all changes in NAV but net investment income and distributions. This would give you a more precise view of whether or not the distribution is being supported by net investment income.

In fact, approximately 24% of PHK's distribution in July was a return of capital based on their own estimates.

Joe Eqcome


On Sep 11 09:11 AM gordonq wrote:

> The NAV seems to be telling us that the fund is currently supporting
> the dividend. The dividend payout decreases the NAV.
> 6/10/09 5.74
> 7/10/09 5.70
> 8/10/09 6.75
> 9/10/09 6.77

PIMCO High Income Fund Cannot Support Its Share Price

Jim Walsh

Let me get this correct. You don’t think that looking at NAVs is a valid metric when investing in a CEF? Then, let me be the first to welcome you to planet Earth!

There are libraries full of academic articles that support the relationship of stock price to NAV. Or, should we just dismiss that and take your word for it.

Let me get you started on this.

A number of studies examine the ability of investors to exploit closed-end fund discounts. In his seminal work, Thompson (1978) uses monthly return data and yearly discount data on 23 funds to evaluate returns from simple trading strategies. He finds closed-end funds trading at a discount tend to outperform the market and concludes that the existence of profitable trading strategies could represent market inefficiencies.

Malkiel and Firstenberg (1978) also offer support for the idea that closed-end funds discounts represent market inefficiencies.

I’d recommend you Goggle, “mean reversion in closed end funds” to “top off” your understanding of this area.

Look, there is nothing wrong with hero worship. So, you think Bill Gross is great. That’s nothing to be ashamed of. A lot of folks thought Bernie Madoff was great too. That’s not to say they are similar. It is just to point out you sometimes need to do the numbers to validate the faith.

Other than that, if you could provide some empirical evidences for your other assertions your comment would be more insightful. Or, should we also take your assertion on faith?

Truly, are you managing public funds? If you are let me know which ones.

Joe Eqcome



On Sep 10 04:07 PM Jim Walsh wrote:

> I manage and invest for several portfolios with the objective of
> income and can find many leveraged Investment Company CEF's that
> yield 10 to 12% APR today investing in much less risky instruments
> than PHK does to get 14%. Looking at NAV's in a disfunctional market
> is folly. If PIMCO does no trades, uses no credit default swaps or
> hedging, and suffers defaults rates greater than the great depression
> with no recovery of capital, a Share price of 10.32 might be justified.
> I think PIMCO is a bit more sophistocated than that!! Bill Gross
> was chomping at the bit to dive into what he called the opportunitiy
> of a Century in the fixed income realm. I saw the look on his face.
> Like a cat that just swallowed a mouse!! My money is on Bill Gross.