Joe Eqcome

Are ETFs and CEFs Good for Dividend Investing?

Steve20423

I maintain a website that focuses on CEFs that's free to interested investors. Additionally, there is a page on the website with links to other CEF related investor information. joeeqcome.web.officeli...

I hope you find this helpful.

Joe Eqcome

On May 08 08:47 AM Steve20423 wrote:

> I'm curious about your due diligence when selecting these funds up
> front.
> I don't disagree with your conclusion but it appears you were speculating
> on most of them to be something their not.
> A simple look at their history of payments indicates they are inconsistent.
> You can't really beat the index of your goal is to emulate it. I
> think purchasing a CEF is a good alternative if they actively manage
> to achieve their goal. But then you need to purchase at a deep discount
> to the market. When so doing there is less downside(in theory). I
> am sure you could have better choices if the goals and management
> of the funds were more in line with your own goals. I would like
> to know where to find more detailed analysis of CEF's If anyone can
> offer some websites or newsletters I would be grateful.
>

Are ETFs and CEFs Good for Dividend Investing?

Dividends4Life

Thank you for you observations. I like many of the other respondents agree that dividend investing is more than picking stocks with high yields.

However, your observation that there is greater dividend volatility in both CEF and ETFs than individual stocks seems to be a tautology, i.e., true by definition.

RICs, such as CEFs and ETFs, are legally bound to distribute their income and capital gains on an annual basis. As a consequence, such entities, by their very nature, would have distributions that fluctuate with stock market and the CEF managers' decision to harvest their capital gains. Operating companies are under no such distribution requirement and the dividends as a percentage of net income has averaged 50% to 60%. This has provided operating companies much more flexibility maintaining dividends in times of economic stress.

Much of your investment period (the late ‘70s) has been disappointing for shareholders and was reflected in the distribution of the CEFs. So, I'm not surprised with your results.

Lastly, what you may want to focus on is the composition of the dividend. The key is to find CEFs that continue to pay consistent amounts from net investment income which is more of a recurring source of distribution.

Joe Eqcome

CEF April Monthly Review: Real Estate Funds Rock

Oooopps....

Transposed Berkshire Hathaway ticker symbol in comment. Correct symbols should be: BRK.A & BRK.B

Joe Eqcome

On May 04 09:51 AM Joe Eqcome wrote:

> Alan Young
>
> You're correct that BIF is not a real estate related CEF. What I've
> try to do in these weekly reviews, in addition to provide an overview
> on the CEF market segment, is to also provide an investable idea.
>
>
> I thought that BIF might be some of interest as it has been brought
> to our attention by Dan Plettner in this blog. It’s my intention
> to do some more work on it and for other who might contribute provide
> some feedback.
>
> Reason for my interest in BIF is: trading a significant time weighted
> historical discount; has a large position in Berkshire (seekingalpha.com/symbo...);
> has a significant slug of cash. Dan is raising investors’ consciousness
> regarding actions that management might take do to close the discount
> gap. For these reasons I think it may be worthy of further analysis.
> (For the purpose of disclosure, I own a small holding in BIF and
> may increase that position. While I’m happy to risk my own capital
> on an incomplete idea, I don’t think it is fair for other people
> to do so until the idea can meet the more rigorous criteria.)
>
> I thought it was worth of note but short of a recommendation as I'm
> still accumulating info.
>
> Thanks for your comments.
>
> Joe Eqcome
>

CEF April Monthly Review: Real Estate Funds Rock

FAMCO

Your observations regarding the lack of an impartial advocate for retail CEF investor is both a true and sad commentary. Even when the brokerage firms had CEF coverage it was significantly biased; it was no more than a marketing tool for CEF IPO’s than independent research. Remember, the CEF industry is dominated by a few large fund sponsors who are likely to do “one off” funds. If you were an underwriter, you’d want to nurture the sponsor as they provided a nice steady stream of investment banking fees through a variety of CEFs develop by the sponsor.

Additionally, the Closed End Fund Association (CEFA) is financially supported by the CEF sponsors. So, while CEFA provides decent information on the CEF market segment, as provided by Lipper, it can’t provide independent research. This is not a criticism of CEFA, just a fact.

As it relates to BIF, if management is not maximizing the value of the CEF for the benefit of its shareholders’—as Dan suggests, then we should collectively apply pressure to have the policy or management changed. Whether Dan’s appeal will fall on deaf ears will be a function of the strength of his argument. It’s something which I’m going to spend some time looking into. (As a point of disclosure, I do own a small holding of BIF and I’ve had e-mail exchanges with Dan.)

Joe Eqcome



On May 03 10:33 PM User241885/(FAMCO) wrote:

> Maverick's question about the closing gap on NAV discounts on buy/write
> funds may have to do with the huge per-centage distributions as the
> year end sell-offs pushed yields in to the high teens. There is little
> or no brokerage sponsorship left so even the quality non-leveraged
> names like Eaton Vance languished.
>
> The press did not pick up on this until the end of the winter and
> with retail clamoring for yield, demand finally stirred up. It is
> ironic as the data suggests that option selling of funds are the
> ones that most steadily experience NAV erosion over time.
>
>
> Dan Plettner's crusade with BIF reminds me of the horrendous situation
> at the Seligman funds where the entire family funds during were in
> the bottom percentiles of their categories consistently throughout
> the great run of the eighties and nineties. In spite of the fact
> of high fees, bad performance, continual bashing by the newsletter
> writers and personal financial journalists, management still held
> on through the decade.Does anyone know what happened to that family
> of funds?
>
> It would not surprise me if the experience with BIF takes a similiarly
> lengthy course. The actual history of "open-ending" closed end funds
> has not been one characterized by overwhelming shareholder victory.
>
>
> Having said that, I wish Dan the best of luck. The lesson of the
> last few years is that shareholders deserve better.

CEF April Monthly Review: Real Estate Funds Rock

Maverick

Your observations matches the numbers in my database.

Opt/Arbitrage funds are classified in the “OtherFnds” category. There are 29 "OtherFnds" in my data base of which are 12 are classified as “Opt/Arbitrage”. Those 12 Opt/Arb funds are trading at a flat prem/discount (-0.6%) as of May 1st. Five of the 12 are trading at a premium (7.5%) while the balance at a discount. The greatest discount of the group is Nicholas-Applegate Intl Prem & Strategy Fund (NAI) at a discount of 15.8%. Don’t know much about this CEF. Do you have a view on NAI?

Joe Eqcome

On May 03 12:05 PM mavericks wrote:

> Wondering what category buy/write (call option writing) equity CEF's
> fall into? Many have gone to low single digit discounts if not absolute
> premiums! Saw the same thing happen in Jan. and we all know how that
> turned out.

CEF April Monthly Review: Real Estate Funds Rock

Alan Young

You're correct that BIF is not a real estate related CEF. What I've try to do in these weekly reviews, in addition to provide an overview on the CEF market segment, is to also provide an investable idea.

I thought that BIF might be some of interest as it has been brought to our attention by Dan Plettner in this blog. It’s my intention to do some more work on it and for other who might contribute provide some feedback.

Reason for my interest in BIF is: trading a significant time weighted historical discount; has a large position in Berkshire (BKR); has a significant slug of cash. Dan is raising investors’ consciousness regarding actions that management might take do to close the discount gap. For these reasons I think it may be worthy of further analysis. (For the purpose of disclosure, I own a small holding in BIF and may increase that position. While I’m happy to risk my own capital on an incomplete idea, I don’t think it is fair for other people to do so until the idea can meet the more rigorous criteria.)

I thought it was worth of note but short of a recommendation as I'm still accumulating info.

Thanks for your comments.

Joe Eqcome



On May 03 03:05 PM Alan Young wrote:

> Good article, although the last paragraph on BIF is non-sequitor
> (since BIF no longer holds an appreciable amount of real estate).
>
>
> Personally, I am much chagrined to have missed this run-up. I was
> early to spot REITs as oversold and bought while they were still
> falling; early to cash in when they started bouncing back; and now
> maybe too late for what's left of the bounce. OTOH, a healthy does
> of panic could still return to this sector--it certainly is riddled
> with problems, and it's not a sure thing that TALF will cover them
> all.

CEF April Monthly Review: Real Estate Funds Rock

JSE17

I agree that commercial real estate securities may be ahead of themselves given their significant recent run-up. No need to chase them here as there are still significant pending issues.

Thanks for the encouragement.

Joe Eqcome


On May 03 09:44 AM jse17 wrote:

> Your work is appreciated Joe!
>
> It may be at or near the time to sell the high flying REIT CEFs and
> buy with 90% or so of the resulting capital, VNQ.

CEF Fund Review: A Tale of Two Market Legs

Old Man

Thanks. MBB is a good find for the purpose of CEF US Mortgage fund type comparison. I'll add it to my list.

Joe Eqcome

On Apr 27 11:22 AM Joe Eqcome wrote:


On Apr 27 08:51 AM oldman wrote:

> MBB, an ETF for mortgage backed securites is positive.
>
> Performance As of 31-Mar-09 Get Performance for:
>
>
>
> MBB
> PERFORMANCE OVERVIEW
>
> Year to Date Return (Mkt): 1.53%
> 1-Year Total Return (Mkt): 7.07%
> 3-Year Total Return (Mkt): N/A
>
>

CEF Fund Review: A Tale of Two Market Legs

Alan Young

Thank you for your comments. I've always find them to be thoughtful, constructive and of value. The old adage that "better is the enemy of good" applies here.

Let me address your thoughts in reverse order.

You're correct regarding the difference in performance price change versus total return and that's why I'm careful to make sure I articulate on which the calculations are based. I mentioned "share price change" twice in the second paragraph and once in the title of the chart and "average share price appreciation" in the third paragraph. So, I'm doing my best to make sure that distinction is being made. Additionally, for shorter periods of time, I believe the distribution plays a lesser role on returns; moreover, it’s difficult to determine the components of distribution which might contain return of capital which would not be a true return on investment.

You're also correct on the observation that the data for CEF and ETF comparison is available in the article. I try to maintain a discipline of not more than two pages of text with charts. So, I’m always struggling for the correct balance with respect to data presentation. Since my initial goal was comparing CEFs among themselves over various short periods of time I was left with little space to compare them with ETFs--which I believe would be an insightful comparison.

Joe Eqcome



On Apr 27 10:39 AM Alan Young wrote:

> Joe, I like what you are trying to do, but I'm having a hard time
> following your analysis.
>
> 1. Rather than comparing CEFs in different asset classes, without
> context, it would be more useful to show CEF behavior in the same
> table as the corresponding ETF behavior over the same period— IOW,
> show for any given asset class whether CEFs performed better or worse
> than ETFs. Even though you may have the data here, it's hard to see.
>
>
> 2. Are your performance numbers based on price, or total return?
> Obviously there's a big difference when CEF distributions are yielding
> 10% or more over ETFs.
>
> Thanks...

The Chile Fund: A Play on a Nascent Global Economic Recovery

Alan Young

On a monthly basis I think you'll find that adjusted for distributions and splits that in fact ECH has underperformed CH since its inception.

If you indexed the adjusted prices of both ECH and CH for ECH's short operating history (Jan '08), CH is down 40% while ECH is down 46%.

Again, this is because a portion of CH's return is distributed to CH's shareholders over the period and is not reflected in its share price—yet still constitutes a return to the investor. I know this concept is a problem for rookies in this market segment and that's why I took pains to point it out in the article.

You can't effectively compare CEF returns with other stocks without taking into consideration distributions either through an adjustment, as I did in this case, or by comparing them on a total return basis.

Joe Eqcome






On Apr 22 10:50 AM Alan Young wrote:

> Chile is a good destination for investment. Hwever, CH under-performs
> the index fund ECH by about 10% annually. IMO the only reason to
> buy it is if you think the discount will be closing, giving a temporary
> price advantage.

ETF Stats for March 2009

Thanks. Good stats!

Large Cap CEFs Underperform Large Cap ETF, Offer Other Advantages

Alan Young

Your points are thoughtful. The chart accompanying the article was based on monthly share price change and not total return.

To your point, I do have a chart comparing the annual total returns of large cap CEFs with the S&P 500. It shows the same pattern although a much less pronounced. Indexed at year-end 2001, CEFs underperformed the S&P 500 by 19% by the end of 2008 on a total return basis.

I also agree that total return is the right metric for evaluating long term investments. Since my observation regarding both BLU and ZF were for short-term trading purposes (3 to 6 months) the distribution was less important.

Joe Eqcome



On Apr 09 10:00 AM Alan Young wrote:

> Is your chart a price chart or a TOTAL RETURN chart? Those 12% annual
> distributions would make a huge difference!
> So, please be clear.
> The discount can be helpful at times but is incidental to your point
> about performance. Total return is the key.
>

CEFs Continue to Advance; Real Estate Funds Surge

Nana 1

I’m always amused by people who resort to incensed name calling to defend their position. There is an old Chinese saying: “You can always tell which party is losing the argument by the one who strikes first.” Your strike is feeble, truly sophomoric and unprofessional. The only public lecture you’ve provided us is one regarding your poor upbringing and your inexperience in investing.

Let’s deal with the fact:

1. Real estate stocks didn’t go up last week because real estate prices when up;
2. The sharp move was especially in response to Kimco’s very successful public offering that demonstrated their ability to facilitate repayment of their debt. But don’t take my word for it, here’s a quote from the WSJ ("Research In Motion, Kimco Lead Stocks", April 3, 2009):

“Investors cheered Kimco Realty's sale of 105 million new shares to address its debt concerns, lifting shares in the owner of shopping centers 26%. The shares were sold at $7.10 apiece, or 5.2% below Thursday's closing price.

Kimco, which owns stakes in 1,950 shopping centers globally, gained $717 million from the sale. The New Hyde Park, N.Y., company was the third major REIT in recent weeks, behind mall owner Simon Property Group and warehouse REIT AMB Property, to pare its debt with a huge stock sale as the refinancing market remains prohibitively expensive.”

I’m happy that you’ve made money shorting “these idiots”, as you call them. However, judging from you comments, this may be the case of a blind squirrel occasionally finding an acorn.

Please, continue to short these stocks, we’ll all be happy to take your money because you’ve confused a bear market with brains.

Joe Eqcome

CEFs in Cyclical Bottoming Process: Two Recovery Plays

JCarroll

According to FOF’s recent annual report, its net investment income was $.74 per share. So, its current distribution of $1.08 is 146% of its recurring income. The balance of ‘08’s distribution was a “return-of-capital” which diminishes its NAV per share by a similar amount.

If you based its future annual distributions on its current net investment income, it would be around a 9% distribution yield. That would be the yield on which I’d base my investment decision.

You’re correct regarding FOF’s expense ratio being in addition to that of the CEFs it holds. While I don’t have the exact expense ratio for its holdings, the average for the CEF market segment is 1.5%.(You should note that management expenses of its portfolio holdings are already imputed into their NAV calculations.)

Discounts vary with investor sentiment and market cycles and tend to be the widest at market bottoms. Typically, discounts tend to narrow when the market "turns-up" and accelerates the share price appreciation.

Because FOF owns CEFs that trade at a discount, FOF’s discount is a “discount on a discount”.

For example, if the average price of FOF portfolio holdings is $9.00 per share and its associated NAV is $10.00, then FOF’s imputed portfolio discount is 10%. Excluding the management fee for a moment, FOF’s NAV is 9.00 per share—the average share price of its portfolio holdings. If FOF trades at a discount of 10% to its NAV of $9.00 per share ($8.10), then it is trading at a 19% gross discount to the NAV of its portfolio holdings ($10.00). If you assume a management fee of 1% based upon FOF’s NAV of $9.00 per share, then the inherent portfolio discount is closer to 18%.

As noted above, one thing to keep in mind with thinking about the expense ratio and the NAV is the expense ratio is imputed into the posted NAV calculations. So, it is not necessary to assume a further deduction when looking at the calculated NAV per share. But it is appropriate in the previous example.

Here is a link to a report on FOF. Focus on the segment “Per Share Changes to NAV”.
joeeqcome.web.officeli...

I hope this is helpful.

Joe Eqcome

CEFs in Cyclical Bottoming Process: Two Recovery Plays

Asian-

I once asked a famous institutional investors how he had time to research individual financial stocks prior to purchase during the savings & loan stock market recover. His response was he didn’t. He said he bought the whole group and kicked the stocks out he didn’t like after he owned them. He added that he would have missed a powerful part of the segment’s initial market movement had he not proceeded in that fashion.

The contention of the article—rightly or wrongly—is that we may be on a verge of a “run” in the closed end fund segment for factors articulated therein. The proposition is that investors may be able to capture the early part of that powerful advance by participating in the highlighted stocks designed to capture the diversified characteristics of a diversified CEF Index.

While your point regarding the diversity of the CEF fund types is true, fund types are sub-sectors within the CEF market segment. Closed end funds are in fact a single market segment bounded by the regulations of the “40’s Act” that created them.

Early in a stock recovery cycle for any particular market segment—be it financials, industrials, REITs, techs, etc., all boats will rise in a fairly indiscriminate fashion. My task was to make its simple for less knowledgeable investors to participate in that early price movement through a single stock purchase.

It is during the subsequent phases of the CEF market cycle that knowledgeable investors like you will be needed to help us parse the various fund types.

Joe Eqcome