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.

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.

CEF Weekly Review: Municipal Funds Rule

Mavericks

I used the WSJ category for "OptArbStrgy" and I counted 31.

Of the 49 CEFs in the Claymore CEF Index as of 9/4/09, 11 are classified as "OptArbStrgy" representing 21.4% of the portfolio. The CEF that were classified and "OptArbStrgy" were: BDJ, BGY, EOD, EOI, EOS, ETB, ETV, ETW, JPZ, JSN & NFJ.

Some may feel this is an overweighting of the category as a component of the CEF market segment.

Here's a link to the composition of the index: www.claymoresecurities...

Joe Eqcome

On Sep 07 10:30 AM mavericks wrote:

> Where do the equity buy/write funds fall under in the Claymore CEF
> Index? I think there should be a separate category for them considering
> how many there are. I count at least 30.

CEF Volume Trends May Portend Their Appreciation

Mavericks,

You claim that CEFs are in a bubble mode. So, I’m making the heroic assumption that this claim is based on your follow up sentence that states CEFs are trading at “all time high premiums….” Of course, this is notwithstanding your implied notion that anyone who invests in CEFs is stupid.

Setting aside for the moment CEF investor stupidity, unless you’ve developed a valid and reliable model for valuing CEFs NAVs that is different than the one we mortals are employing, there is no empirical evidence to support your claim--none whatsoever on an industry-wide basis. I'm sure anyone of us can point to islolated situations where premiums are perplexing. Case in point is PHK.

Of course if you have support for you industrywide claim, we would all be appreciative if you could provide us the backup work.

There is a saw in the investment business, “There are two kinds of statistics, the kind you look up and the kind you make up.” Sound to me you’re trafficking in the latter.

Oh, by the way, I’m not “taking my book”. I’d love to see your proof for that claim.

Joe Eqcome

On Jun 27 10:49 AM mavericks wrote:

> Author is just talking his book. CEF's are in bubble mode currently.
> All time high premiums on many I follow as small investors chase
> yield in tough times. Contrarian indicator?

A Poor Man's CEF Portfolio That Performs

Phil, Phil, Phil……..,

You seemed to have missed the point.

The point of the article was to construct a CEF portfolio as the S&P stock selection committee would have selected a stock to add to its indices and see how it performed. That selection process included certain criteria when looking for Index candidates: trading analysis, liquidity, ownership, fundamental analysis, market capitalization, and sector representation.

This portfolio was not meant to be a portfolio of best CEFs picks base upon a portfolio managers criteria, but one constructed on a limited set of rules to test a basis thesis: If you constructed a CEF portfolio like S&P does, what would you get? It just happened to perform favorably relative to a CEF rule based index.

Anyone can change the stock in the fund types that best suits them. I have no economic interest in the portfolio.

Since you’ve taken the time to provide a detailed response, let me response in a detail manner addressing your points.

Point 1: “An investor with $10,000 to invest doesn't need the complexity of something like this.”

Response: I wouldn’t disagree with this observation but you failed to provide any recommendations or data to support your contention. Is this a case of "proof by assertion".

Point 2: “One of the major attractions of CEFs is the ability to buy them at a significant discount.”

Response: The stock for inclusion in the portfolio were based on the limited criteria stated above and not representative of the best stock picks in the sector based upon a criteria, as you’ve mentioned, premium or discount. (Some CEF portfolios are not liquid and are priced infrequently and can cause discounts or premiums not reflect the true underlying value of the assets. This is “mark to market” issue that banks are currently faced with; I’d assume this would apply for high yield bond funds where the last trade may not represent the current value.)

Point 3: “Your chart includes the distribution yield….Your chart does NOT include each fund's expense ratio, which is VERY important.

Response: As it relates to the observation regarding distribution yield, I agree that it does represent the dividends from investment income, that is why I labeled it distribution yield and not dividends. Nonetheless, I agree with this observation and given more space I would have made that point.

Again, an expense ratio would have been helpful given the space. On average the expense ratio is 1.8% versus 1.5% for the industry. The reason for this slighty higher expense ratio is that there are far less higher skilled funds (convert, high yield, etc. represented as fund types) that would charge more than more than the garden variety equity funds.

Also, your focus on expense ratios might be misplaced if it isn’t compared against a peer group and/or the return generated by the CEF. Sometimes when you pay peanuts you get monkeys.

4: Your cost comparison of the commissions of buying these funds implies…

Response: I don’t see what’s so confusing about this point. Let me make it simple for you. There are CEFs that invest in CEFs (FOF is an example). The managements are paid a fee for that purpose; let’s say 1.5%. Let’s say you construct this portfolio yourself of the group of stocks owned by the CEF, wouldn’t you eliminate paying that 1.5% management fee annually? What difficult about this concept.

Point 5: You should mention that many CEFs, including some on your list, are leveraged….

Response: Yes, some of these are leveraged, but so are some of the companies that are in the S&P 500. (Do they mention that?) Again, that wasn’t a criterion for the construction of the portfolio.

Point 6: It is relatively easy to create an index or portfolio of investments that beat a benchmark like the S&P 500 over the last 5 years. Hindsight is 20/20…

Response: The portfolio was modeled on the selection process of the S&P 500 committee to see if it could be applied to CEFs. The portfolio wasn’t constructed to be a superior performer; it just ended up that way.

Joe Eqcome



On Jun 04 02:50 PM Phil S wrote:

> Hoo boy...
>
> Where to start?
>
> 1) An investor with $10,000 to invest doesn't need the complexity
> of something like this. The (likely potential) incremental returns
> improvements from this on a $10K portfolio are small, relative to
> incremental costs and complexity it adds versus a plan based on 2-4
> low cost index funds.
>
> 2) One of the major attractions of CEFs is the ability to buy them
> at a significant discount. Of your 10 funds, only 3 are at a 10%+
> discount. You've even got a fund trading at a 55.72% premium in there!
> In my opinion, it is not smart to pay $830 (100 shares worth) for
> roughly $513 worth of underlying net assets.
>
> 3) Your chart includes the distribution yield, which, while somewhat
> useful, may very well confuse novice investors unfamiliar with CEFs
> (which often distribute more than they 'earn'). Your chart does NOT
> include each fund's expense ratio, which is VERY important.
>
> 4) Your cost comparison of the commissions of buying these funds
> implies that by paying some commissions up front, the investor is
> saving money in the long run, by avoiding "1.5% average CEF management
> fees". Your description is sloppy and may mislead novice investors.
> Perhaps you are referring to the AUM (Assets Under Management) fees
> that some financial advisors charge, ON TOP of fees in underlying
> investments. In any case, CEFs, like ETFs and mutual funds, have
> expense ratios that are built in. Investors don't see a line item
> charge on their brokerage statement for these, but they pay them
> all the same (they are, if I understand correctly, deducted from
> the assets of the funds, and effectively lower the NAV and/or distributions
> of the funds). Note that the expense ratios for CEFs are generally
> HIGHER than those for low cost, broad-based index funds or ETFs from
> Vanguard and similar companies.
>
> So a small investor has to pay:
>
> 1) Commissions
> 2) Spreads (an implicit cost - roughly half the difference between
> the bid and ask price for a CEF).
> 3) Expense ratios
>
> The first two are generally paid once when you buy and once when
> you sell. The last is an ongoing cost.
>
> Yes, they avoid a fee to an advisor, if they don't use one. But an
> investor who is managing their own portfolio (and thus somewhat likely
> to read this article and perhaps follow the advice), is probably
> not using an investment advisor charging a wrap fee anyways, and
> may be confused by your language.
>
> 5) In an article seemingly aimed at less knowledgeable investors,
> you should mention that many CEFs, including some on your list, are
> leveraged. i.e. They borrow money in various ways to invest more
> in their target strategy. In good times, that can boost returns,
> but in bad times (such as we've recently experienced) that can magnify
> losses. Many leveraged CEFs are significantly riskier than similar
> non-CEF options.
>
> 6) Is this the first publication of your "Eqcome CEF Big 10 Portfolio"?
> If so, you should probably add a cautionary note for the promising-looking
> comparison chart. It is relatively easy to create an index or portfolio
> of investments that beat a benchmark like the S&P 500 over the
> last 5 years. Hindsight is 20/20. I shoulda/coulda bought Google
> back in the day. Indexes are far more reliable gauges of the value
> of a particular strategy or asset class going FORWARD from the time
> they are first constructed and published. This doesn't mean that
> it's wrong to show the backtest results for a newly constructed portfolio/index,
> but rather, you should disclose the date at which it first went 'live',
> and, particularly for an article aimed at novices, highlight the
> issues with such backtests.
>
> ===
>
> OK, so that was a lot of criticism of a relatively short article.
> Still, I think investors who are interested in owning CEFs should
> have a reasonable understanding of the costs and risks.
>
> All this criticism does not mean that CEFs are necessarily a bad
> investment. In fact, much of my portfolio is currently in various
> CEFs. But would-be CEF investors should educate themselves. Understand
> the costs, the risks, the nature of CEF distributions (and the differences
> relative to more conventional dividend payments from other asset
> classes). Understand the nature of CEF premiums and discounts. Realistically,
> it will take many hours of reading (in my opinion), from a variety
> of different sources, to really understand CEFs. For a $10K portfolio,
> it strikes me as unlikely that the incremental benefits of informed
> CEF investing (relative to other good alternatives) will be large
> enough to justify the time and commission investment.
>
> In particular, be able to solidly answer the question "Why CEFs?".
> If you don't know why, or if, they are superior for you than other
> investments, then you probably shouldn't be investing in them.<br/>
>
> Disclosure - I currently own many CEFs, but not (at the moment),
> any of the currently listed "Big 10".

Shareholders’ Case for Tender, Liquidation or Conversion of Adams Express

Adams Express Company

Thank you for your response.

While I’ve acknowledged ADX’s management has done a good job of meeting its benchmarks, my use of “sub-optimal returns” relates to ADX’s inability to narrow its chronic discount.

Let’s use the following example for the purpose of illustration. ADX’s current share price (3/5/09) is $6.15; if that share price were grow at a 3% annual rate for 10 years, its price appreciation would be 30.5% at the end of the period (if the discount remained constant). If the discount were to gravitate to par (NAV compounding at 3%) at the end of the 10 year period, share price appreciation would be 60%--double the rate.

So, ADX’s inability, or the close end fund’s structural flaw, to narrow its chronic discount creates a sub-optimal return for shareholders versus liquidating ADX at its NAV and reinvesting the proceeds in the S&P 500 index.

The question is: how does management proactively accomplish this task? And if it can’t, I think it is a reasonable question by shareholders to pose whether or not there are alternatives for accomplishing it.

Joe Eqcome

On Mar 06 06:13 PM The Adams Express Company wrote:

> Mr. Eqcome’s piece raises some tough questions about the Company
> to which we would like to briefly respond. He says that Adams Express
> matched the performance of its benchmarks, and later in his piece
> decries what he calls our “sub-optimal returns.” Neither statement
> is correct. In fact, Adams Express has outperformed its benchmarks,
> the S&amp;P 500 and the Lipper Large-Cap Core Mutual Fund Average,
> for the past 1, 5 and 10 year timeframes on an NAV basis, hardly
> what one would describe as “sub-optimal.” Currently, our discount
> is in line with, or in some cases narrower than, our peer group of
> Domestic Large-Cap CEFs, as listed weekly in The Wall Street Journal.
> While we think shares of our Fund should trade closer to our NAV,
> CEF discounts are a fact of life and provide opportunities as well
> as complexities for investors. Empirical studies have shown that
> long-term investors who reinvest their dividends and capital gains
> in a CEF that is trading at a discount earn a better total return
> than in funds that are trading at par.
>
> We strongly believe that for those who are looking for a long-term
> investment product, CEF’s make a lot of sense for a variety of structural
> reasons, for example, investment managers aren’t forced into and
> out of positions because of cash inflows and outflows associated
> with open-ended funds. None of the “remedies” that he calls for are
> appropriate for our Fund. Given our virtually unique “internally-managed”
> operation, converting the Fund to an open-end mutual fund or ETF
> is cost prohibitive. Tenders provide only temporary fixes and liquidation
> would deprive our long-term shareholders of all the benefits that
> our Fund provides. We have found most of our shareholders purchase
> and retain shares in our Fund for the same reasons that were identified
> by Mr. Spitzer in an August 19th article in Seeking Alpha – our 1)
> Low expense ratio, 2) Low turnover, 3) Good long term performance,
> 4) High discount to NAV and 5) Solid portfolio holdings. Last year
> our annual rate of distribution to shareholders was 5.61%, and our
> 10 year average is 7.19% . And, we have paid dividends to our shareholders
> every year for the last 73 years.