Joe Eqcome

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".