Joe Eqcome

CEF Weekly Review: Convert Funds Lead

Jade Bond

Again, thank you for your measured and reasoned response.

While I would agree with you that FHI and PHK are different in many material ways, I keep on getting hung up on the fact that PHK’s premium is so much greater than stock price.

Historically, that premium level has not been maintained for an extended period of time as there is gravitation to the mean. FHI just is just recent proof of that phenomenon--this market sector is littered with them.

The threshold issue is that supporters maintain that the NAV is somehow undervalued. I just want someone to say: “the reason is that the NAV is undervalued is because they have interest rates swap on XYZ Company that can’t be valued until they expire. When they expire they will increase the value NAV by $3.00 per share.”

It’s that inability to pinpoint the missing value I believe may be a flawed investment assumption. Not necessary incorrect, but in the words of Donald Rumsfeld, “it’s an unknown knowable”.

It would also seem that the fair value accounting requirement provides a mechanism for valuing such exotic assets. There is both Tier II & Tier III that allow for valuation based on private market and model assumptions. So, I’m not sure I can buy into the complexity theory of value.

I think your dividend argument is probably the strongest regarding support for the value.

I hope I’m wrong regarding the estimate of value, because individual can’t eat high yield. They rely on the nominal value of the distribution. If the dividend is reduced significantly, it would add insult to injury for those investors who purchased the stock based on the current distribution. They have already experienced a destruction of capital but will also experience a diminution of income.

For investors who buy at these levels with the knowledge that the dividend will be reduced, I believe they can make money in the long term.

So, I don’t necessarily disagree with your longer term assumption.

Joe Eqcome (Disclosure: I’ve short positions in the stock.)



On Jul 27 02:09 PM Jade Bond wrote:

> Ah, I see now, Joe. You're a specialist in CEFs. Sorry, I didn't
> know that was your specialty. Indeed, there is merit to the point
> of view that all asset classes behave similar to each other.
>
> Corporate bonds move in generally the same direction, which individual
> bonds under or out performing based on the internal credit risks
> of the entity they represent.
>
> Equities move in generally the same direction, which individual bonds
> under or out performing based on the cash-flow internals of the corporation
> they represent.
>
> So it makes perfect sense to presume CEFs should move in generally
> the same direction, with individual funds under or out performing
> based on internal operations of the portfolio they represent.
>
> PHK is a true outlier among it's peers. By definition, one doesn't
> even need math to conclude it should revert to the mean. But you've
> presented numbers to demonstrate that it should, and that's fine.
> It's a well-founded high level view. But you want "simple math based
> on observable facts" to demonstrate why it will remain an outlier,
> or why it's NAV will move toward market price faster than the other
> way around, or maybe how internal cash flows can support the current
> dividend.
>
> Unfortunately, you're asking for the impossible. Simple math about
> individuals is too easily refuted, since it necessarily requires
> assumptions and generalizations that omit important specifics of
> the entity under scrutiny.
>
> PHKs portfolio is probably one of the most complicated around, and
> at the portfolio level not at all like FHI except in name and general
> description.
>
> But a quick simply math of the credit ratings reveals these two funds
> aren't alike at all. FHI is around 50% junk grade, and then 20% AAA.
> There's very little left in the mid-range where credit spreads are
> most likely to shrink in an recovering economy, asset prices rise,
> and defaults less likely to occur (relative to junk).
> www.ftportfolios.com/R...
>
>
> Now look at PHK credit mix. There's almost no junk bonds, and they
> even report short AAA credit, which presumably means they expect
> rising interest rates on AAA debt. If those are Treasurys, they got
> that right.
> www.allianzinvestors.c...
>
>
> Furthermore, PHK has 21% of assets in banks. Everyone knows the Federal
> Government is ensuring the cash flow to bondholders is secure, even
> if the bonds are rated and priced below AAA.
>
> PHK is nothing at all like FHI. You're comparison seems to me like
> belief in search of facts, just as mine does. That's not to say PHK
> won't or can't cut the dividend, but the simple math in your comparison
> is like predicting GOOG future performance based on YHOO past performance.
>
>
> The more likely figure, if they cut their dividend, comes from their
> Section 19 filing, showing distributions at an annualized rate of
> $1.02 per share.
> www.allianzinvestors.c...
>
>
> I'd like to see the previous Section 19s to find out if net investment
> income is up, down, or steady. Unfortunately, I can't find it in
> the SEC Edgar database (PHK's CIK = 0001219360). But if operations
> can convert low-yielding assets into high-yielding assets, the net
> investment income might very well make up the current shortfall.
> You can't predict that with simple math -- you need to find out what
> their trading activity is by comparing past and present portfolio
> mix. That would take days.
>
> A short-term short appears to be a good play, but I wouldn't hold
> that for long unless credit market's collapse again.
>
> FD: Long PHK

CEF Weekly Review: Convert Funds Lead

CEF Investors

For some reason, the weekly CEF fund type chart, which was origninally included, was not published with this article. For those of you interested, here is a hyperlink to that chart. joeeqcome.web.officeli...

Have a good week.

Joe Eqcome

CEFs: Discount at Historical Average

Oldman

With the possible exception of certain muni bond funds, I’m underweighted on the fixed income side—particularly long government/agency bonds. I’m concerned we’re going to see more inflation at some future point in time as global governments print money to float us out of the toxic assets problem. This would put downward pressure on the asset values.

If you have a slightly positive bias towards the market, you may want to consider “buy-write” CEFs. These CEFs buy a diversified portfolio of stocks and write call option against its portfolio. Such CEFs can generate premium income by writing (sell) the option and if a particular stock gets called away because the share price rises to the option strike price, the CEF can book another gain. You don’t want to owns such funds if you think the market is going to decline as the share price decline can off-set the premium received by writing calls.

Options are a very specialized investment area which I’m not as familiar as I’d like to become, so caution is in order.

If you’re so inclined, you might want to consider Eaton Vance Tax-Managed Buy-Write Income Fund (ETB). It has over $300 million in assets, currently yielding 13.9% and is selling a discount of 5.8%.

Breaking down the 13.9% distribution yield: 2.2% is supported by investment income; if you add on net realized gains it boosts it to approximately 5.8%; the rest coming from return of capital. So, the distribution yield is priced accordingly.

I hope this is helpful.

Joe Eqcome



On Jun 08 10:00 AM oldman wrote:

> with weakness in employment, housing, retail etc is there any good
> reason funds that hold goveernment/agency bonds sold off? My thought
> is perhaps a strong stock market has temporarily changed the flow
> of funds and weakness in bonds will become stronger a gain. Where
> would you get your income from now?

CEFs: Discount at Historical Average

bsharvy

I maintain my own database of approximately 640 CEFs and download pricing data daily. So, the CEF discount is calculated on that basis.

I post the month end Prem/Disc on my website for the Eqcome Index along with its CEF sub-indices (see "CEFIndex", on the website. That Prem/Disc is different than the one I noted in the article as it included a comparison of data I had available for all CEFs in the data base; the Eqcome CEF Index is comprised of just 130 CEFs.

These number would be different that Claymore CEF index as it is constructed differently.

You're aware that Claymore updates its index daily? Its available on under indices/fund/clmref/hi...

I hope this is helpful

Joe Eqcome


On Jun 07 01:55 PM bsharvy wrote:

> Where are you getting the info that the average discount is 5.7%
> on the index. Claymore's site last updated the info on March 31.