John Cole Scott

Closed-end funds, registered investment advisor, dividend investing
John Cole Scott
Closed-end funds, registered investment advisor, dividend investing
Contributor since: 2012
Company: Closed-End Fund Advisors
Preferred generally underperformed convertibles in a rising rate environment but do offer some increased protection in a bear market or recession.
Yes, one major downside to the open-fund structure is redemption risk or also big inflows at the top of a market / cycle.
part of how we
I would say CEFs down use leverage to offset their fees, they use it in increase yield when the yield curve is normal. I would say good NAV TR vs. peer funds is more important than an expense ratio of 1.25% vs. 1.75%
And yes, we love when the market over reacts on the up or down. It is part of how we seek to help our clients have better than average experiences in a CEF based portfolio.
Check out our blog (http://www.cef-blog.com) for an article/video called "BDC Boot Camp". We also did an article looking at BDCs during the last increase of interest rates. A more recent article posted to SA and our blog covered recent trends "Is my BDC Broken?".
A BDC is a closed-ended management company that elected to be regulated under the 1980 BDC Regs. Like traditional CEFs which are also closed-ended management companies; BDCs are Fixed Capital, active management, regulated under 1940 act (independent board and other investor protections), diversified portfolio of 30-150 holdings and trade publicly on a stock exchange. They also have access to cheap leverage.
They also allow our firm to blend our fundamental analysis of sectors and portfolio managers with the technical trade and historical trade patterns for inefficient securities retail driven securities.
In my opinion a Debt-focused BDC is similar to traditional Sr. Loan CEFs and High Yield CEFs.
Robin,
That is the type of info we use to help our clients and not terribly important in out ok. But, you are likely correct that there are not many.
We don't suggest holding most funds over a whole business cycle.
Most CEFs have their best entry point 7 months to 11 months post IPO based on research we published a few years ago on our blog.
There were only 5 debt BDCs in 2004, now there are 42. I think people look too closely at a fund that has done great over 5-10 years, when we only car about the next 6 months to a year and that dividend policies and discount changes are generally more important than just NAV or Mkt price TR calcs. Also funds change direction over time and even managers. While we only some CEFs for 5-10 years, most of our positions are held 3 months to 2 years.
If you are a buy and hold investors we think you can do less harm to yourself in many sectors with ETFs and OEFs.
Also ... sorry some replies are doubled. My computer/SA was not showing the relies posted from the office yesterday.
Yes, we do not give fund ideas or recommendations, but glad you liked the article.
This is a good question, and hopefully my answer helps you get perspective you can use to make better decisions.
"Most" is a little strong of a characterization as based on our database, 90 of 615 CEF and BDC (14.6%) have a dividend policies that are "Managed". 73 of the funds are equity funds where, if the policy is repeatable, if fine by me. the 17 bond funds that do it typically are risker policies IMO ... however data is never black or white and is more or an art than a science.
Lev Adj NAV yield is one of the best ways I know to understand if a dividend policy is too high, too low or "just right"
Return of Capital varies in importance by the sector of fund and if you plan to put the fund in your IRA vs taxable account the answer can also be different. MLP, Cov Call, and tax advantaged funds often have high RoC and when done well improve the income experience from an after tax perspective.
Also. I would argue a divined policy is not a promise. Every quarter about 10% of CEF increase or decrease their yield to shareholders. The last time interest rates went up March 2004 - Sept 2007 97% of BDCs and CEFs changed their dividend policies (up and down). If you want a "promise" I suggest buying individua bonds as those are promises ...that if cannot be paid in full ... end up with a default.
Thank you, I am glad it was helpful.
We give our actionable ideas to our clients. We use forums like SA to give perspective and see if anyone has a better idea or sees something missing in a view that can help me better understand a concept or issue we are trying to address.
We hold a well attended Quarterly CEF/BDC research call with slides and replay available and offer a 10 year Discount and Asset Class performance table for free on our website (Investor Resources section).

IMO if you are a SA reader, you are hear to learn how to make your own investment selections. Risk perception, timeline and experience are different for everyone and personal in my experience.
There are 615 US CEFs/BDCs you can get to the "list" through free resources like CEFA.com or CEFconnect.com as well as in our weekly XLS data file (but requires paid subscription).
My goal for this article was to discuss current market yield vs Leverage Adjusted NAV yield. i.e how we feel comfortable with clients taking 8% a year of a portfolio paying 9.7% and backing out discounts and leverage to see what the manager has to do to me the dividend policy of the board of directors.
We started covering the BadC sector last year in 1Q14. Launched our BDC model in 4Q14. You are clearly great at research.
Bill, you need a hobby, or a job... I hope you are at least short BDCL. We use S&P TR, Look on page 14 of put investor presentation. All indexes are Tr. our performance is net fees. We always show both figures.
Our models have BDCs as 5% to 20% allocations. If you went to our website and did a little research you would see that. BDCs are a sector. We think they are cheap. We are overweight. Let's talk In a year and see what happened.
Ok, Lots of comments to read, but hope this sheds some light.
The WF BDC Index (if you take the holdings and look at how they did 2005-2014) averaged +10.7% TR. (I had my data team build this out to give us a 10 year figure)
The S&P 500 has a 10 year average of +9.50% (Not bad but BDCs won)
The 10 year average Debt-BDC discount to NAV is -0.41%
We have summarized this data on a two page sheet for the 11 CEF/BDC sectors: http://bit.ly/1jK02dX
Debt BDCs ended 9/30/15 at a -19% avg discount to NAV.
We show BDC data (updated daily and as each BDC released new portfolio data) on this site: http://bit.ly/1jK00CL.
Debt BDCs are up through last Friday +0.6% YTD (about the same for S&P 500).
We only have deep CEF/BDC data since May 2012, but Debt BDCs have an average (not cherry picking) NAV TR or +27.6% and a 3 year avg. Mkt Pr TR of +8.9%. We agree with Buzz that most of that difference should be recoverable in the next 6-18 months (my forecast).
I spent 2 hours last month is a BDC fair market review session, most BDCs do good work here.
In regards to BILLBDC's late comment. BDCs are regulated and reviewed by FINRA and The SEC. Plus investors can vote with their feet every day.
Yes, it does change the trading dynamics a little. And add to volatility as less institutions step in to be the relative bottom or top in a fund trading level. We like trading volitiaitly, but understand that most investors do not enjoy it.
Thanks Josh, I will fix the article and let my data manager know.
AINV has a 3 year NAV TR of 23% vs. a peer group avg of 27% (BDCUniverse.net data). The energy exposure is the main cause of that lag/writedown IMO. If you think energy/oil will recover then it's a BDC to consider.
TICC is a very interesting story to watch unfold. I think it is good for the sector as it reminds the external manager that they can lose their fund if at a deep enough discount. To look at TICC you also have to look at OXCL and other CLO investments. I think TICC's main problem has been their aggressive use of their bad assets for the CLO exposure. Good for yield, generally bad for risk IMO.
Regarding buybacks, BDCs need to show investors they care about them. I think the BDCs that do meaningful buybacks should get above NAV faster and be able to add far more quity down the road. If they just care about fees then they might be stuck at a discount for a very long time.
NAV is updated quarterly, cost most BDCs $100K to $500K to get the figure. I spent 2 hours at the BDC Roundtable last month in DC in a break-out session on fair market value (FMV) calcs for BDCs. Knowing how a BDC has marked in the past (nowing the manger - what he says in the quartelry reports and on the conf call) is helpful based on your view of credit spreads and potential loan losses/non accruals can help decide the discount or yield you require to own a BDC. The 3 main weeks for earning season for BDCs can be a bumpy ride. We like bumps.
I don't like the ETN structure it poses more risk than I like for my clients. I also don't want to own the BDCs in the index that are not on "my list". BDCS is better IMO as it does not have the same 2X risk. ETNs are not a basket of "held" securities. If you just want to hold a bunch of BDCS for a few days or a week then it might make sense. Selecting a BDC and timing it on your own (like a good BDC after a secondary) should give you better risk adjusted returns IMO.
Thank you
Yes I agree, Good work. Aaron runs a good BDC, I wish I had found him sooner but we needed the extra liquidity from the 2Q15 secondary to really feel comfortable being a buyer.
Thanks Bulls, I always intend to write more often but our CEF/BDC Universe data project has taken a lost of my focus the past few months.
WF BDC research is good, I review their 200 page overview each quarter. KBW/Stifel also has great analyst. I assume most people here also follow BDCBuzz who is very helpful to our work.
This was part of the 2014 drop in BDCs and not the 2015 pullback IMO.
That was the cause of the drop in May and is one of the reasons BDCs trade at a little higher yields. I think the future holds a good opportunity for some BDCs to gain increased institutional interest. The SBIA is trying to change the expense ratio calculations for BDCs (as based on the current formula the average is 10), yet the BDC index has averaged 10% a year TR after that cost.
When rates start to go up I see more interested in these funds.
Sorry, whale missed this comment earlier ... we look at both short-terms and long term UNII and Earnings trends. It is not a perfect picture, but taken with knowledge of the sector the funds invests in and the fund sponsors historical approach to dividend levels it is very useful.
The only good measure of UNII is a 12-24 month trend chart as it has some seasonality and fund sponsor specific nuances. If you can't get to that data then I would only focus on earnings coverage, which is easier to see and digest, in my opinion, with the past 2-3 reporting periods for a fund.
We have UIT with SmartTrust focusing on BDCs. You can track the current series (2) here: http://bit.ly/1DLJmrf
Their full list: http://bit.ly/1DLJoPI 
Charts/slides are on our blog post dated Jan 9th, 2015: http://www.cef-blog.com
You can download the 50 slides off our blog: http://www.cef-blog.com
Yes, they are very different, but cannot be BDCs (though look and feel more like a BDC) because of the good asset 70% requirement.) NHF is also a funny animal in the loan grouping as it is over 60% equity now and acts more like a hedge fund that pure loan fund.
Here are the BDCs (equity and debt) that as of Jan 16th were trading bellow their 3Q14 NAV (reported 10/27/14 to 12/10/14 ... MVC is a 7/31/14 NAV and SAR is a 11/30/14 NAV)
ABDC, ACAS, ACSF, AINV, ARCC, BDCV, BKCC, CMFN, CPTA, CSWC, EQS, FSC, FSFR, FSIC, FULL, GAIN, GARS, GLAD, GSVC, HCAP, HRZN, KCAP, MCC, MCGC, MVC, OFS, OHAI, PFLT, PNNT, PSEC, RAND, SAR, SCM, SLRC, SUNS, SVVC, TAXI, TCRD, TICC, TINY, TPVG, WHF
The BDCs at Premiums to NAV/Book = FDUS, GBDC, HTGC, MAIN, MRCC, MFC, TCAP, TCPC, TSLX
BDCs are not currently covered at CEFConnect or CEFA.com. Lipper is working on it, M* says they have no current plans to integrate the info for investors.
We have spent most of the past 6 months collecting and digesting BDC data. we are up to producing 100 data points a week and will continue to dig into their quarterly info and press releases to learn the sector.
We found that most investors or financial advisors did not have the perspective on what went on in the CEF Universe during the quarter. I think if you read the article you see that I think MLPs, Sr Loan, Emg Market and Debt-BDCs are very cheap and Muni are moderately cheap. If you should own them I have no idea as I don't know what you needs, risks or timeline is for your portfolio.