Seeking Alpha

Blinded by fat yields, investors continue to bid closed-end funds far higher than their NAVs....

Blinded by fat yields, investors continue to bid closed-end funds far higher than their NAVs. 66% of taxable and 73% of muni-bond funds trade above NAV now, compared to just 30% a year ago, with often the funds with the highest distributions having the highest premiums. "We believe that an excessive premium for the fund is not likely to be sustainable," says Gabelli of one of its funds. Are investors listening?
From other sites
Comments (35)
  • Paulo Santos
    , contributor
    Comments (20656) | Send Message
     
    Another sign a bubble has been created.
    8 Oct 2012, 03:27 PM Reply Like
  • nicholas davout
    , contributor
    Comments (1949) | Send Message
     
    bubbles last for years look at tech in the '90s & housing more recently.
    8 Oct 2012, 04:20 PM Reply Like
  • W. Walker Jr.
    , contributor
    Comments (271) | Send Message
     
    The bubble will continue so long as the Fed pushes investors into riskier assets. I don't see interest rates going up anytime soon, nor do I see a slowing of the printing presses.

     

    Today's nearly 5% decline presented an opportunity for investors to jump in before we continue our upward climb. Corrections of 5% haven't been seen in quite sometime. I've been waiting for this day for several months now.

     

    It is important to note with all the advisors clamoring how oversold CEF's are, and rightfully so; CEF's are historically able to maintain high premiums for months if not years before collapsing and starting all over again.

     

    Yes the premium is sky high but most income investors need the income, where will they go to find it if not in high dividend yielding stocks, ETF's, CEF's etc?

     

    I think it is slightly premature to call the party over, just yet.
    8 Oct 2012, 03:37 PM Reply Like
  • DTKrueger
    , contributor
    Comment (1) | Send Message
     
    I have 3035 shrs of PHK in my IRA which has a cost value of $40,600.00 and 965 shr in just my saving brokeage account with a cost value of $12,100.00. Should I keep or sell. If I sell what would get for these shrs.

     

    Any help or thoughts would be greatful.
    8 Oct 2012, 04:48 PM Reply Like
  • NYer1
    , contributor
    Comments (1139) | Send Message
     
    How did yesterday's decline present a buying opportunity when PHK is still valued at a HUGE premium of 64% to its NAV?
    You have to get your facts right, CEF have historically tended to trade BELOW NAV and not above it.
    Matter of fact, PHK has traded BELOW nav for virtually all of the time before the last few years of ZIRP fed policy surfaced!
    When one reads Bill Gross (non) comment to Barron's inquiry regarding their article one can deduct very easily he cannot justify the current valuation as a buying opportunity.
    You can still get nice high yields with other funds (maybe slightly lower but 8.5% is still good) that actually EARN their distributions and are not valued at those obscene premiums to NAV.
    Consider that 43% of the last dividend declared, for example, paid you back your capital (ROC)and was not derived from investment income!
    http://bit.ly/QQGZwl
    Do some research and you'd see that there were a few of them this year (and last year as well).
    The fund cannot possibly earn its distribution rate of 17.45% on its NAV - this is just NOT doable in today's market environment with high Yield Bonds or Mortgage backed securities and some investment grade corporate bonds that the fund holds.
    PHK has resorted to macro speculations on interest rates, currencies and commodities using options, futures and swaps over the past few years to try and close the gap between what it earns on its bond portfolio and what it needs to pay every month.
    2011 was a case in point where they made a few bad mistakes (see numerous articles on Gross' flops betting on higher treasury bonds rates last year) and the results could be seen in the NAV dismal performance last year
    When people chase those high yield these days they forget that a much more important factor than "Return of Investment" is "Return OF Investment"!
    9 Oct 2012, 09:16 AM Reply Like
  • MexCom
    , contributor
    Comments (3054) | Send Message
     
    The bond market is very strong. I have seen wide swings in this fund before. I used today's dip to add to my position.
    8 Oct 2012, 04:15 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (20656) | Send Message
     
    Do you understand that it's trading well above what it's worth?

     

    It's not like a share where there's any doubt about what it's worth ... it's a fund, trading well above NAV.
    8 Oct 2012, 04:18 PM Reply Like
  • nicholas davout
    , contributor
    Comments (1949) | Send Message
     
    yes, we all know stuff with 5% or higher yields are trading above nav
    but the other side of it is that its worth what the market currently prices it at, supply & demand. the key is to have only small positions in each to boost average yields & put trailing stops under them & hope there isn't a flash crash in that position. not for the weak of heart perhaps, but a viable strategy at present. (been at this
    for 47 years now)
    8 Oct 2012, 04:26 PM Reply Like
  • W. Walker Jr.
    , contributor
    Comments (271) | Send Message
     
    Todays dip was even better :-)
    9 Oct 2012, 02:44 PM Reply Like
  • W. Walker Jr.
    , contributor
    Comments (271) | Send Message
     
    Yup, I'm well aware of how much of a premium it's trading at...

     

    Funds like this will continue to sell at premiums because of the Fed, bottom line, there is not logical rhyme or reason anymore, just the Fed forcing everyone into riskier assets.

     

    Yesterday was a good buy in and today is even better. I've had a strike price of 12.90 to buy for three or four months now, and yesterday I got a little itchy on the trigger finger. Good thing I always buy in little chunks, which allowed me to buy more today.

     

    Im long PHK until the FED stops.
    9 Oct 2012, 02:47 PM Reply Like
  • NYer1
    , contributor
    Comments (1139) | Send Message
     
    have you looked recently at the Section 19 notices PHK has been issuing?
    Out of the last 11 months, PHK has been paying you back capital in 10 of those months.
    This last dividend (for Sept.) had about 43% of it in Return of Capital (ROC)..that means that when you pay 13-14 for PHK in the market, every month they give you back principal at NAv which is just 8.38 now.
    I agree with you re the Fed policy but there are PLENTY of funds yielding over 8% that do not trade at obscene premiums to their NAV that can be bought with much less risk.
    What you saw over the past few days can go on until PHK is back to within 10% of its NAV (or below) which means you will look at substantial paper losses on your capital.
    And if Pimco raises the white flag and reduces distribution, you can be sure PHK will trade BELOW NAV - figure another 30-35% lower from where it is now.
    What you are doing now resembles what people who bought internet stocks were doing back in 2000..chasing performance..we all know how it ended!
    9 Oct 2012, 03:03 PM Reply Like
  • ravensberg1666
    , contributor
    Comments (9) | Send Message
     
    The FED assumes that by forcing everyone into riskier assets that it will create a "wealth effect" and thereby stimulate the economy. It never occurs to them that the opposite could happen. I'm no fan of Bernanke, that's for sure.
    10 Oct 2012, 02:03 PM Reply Like
  • nicholas davout
    , contributor
    Comments (1949) | Send Message
     
    headlines two years too early it seems; running 160 positions (diversified!!!!) across family accounts with several dozen mlps, reits, mreits, cefs, bdcs as part of the 'mix'.

     

    far and away single biggest position AAPL at 8%.
    8 Oct 2012, 04:18 PM Reply Like
  • dingbatter
    , contributor
    Comments (2) | Send Message
     
    I held PHK @ 15 months and of course got some great dividends but was always afraid it was overvalued thanks to info from Alpha and others. Just a thanks for the heads up as I got lucky by exiting recently. You can make money on these type funds but its either luck or you have a crystal ball that tells you when it actually matters that they trade at a premium. In my case just dumb luck and I'd have just blundered onward had I not been warned repeatedly. It never matters until it matters. Many thanks to the S. Alpha folks!
    8 Oct 2012, 04:39 PM Reply Like
  • W. Walker Jr.
    , contributor
    Comments (271) | Send Message
     
    Suzie Orman said it best this weekend...(I hate to quote her but)

     

    People need the income, where else are they going to go?
    The possibility of capital erosion due to corrections are worth the risk in ETFs CEFs and dividend stocks & funds, considering that they would certainly lose that money in treasuries and CDs.

     

    For example:

     

    Person A had 200k invested in CD's at 5% kicking off 10k a year in income. Now that CD is mature, and where do you reinvest, in a CD fetching a hefty 1-2%? Lets assume that they do reinvest, now that same 200k is only kicking off 2k a year. If they need 10k for income and are only bringing in 2k, they logic dictates that most will reduce their principal 8k this year, just to get the same income as before.

     

    Next year, they only have 192k to invest...Continue the cycle...

     

    The capital will erode either way, there is more chance of an upside with these highly risky funds.
    9 Oct 2012, 03:25 PM Reply Like
  • NYer1
    , contributor
    Comments (1139) | Send Message
     
    Really smart..
    If she gave that advice she is an idiot..I am sure she never gave advice to go out of CD's and into something that sells at 60-70% PREMIUM, you are extrapolating her comments my friend to justify your decisions.
    If she heard you saying on her show that you bought PHK (and she did her DD) she would scream at you to bail out ASAP.
    There are plenty of alternatives you can buy yielding 8%+ that trade below or slightly higher to NAV - yes, you incur market risk with them too but you don't incur CRASH risk like you do with PHK!
    Never to late to say this is a big mistake.
    10 Oct 2012, 07:01 AM Reply Like
  • W. Walker Jr.
    , contributor
    Comments (271) | Send Message
     
    First, I was speaking generally about these higher risk income investments, not PHK specifically.

     

    Second, with regards to PHK it depends on where you bought the fund. I got in much closer to NAV.

     

    Third, the bubble is nearing the top for these funds and we are heading for a correction, just not yet.

     

    PHK has been the target of many media stories since it leads the pack, or did with a premium near 70%.

     

    Any CEF has these severe drops then they work there way back up and do the same thing, over and over and over again.

     

    Had there not have been multiple stories scaring the daylights out of investors to exit PHK specifically for something else, we wouldn't have seen such a sharp step backwards so soon.

     

    Don't get me wrong, I know everything I'm saying about this fund is not the normal (I'm stunned I'm defending a CEF with such a high premium), but it's hard to ignore our government herding us into riskier investments for the foreseeable future (Obama or Romney).

     

    Yes there are alternatives, personally I am diversified in my income funds; I hold PHK, HIH, VWEHX and others. While PHK dropped nearly 12% in the last two days, my other funds were barely touched, and in some cases, up.

     

    The high yield bond bubble (macro view) has not bust yet and will not for some time (maybe 1-2 months). PHK (micro view) was getting ready to top out, in the next few weeks/month. Now after the media scare, too much air was let out too fast. We should see this go back up, sharply and quickly followed by a several weeks/months of continued declines. When this bottoms out it will still be a premium to NAV.

     

    After sitting and thinking about the macro, the micro, the political and socioeconomic factors, I feel that we will see a pop back upward into the 13.50-13.90 range and will then proceed to drop lower, I think bottoming around 11.50ish. *this is not investment advise, and my strategy is highly speculative. Consider alternatives carefuly before investing, and always consult your personal financial advisor.
    10 Oct 2012, 09:12 AM Reply Like
  • NYer1
    , contributor
    Comments (1139) | Send Message
     
    I think you are fooling yourself..the fact you bought it close to NAV (How close?) has nothing to do with inflated valuations currently.
    Think of it as if someone gave you a present by pushing PHK to 74% premium to NAV and you did not take it.
    It is still Grossly over valued now at 12 with a 45% premium..the fund should not trade at more than 10% premium and that is also generous.
    Don't be surprised if the next 10-20% move would still be lower and not higher wiping out your profits of the past year+
    They cannot earn the money they distribute and long term that would lead to NAV erosion and market price collapse.
    other funds DO earn what they pay.
    Best of luck
    10 Oct 2012, 11:09 AM Reply Like
  • W. Walker Jr.
    , contributor
    Comments (271) | Send Message
     
    I hate to say it but i might have to eat my words.
    10 Oct 2012, 02:01 PM Reply Like
  • kidpaolo
    , contributor
    Comments (5) | Send Message
     
    Obviously, if they were priced at net asset value, the yields would be sky high, thus the reason for the apparent bubble. Note this condition exists because the fund is leveraged. It is not unlike the mortgage REIT's in valuation and yield. As long as short term rates remain at around zero percent and long treasuries are less than 3 percent, there is no reason for a selling binge. If selling is curtailed and buying continues at least modestly, the price is no going to crash. I would not be initiating positions at the current levels. Perhaps add on the dips.
    8 Oct 2012, 06:15 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (20656) | Send Message
     
    They don't need to be leveraged to be trading at irrational premiums. And some are just distributing (returning) capital is it were.
    8 Oct 2012, 06:16 PM Reply Like
  • wkirk500
    , contributor
    Comments (317) | Send Message
     
    Please explain you definition of Return of Capital "as it were", Regards
    9 Oct 2012, 10:31 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20656) | Send Message
     
    Imagine you open a bank account with $100000. Then, yearrly, the bank pays you $1000 in interest but sends you a check for $10000, reducing your account balance to $90000, $80000 ...

     

    Would you look to those $10000 and say "it's yielding 10%"? Or would you understand that $9000 of those $10000 were not interest, but return of capital?

     

    That's what's happening with these funds, and people are even overpaying (paying above NAV, paying above the bank balance) for the privilege.
    9 Oct 2012, 10:46 AM Reply Like
  • NYer1
    , contributor
    Comments (1139) | Send Message
     
    To further expand on this pPaulo, PHK has now declared for 10 months out of the last 11 months a Section 19 ROC notice.
    The last notice for X div 9/14/12 paid 5.25cents out of the 12.1875 cents as ROC - about 43%!!
    This can continue for a while as long as markets work in PHK favour but as we have seen last year, it becomes VERY ugly when they don't (or when Pimco miss on their macro bets).
    PHK can not earn 17.5% on its NAV to finance its overly rich distribution rate - not in today's market reality.
    Sooner or later they will have to adjust the dividend lower from the levels it was set some 9-10 years ago when rates were MUCH higher.
    9 Oct 2012, 03:08 PM Reply Like
  • wkirk500
    , contributor
    Comments (317) | Send Message
     
    Come on Paul!!! I was trying to get you to discuss return of capital created by option income (strategies) and you give me an accounting definition . Thanks for the lesson!!!! , Regards
    10 Oct 2012, 09:11 AM Reply Like
  • gcmagone
    , contributor
    Comments (915) | Send Message
     
    Paulo, isn't the premium being paid really a problem for those currently buying those shares, not for holders that bought over a year ago?
    8 Oct 2012, 07:30 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (20656) | Send Message
     
    The premium is a problem for anyone holding the funds. It's a bonus, though, for those who bought before the premium existed - if those holders sell, then they realize a gain well in excess of the performance attained by the underlying assets.

     

    In short, anyone holding these things should rationally sell and buy back into some other equivalent asset which is priced at NAV/market.
    8 Oct 2012, 08:02 PM Reply Like
  • gcmagone
    , contributor
    Comments (915) | Send Message
     
    Thanks for your reply. I hold SRV that sells at a large premium, but pays a large distribution ( 8%+). It holds a well diversified portfolio of Master Limited Partnerships which makes it very attractive. If I sold SRV, where else could I put the money with a similar yield and portfolio?
    9 Oct 2012, 06:33 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20656) | Send Message
     
    Sell SRV, buy the underlying MLPs (or similar ones).
    9 Oct 2012, 06:34 AM Reply Like
  • The_Hammer
    , contributor
    Comments (4065) | Send Message
     
    The risk with a number of closed end funds is they utilize leverage that can magnify the drop.Playing with fire with these with such high premiums and leverage.
    8 Oct 2012, 08:39 PM Reply Like
  • greatberries
    , contributor
    Comment (1) | Send Message
     
    With the cheap money the goverment is giving the banks they only way they can make money is by buying closed funds like this. I would buy more as long as the goverment is giving the banks free money
    8 Oct 2012, 10:35 PM Reply Like
  • alltypecoll
    , contributor
    Comments (13) | Send Message
     
    Thanks to all the traders out there I sold half at the high and the rest yesterday thank you all
    9 Oct 2012, 03:02 PM Reply Like
  • Anthony Mazzenga
    , contributor
    Comments (9) | Send Message
     
    Who are the buyers? Any insider trading?
    9 Oct 2012, 03:15 PM Reply Like
  • Grandpa in Tucson
    , contributor
    Comments (37) | Send Message
     
    "Well the walls come tumbling down, the walls come tumbling down,
    Just when you think you've got it made the walls come tumbling down" - from the song by Warner Mack
    9 Oct 2012, 06:35 PM Reply Like
  • Vertical Spread
    , contributor
    Comments (548) | Send Message
     
    It has been 6 months. The walls ain't coming down. Feel stupid yet?
    8 Apr 2013, 01:04 PM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector