Equity CEFs: The Overbought And The Underloved

by: Douglas Albo


There's been some phenomenal returns in equity based CEFs this year, some deserved, others not. Then there are funds that should be trading much higher.

Often the difference has more to do with reputation and yield than actual NAV performance. Even Barron's this week had to chime in on the most overpriced CEF in history.

But if history is any guide, heavily discounted CEFs that keep chugging out strong NAV performances will far outperform these premium valued spaceshots that will eventually fall back to earth.

Let's go right to the scoreboard because there are equity CEFs this year that frankly, have no right trading where they are and then there are others that are offering incredible opportunities.

The first table sorts all of the equity based CEFs I follow (about 100 of the most popular and highest yielding funds) by their total return NAV performance YTD through July 8th, 2016. Only about 35 can be shown in a screen shot. Note: Equity based means the fund's portfolio is at least 50% invested in stocks.

Funds in green have seen their NAVs outperform the S&P 500 so far this year, as represented by the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), which is up 5.3% YTD including dividends. Funds in red have underperformed. Though the S&P 500 would not necessarily be a benchmark for all of these CEFs, since many are sector specific, include fixed income securities or are global/international CEFs, still I like to use SPY as a comparable. NOTE: Most quoted S&P 500 returns do not include dividends and thus, the S&P 500 is up 4.2% w/out dividends.

Sort By NAV Total Return Performance YTD

The next table sorts all of the funds by their total return market price performance (next column over from NAV total return).

Sort By Market Price Total Return Performance YTD

And the last table I want to show sorts the funds by the difference between their total return NAV performance and their total return market price performance. This sorting is a good primer to see which funds may be overpriced or underpriced and I want to start with CEFs that are overbought so far this year.

Sort By Difference Between NAV And Market Performance

I'm really only interested in the CEFs that have seen their market prices outperform their NAVs by 5% or more, and those are shown in red. Anything less than 5% I'm pretty neutral on even if the fund's market price has outperformed the NAV.

What you'll notice is that many of these funds trade at premium valuations (over 10% also gets a red in the Premium/Discount column) and several have abnormally high NAV yields (over 12% also gets a red in the NAV Yield column since the higher the NAV yield, the more difficult the fund has in covering it).

So with all these red flags, let's start with the overpriced CEFs since one is so completely out of whack, even Barron's had to chime in this past weekend.

The Overpriced CEFs

At the top of the list (table immediately above) at #1 and #2 are the Gabelli gold and natural resource CEFs, (NYSEMKT:GGN) & (NYSE:GNT) up over 40% so far this year despite their NAVs being up only 27%+ this year. These are not easy funds to time and I, unfortunately, was a year early on buying them thinking that the time was right in late 2014 and early 2015. Nope, should have waited a year.

But to give you an idea on how volatile these funds can be, I would be just about breakeven on the market price (not including those high distributions) from when I bought GGN and GNT in early 2015, even after the gains they have had this year.

I can't tell you whether GGN or GNT are overpriced now. They've gone from deep discounts at the end of 2015 from tax loss selling to slight premiums now. If you want to play these funds, have at it, but I prefer to invest in less volatile sector focused ETFs instead of these high octane CEFs.

However, there is one CEF that is so clearly overpriced on this list at #3, you wonder how investors don't see the freight train barreling down the tracks at them. I've written many times over the years on the PIMCO Global StocksPlus & Income fund (NYSE:PGP), $20.02 market price, $9.52 NAV, 110.3% premium, 11.0% current market yield, and most of the time it was at good inflection points. But recently, not even I could imagine the premium valuation this fund could achieve.

What makes PGP's 17.6% market price total return YTD even more ridiculous is that PGP has a negative NAV performance YTD and yet someone (naive investors, short covering or perhaps involved institutional investors?) seems to keep a steady bid and support for the fund. Even Barron's made mention of PGP this past weekend when it said;

Other closed-ends from the company defy reason, such as the PIMCO Global StocksPlus & Income, which returned 30.56% on its shares-even while it had a negative 7.92% NAV return. That pushed its premium to unheard-of triple digits, 109.45%. Investors apparently are willing to pay more than two bucks for a dollar in assets to get a distribution yield of nearly 11%. Barron's has pointed out the absurdity of this premium, but that hasn't deterred the stock from being bid up to crazy prices."

At least somebody else is speaking out on what I've been saying for years now. So will PIMCO ever get the message and cut PGP's distribution or will they just let the NAV continue to erode trying to cover a 23.1 NAV yield? Stay tuned over the next couple months since last September, PIMCO declared a -15% distribution cut for their High Income fund (NYSE:PHK), $9.95 market price, $6.47 NAV, 53.8% premium, 12.5% current market yield, and the fund actually dropped to a slight discount on September 14, 2015. But that didn't last long as PIMCO enamored investors put their rose-tinted glasses back on and bid PHK back up to a 53.8% market premium in less than a year. More on the PIMCO funds later.

The #4 CEF on this list, the Voya International High Dividend Equity Income fund (NYSE:IID), $6.73 market price, $6.55 NAV, 2.7% premium, 12.3% current market yield, is another fund that often trades at a premium valuation though I have no idea why. IID is also showing a negative NAV total return performance of -1.6% YTD but yet investors have pushed its market price up 12.3% YTD to a 2.7% market price premium.

If someone is trying to get ahead of any recovery in the international equity markets on a Brexit reversal, I can tell you that CEF investors are historically very poor at predicting the future. I've written a few times on IID, once comparing it to another global CEF, the Calamos Global Dynamic Income fund (NASDAQ:CHW), $7.06 market price, $8.10 NAV, -12.8 discount, 11.9% current market yield.

In that article from April 12th, 2012, Which Fund Would You Rather Own?, I questioned why anyone would buy IID at a premium valuation (9.8% at the time) when you could buy CHW, with much better historical NAV performance at a -9.1% discount? The market yields were about the same and both funds paid monthly distributions. Now CHW is a 30% leveraged CEF with about 50% exposure to global equities and 50% in fixed income convertibles and high yield securities while IID is a pure equity fund that sold options against its global portfolio of stocks.

Though IID had much more overseas stock exposure than CHW, you still have to question why someone would bid up a mostly international stock CEF to a hefty market price premium valuation when with a little bit of research, you could have found other global CEFs that had performed much better and traded at wide discounts. Not only that, a leveraged CEF like CHW could be expected to perform much better than an option-income CEF in a global market rally anyway.

And how would you have done if you had taken my advice from the date of that article? On an NAV basis, here is how the two funds have performed on a quarterly basis taking into account all distributions. Note: Red means it was a down quarter for the global markets while green means it was an up quarter.

Here you can see how much better CHW's NAV performed since the article was written and on a market price basis, it hasn't even been close. CHW's market price is also up 23% on a total return basis compared to IID's miniscule 1.2% from April 11th, 2012 to last Friday's closing prices.

But in a crazy market environment in which everything wants to go up, CEFs can do some even crazier things. Here is what IID's market price did just in the last two weeks despite still having a negative NAV return YTD.

We should all be so fortunate to have mystery investors swoop in and drive our CEFs to premium valuations but why would someone believe IID is now worthy of a premium valuation once again when, if history is any guide, you would be far better off in a more aggressive fund like CHW at a -12.8% discount, which is even wider than the -9.1% discount when I wrote that 2012 article?

And remember what I said about CEFs that trade at wide discounts? You get a windfall current market price yield of 11.9% in CHW, over and above what the fund has to pay on its current NAV yield of 10.4%. That's 150 basis points in your favor and its the reason why CHW's market price performance is so much better than IID's compared to their relative NAV performances. That's right. Buying CEFs at discounts should result in better market price performance than the fund's NAV performance over time because of that windfall yield. I say should because market prices are determined by fickle investors and there's no guarantee that the market price of a fund will match the performance of its NAV.

The Underloved Equity Based CEFs

Now CHW, which I put in the underloved CEF category, may not have impressive historical returns compared to the US major market indices, but then nobody knows for sure which equity or fixed-income sectors or which geographical regions will outperform going forward. You have to make your best estimates based on historical NAV performances, valuations and other factors, like the following example.

Barron's two weekends ago (July 2) highlighted convertible securities as a lagging fixed-income sector that offers opportunities for yield and equity participation. Convertible securities have long been scorned as a hybrid investment less the sum of its parts but with many fixed-income sectors at all-time highs and fears of a bubble forming, convertibles are getting a second look as an undervalued way to generate income and participate in equity appreciation. And what does CHW and its sponsor, Calamos Advisors specialize in? That would be convertible securities.

Going back up to the top table listing of equity CEFs sorted by NAV total return performance, you can see how this year it's been the gold, utility, energy MLPs and other commodity focused CEFs that are performing best. One fund from this list I have owned for years and is perpetually underloved, is the Cohen & Steers Infrastructure fund (UTF), $21.18 market price, $24.58 NAV, -13.8% discount, 7.6% current market yield.

I'm not sure what a CEF needs to do to trade at a higher valuation but if one fund deserves it, it's UTF. What other fund has been paying a solid distribution since inception (2004) and still has seen its NAV grow from $19.06 to a current $24.58? What other fund has consistently raised its distribution since inception, except for one cut during the 2008 financial crisis when it went from monthly pay to quarterly pay, and will probably be in a position to raise again soon? And what fund has had this kind of NAV performance as a global CEF and not one focused purely on US markets? That would be UTF and yet the fund has always traded at a wide discount since as far back as I can remember.

It got to be so bad that back on November 12th of last year, I wrote this article, Enough Is Enough, Consider The Cohen & Steers Infrastructure Fund, when the fund hit an unbelievable -18.2% market price discount. I would encourage you to read the article if you want to learn a bit more about UTF. Though some pure utility sector CEFs have seen even better NAV and market price performances, particularly the leveraged ones from the list above, UTF is more than just about utilities and energy pipeline MLPs. UTF, as an infrastructure fund, is a lot more diversified into toll roads, rails, communication towers, airports, satellites, etc. Something to think about if utilities ever pull back.

But do you want to see how solid UTF has been over the years? Let's bring PGP back into the picture for another comparison of NAV performances, this time on a 1-year, 2-Year, 3-Year, 4-Year, 5-year and even a 6-Year comparison going back to 2010.

Again, PGP and UTF may not be comparable other than both are heavily leveraged but I think this is as eye opening as it gets. Note: tables show quarterly cumulative total return NAV performance from June 30th of the starting year.

1-Year NAV Total Return Comparison

2-Year NAV Total Return Comparison

3-Year NAV Total Return Comparison

4-Year NAV Total Return Comparison

5-Year NAV Total Return Comparison

6-Year NAV Total Return Comparison

So there is not one period over the last 6-years that PGP's NAV has outperformed UTF's NAV and yet investors have found it in their infinite wisdom to reward PGP with a 110% market price premium. That's a market price over $10 higher than its NAV while UTF's market price trades at over $3 lower than its NAV at a -13.8% discount.

You would have to go back to the lows of the financial crisis in early 2009 to finally start a period in which PGP's NAV has outperformed UTF's and that's only because PGP's NAV had dropped so much by then. I wish readers could truly understand the absurdity of this because if PGP deserves a premium valuation, which it does not, then UTF deserves twice the valuation.

But What About Market Price Performances?

I know, you can't buy NAV performance. You can only buy the market price and right or wrong, investors are enamored with all things PIMCO. And with all the hoopla over the PIMCO funds, you might think that PGP and even PHK must be leaving a fund like UTF behind in the dust when you compare their market price performances. I mean, both PGP and PHK have skyrocketed to mind blowing market price premiums while UTF continues to struggle at a double digit market price discount.

Certainly, over the past year, this may be the case but the farther you go back, the better UTF's market price total return performance compares. Remember, I'm talking now about market price performance, not NAV performance where UTF has clearly outperformed over multiple time periods and multiple market environments.

Market price performance, however, is determined by investor sentiment and includes those ridiculous market price premiums. Go back 1-Year and yes, PGP dramatically outperforms even while its NAV declines. PHK and UTF are a bit more even until more recently.

1-Year Total Return Market Price Performance

But go back 2-Years and now the funds are more bunched up with UTF slightly ahead.

2-Year Total Return Market Price Performance

Go back 3-Years and now UTF's total return market price is starting to pull away.

3-Year Total Return Market Price Performance

Jump to 5-years and it's not even close.

5-Year Total Return Market Price Performance

Now think about this for a minute. 5-years ago, which is about the time I started following and investing in UTF, UTF's discount was -8.1% while PGP's premium was 62.6% and PHK's was 52.8%. So since 7/8/2011, UTF's discount has actually widened to -13.8% while PGP's has skyrocketed to 110% and PHK's is about the same at 53.8%. And yet, you still would have been far better off buying UTF back then.

Do you understand now why CEF investors are blind? They will fall all over themselves to buy a PIMCO fund at outrageous market price premiums but yet wouldn't touch a fund like UTF at a -13.8% discount, even though UTF's NAV has far outperformed over virtually any time period.

If you go back up to the top table of this article you will see how once again, UTF's NAV is one of the best performers up 14.2% YTD while PGP's NAV isn't even on the list because it's in the bottom quintile at -0.7%.

More Underloved Equity CEFs

I didn't intend to spend so much time on overbought CEFs but it gets very frustrating to see such obvious mispricings. But let me get back to the underloved CEFs.

Underloved may be a cute term but there is a reason for it. Some CEFs from the list above, like the BlackRock Commodity and Resources fund (NYSE:BCX), $7.78 market price, $9.36 NAV, -16.9% discount, 6.9% current market yield, are undervalued at wide discounts while showing strong NAV performance this year but I wouldn't call it underloved. That's because if you take away this year's performance, which obviously is due to a strong metals, energy and commodity rally, it's been a ramp down at both NAV and market price since inception for BCX. If the commodity sectors continue to rally, then great, BCX will continue to do well. But investors are just reacting to poor longer term performance, in which case love has nothing to do with it.

No, underloved to me means a CEF has shown strong NAV performance for years but continues to trade at a wide discount. The Gabelli Healthcare & WellnessRX fund (NYSE:GRX), $10.91 market price, $12.56 NAV, -13.1% discount, 4.8% current market yield, is probably the ultimate underloved fund considering how strong its NAV has been over the years (try 105.6% NAV total return performance since 2012) and yet still trades at a -13.1%.

But I've written so many times on GRX and how it blows away virtually every other equity CEF at both NAV and market price performance that it's not even worth bringing up again. That's fine. I'm content owning a CEF at a perpetual steep discount that even during a down year for the biotechnology and healthcare sectors, is still one of the top performers YTD.

My final underloved CEF is a fund that I am getting a lot of flack on for bringing up recently. The Boulder Growth & Income fund (NYSE:BIF), $8.25 market price, $10.35 NAV, -20.3% discount, 4.8% current market yield, has one of the widest discounts of any CEF even though the fund is showing excellent NAV performance this year as value investments finally outperform growth investments.

But did you know that BIF has actually been showing strong NAV performance for some time now? Go back to the beginning of 2012 and BIF's total return NAV performance is 62.3%. That's better than the Dow Jones Industrial Average since then, which is more of a value index compared to the S&P 500 and certainly the NASDAQ.

So BIF gets no love. At least not yet. But I believe with a reinstated monthly distribution currently yielding 4.8% and still trading at a -20.3% discount, it's only a matter of time before investors warm up to BIF. And if they don't, I will be pushing Boulder to conduct a buyback since where else can you sell the Berkshire Hathaway stocks (NYSE:BRK.A) or (NYSE:BRK.B), which constitutes 30% of BIF's portfolio, and immediately buy a portion of it back at a -20% discount?


During giddy times in the broader markets like we are currently in, CEFs can do some even crazier things. But I would encourage income investors to not get caught up in the hype and instead, focus on funds that are showing steady NAV growth while paying windfall yields over and above their NAV yields. Because over time, these are the fund's you stay with instead of the pop culture funds that will only break your heart.

These may be underloved funds right now and they may stay underloved for some time for all I know, but like a teenage romance from your past that you may have let go too soon, you may look back with affection and say to yourself, "Why did I ever doubt you when you were always there for me?"

Disclosure: I am/we are long GRX, CHW, UTF, BIF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.