Closed-End Fund Snap Back - For Now: CEF Weekly Update

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Includes: ACP, ADX, BIF, CBA, CEM, CEN, CHY, CLM, CRF, CTR, DMO, DSE, ECC, ECF, EDF, EDI, EMO, EOD, EXD, FEN, FGB, FMO, FPL, GAM, GDL, GER, GGN, GGT, GGZ, GLO, GLQ, GLV, GOF, GPM, HIE, HTY, IAF, IRR, JMF, JMLP, KED, KYE, KYN, NCV, NCZ, NDP, NTG, PGP, PHK, RGT, RIF, RIV, SRV, THW, TY, USA, VGI, ZF, ZTR
by: Michael Foster Financial Services

Summary

CEFs are taking a respite from recent weakness.

The recovery in foreign funds may be a result of the dollar's downturn, while muni investors may have realized the upcoming rate hikes aren't a really big concern.

Pimco's premiums remain--with only one exception.

The CEF Insider indices show a respite from the recent weakness in CEFs across the board, with a less pronounced but still noticeable improvement in the Tax-Free Bond Sub-Index which, I suspect, is a result to the market relaxing a bit about future rate hikes:

What’s more interesting to me is the Foreign Sub-Index. I’ve been doing a lot of thinking and modeling about the U.S. dollar and its impact on foreign CEFs. There are a lot of moving parts here, but arguably the most important consideration is the U.S. dollar. Expected strengthening in the dollar has been dashed; after a few weeks of recovery, the dollar is back on a downward trajectory, indicating that the “return of the greenback” is not quite upon us:

I personally interpret this as a return to risky assets from safer liquid alternatives, which is doubly good for foreign CEFs. However, many foreign CEFs have had massive price growth far in excess of NAV growth throughout 2017, causing unusually small discounts, historically speaking. Choosing the right foreign CEF is key right now—and abandoning the sector altogether is probably a bad idea.

Biggest Discounts

The improvement in foreign funds has even changed the mixup of most discounted funds, but 4 are still foreign focused versus 6 U.S. focused:

Symbol

Management Fee + Interest Expense

NAV

Price

%Premium/Discount

%Yield on Price

IRL

1.75%

15.58

12.65

-18.81

9.8

GGZ

1.63%

15.06

12.25

-18.66

2.29

RIF

2.24%

23.7

19.38

-18.23

6.81

DNI

1.69%

15.97

13.17

-17.53

4.56

CUBA

3.30%

8.16

6.83

-16.3

1.98

BIF

1.43%

12.3

10.33

-16.02

3.97

EGIF

2.82%

18.98

15.95

-15.96

5.49

GAM

1.24%

39.27

33.04

-15.86

1.45

CAF

1.89%

28.53

24.08

-15.6

0.28

SRF

4.02%

10.08

8.53

-15.38

5.63

It’s also worth noting that Boulder Growth & Income Fund (BIF) has made a sudden return to the top 10, but I also want to point out that SRF has a 4% management fee and a since-inception annualized return of -30.7%. Negative 30.7%. I know the energy market hasn’t been the easiest place in the world to make money, but that’s still embarrassing.

Biggest Premiums

Pimco, right? It’s Pimco, isn’t it? Come on, you know you’re expecting Pimco.

If you’re a regular reader, you know Pimco is the star of the “top 10 premium CEF” list I compile every week. And despite the recent weakness in some Pimco funds, the top shop in Socal (that’s southern California, btw) continues to dominate the scoreboard:

Symbol

Management Fee + Interest Expense

NAV

Price

%Premium/Discount

%Yield on Price

PGP

3.22%

11.19

16.17

44.5

10.89

GUT

1.67%

5.5

7.05

28.18

8.51

PCQ

1.29%

14.14

17.16

21.36

5.38

PCK

1.38%

8.64

10.11

17.01

5.61

BHV

2.32%

15.52

17.95

15.66

4.21

RCS

1.53%

7.75

8.93

15.23

9.68

DNP

1.90%

9.99

11.27

12.81

6.92

DMO

2.58%

21.92

24.56

12.04

10.99

PTY

0.89%

14.92

16.63

11.46

9.38

NOM

2.22%

13.79

15.3

10.95

4.16

One day I’ll write in depth about why a CEF shop would want to have heavily premium-priced funds and the implications this has for shareholders and managers, but for now let’s just say Pimco’s position isn’t being threatened much. Half of the 10 most premium priced funds come from the firm, and those premiums haven’t budged much. That’s made buying high quality Pimco funds at a reasonable price difficult—although subscribers of mine who have seen a couple of very short blog posts show up in their newsfeed know that there was one very misunderstood Pimco fund that was ridiculously underpriced—and that fund is up about 2.8% since I made that observation last week.

How to Use This Information

I write these weekly reports as a starting point for CEF investors to get a sense of which funds are most and least popular and whether there is a unifying force behind those relative popularities. Additionally, tracking the total return and market performance of CEFs provides investors with an idea of how and when these funds can be used as investment vehicles for a superior total return or a high rate of sustainable income.

This glance at the market is only a first step, however. A variety of other due diligence processes are necessary for CEF investors, including an analysis of NII, a look at management, an analysis of the fund's portfolio, changes to the fund's mandate, changes in and uses of leverage, and overall long-term and short-term fund performance. While some CEF investors like to use other metrics to make CEF purchasing decisions, such as recent tender offers, activist investments, insider trading, and Z-scores, it remains to be demonstrated whether those factors are predictive of future CEF returns and thus should be considered with caution.

Disclosure: I am/we are long ADX.

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.

Additional disclosure: We are also long BIF.