The Weak Dollar And Foreign Closed-End Funds: CEF Weekly Update

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Includes: ACP, ACV, ADX, AFB, AFT, AGD, AIF, AKP, AOD, APB, APF, ARDC, ASG, AVK, AWF, AWP, BAF, BANX, BBF, BBK, BBN, BCV, BCX, BDJ, BFK, BFO, BFY, BFZ, BGB, BGH, BGT, BGX, BGY, BHK, BHV, BIF, BIT, BJZ, BKK, BKN, BKT, BLE, BLH, BLJ, BLW, BME, BNJ, BNY, BOE, BPK, BQH, BSD, BSE, BSL, BST, BTA, BTO, BTT, BTZ, BUI, BWG, BXMX, BYM, BZM, CAF, CBA, CCA, CCD, CEE, CEM, CEN, CEV, CGO, CH, CHI, CHW, CHY, CIF, CII, CIK, CLM, CMU, CRF, CSQ, CTR, CUBA, CXE, CXH, DBL, DDF, DEX, DFP, DHF, DHG, DHY, DIAX, DMB, DMF, DMO, DNI, DNP, DPG, DSE, DSL, DSM, DSU, DTF, DUC, EAD, ECC, ECF, EDD, EDF, EDI, EEA, EFF, EFR, EFT, EGF, EGIF, EHI, EIA, EIM, EIO, EIP, EIV, EMD, EMI, EMJ, EMO, ENX, EOD, EOI, EOS, EOT, ERC, ETB, ETG, ETJ, ETO, ETV, ETW, ETX, ETY, EVF, EVG, EVJ, EVM, EVN, EVO, EVP, EVT, EVV, EVY, EXD, EXG, FAM, FAX, FCO, FCT, FDEU, FEI, FEN, FEO, FFA, FFC, FGB, FHY, FIF, FIV, FLC, FMN, FMO, FMY, FOF, FPF, FPL, FRA, FSD, FUND, GAB, GAM, GBAB, GCV, GDL, GDO, GDV, GER, GF, GFY, GGM, GGN, GGT, GGZ, GHY, GIM, GLO, GLQ, GLU, GLV, GMZ, GNT, GOF, GPM, GRR, GRX, GUT, HEQ, HIE, HIO, HIX, HNW, HPF, HPI, HPS, HQH, HQL, HTD, HTY, HYI, HYT, IAE, IAF, ICB, IDE, IFN, IGA, IGD, IGI, IGR, IHD, IID, IIF, IIM, INB, INF, IQI, IRL, IRR, ISD, IVH, JCE, JDD, JEQ, JFR, JGH, JHA, JHB, JHD, JHI, JHS, JHY, JLS, JMF, JMLP, JMM, JMT, JPC, JPI, JPS, JQC, JRI, JRO, JRS, JSD, JTA, JTD, KED, KF, KIO, KMF, KMM, KSM, KST, KTF, KYE, KYN, LDF, LDP, LEO, LGI, LOR, MAB, MAV, MCA, MCI, MCN, MCR, MEN, MFD, MFL, MFM, MFT, MFV, MGF, MGU, MHD, MHE, MHF, MHI, MHN, MIE, MIN, MIW, MIY, MMD, MMT, MMU, MMV, MNE, MNP, MPA
by: Michael Foster Financial Services

Summary

Foreign funds remain extremely good buys.

The weak U.S. dollar isn't fully priced into foreign CEFs.

Overpriced CEFs don't outperform indexes, demonstrating another inefficiency in the CEF asset class.

Last week I wrote that the “’return of the greenback’ is not quite upon us”. I was right:

The CEF Insider Foreign Sub-index has not fully priced the dollar’s redoubled decline, resulting in a wonderful buying opportunity for this class of funds:

Yet, in typical CEF investor fashion, this isn’t being priced in. Low yielding foreign funds poised to benefit the most from this trend are among the most heavily discounted funds, and the sharper upswing is being seen in U.S. equity funds (as you can see from the red and purple lines above). I repeatedly emphasize the irrationality of the CEF market caused by the random walk of fund flows and the retail investor base who often make first-level investment decisions based upon partial (or even zero) data and analysis. This is why I love closed-end funds, and why you should too.

Biggest Discounts

We’ve seen broad-based declines in total discounts with equity funds continually discounted higher than debt funds and foreign-focused funds with low yields continue to have higher discounts than other sorts of funds:

Symbol

Management Fee + Interest Expense

NAV

Price

%Premium/Discount

%Yield on Price

RIF

2.24%

23.86

19.44

-18.52

6.79

GGZ

1.63%

15.32

12.64

-17.49

2.29

DNI

1.69%

16.07

13.33

-17.05

4.5

IRL

1.75%

15.73

13.14

-16.47

9.43

SRF

4.02%

10.15

8.52

-16.06

5.63

EGIF

2.82%

19.13

16.14

-15.63

5.43

GAM

1.24%

39.68

33.52

-15.52

1.43

BIF

1.43%

12.36

10.49

-15.13

3.91

GDL

4.68%

11.62

9.9

-14.8

4.04

After a brief gambit at the top of the most discounted list, IRL has seen its NAV and price rise significantly in the last week despite the truncated trading hours, which I believe is a large part the result of the dollar’s continued weakness.

Biggest Premiums

Only four of the top 10 premium priced funds are from Pimco, with Gabelli, Nuveen, Cornerstone, BlackRock and Western Asset also making the list.

Symbol

Management Fee + Interest Expense

NAV

Price

%Premium/Discount

%Yield on Price

PGP

3.22%

11.29

16.07

42.34

10.95

GUT

1.67%

5.53

7.08

28.03

8.47

PCQ

1.29%

14.07

17.18

22.1

5.38

PCK

1.38%

8.59

10.11

17.69

5.61

BHV

2.32%

15.46

17.71

14.55

4.27

RCS

1.53%

7.78

8.84

13.62

9.77

DNP

1.90%

10.02

11.35

13.27

6.87

DMO

2.58%

21.72

24.52

12.89

11.01

CRF

1.45%

13.05

14.68

12.49

18.81

NOM

2.22%

13.73

15.35

11.8

4.14

I’m personally most impressed with DNP’s fund making the list with its 13.3% premium despite the relatively low 6.9% yield and its 12% MLP exposure. A small fund managed by a small asset manager with MLP exposure is not where I’d expect to find a big premium.

To dig into what’s happening, let’s quickly look at a couple charts. Here’s the YTD price and NAV performance:

Note the growing delta. Let’s now compare it to the index to see DNP’s lack of alpha:

Even adding the 6.8% dividend yield, we’re looking at a 241 basis point underperformance with DNP. However, let’s look at DNP’s beta:

The fund is slightly less volatile than the index while being higher yielding—which may be what investors are paying a premium for. Although there are better utility CEFs out there—which leads me to the inevitable conclusion that this is, yet again, a data point to add to the mountain of evidence of just how irrational the CEF market is.

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 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.