My Income Portfolio - NAV Of My Life

Summary

• The Net Asset Value (NAV) for a CEF remains, for me, a primary measure of its overall health.
• Although past performance does not guarantee future results, a CEF with a good track record is more likely to withstand the test of time.
• It is time to evaluate the CEFs in my Cupolone Income Portfolio and make hard decisions about whether to continue to maintain my position in each.

Hulton Archive/Hulton Archive via Getty Images

"We Are the World"

Thirty-six years ago, on July 13, 1985, a globe-spanning rock concert was held simultaneously at London's Wembley Stadium and at Philadelphia's John F. Kennedy Stadium. This concert, which many consider to be the greatest musical event in history, was called "Live Aid." Its goal was to catalyze global attention on the expanding emergency of poverty in Africa through live performances-on two different stages-of the greatest musical artists of the time. The thirteen-hour charity event was the largest satellite link and largest television broadcast of all time, with nearly two billion viewers in 150 countries connected live to this massive rock concert. The closing song and symbol of the concert, "We Are the World," was headlined by Michael Jackson and Lionel Richie and backed by the super-group called "USA for Africa."

I know exactly where I was on that July 13, 1985. I had just arrived in Belgrade, the capital of Serbia, where I had spent the previous winter collecting material for my Slavic philology thesis on the Serbo-Croatian linguistic situation. That evening I was invited by a friend-the daughter of a well-known Serbian stage actor-to a dinner with some actors and artists of her acquaintance. We were in a splendid outdoor restaurant, in whose garden a huge projection screen had been installed (which was, at the time, quite rare in an Eastern European country) so that diners could watch the live concert. In addition to the Live Aid concert, the live coverage included footage from concerts featuring top acts of the Yugoslav rock scene: one, a concert entitled YU Rock Mission presented by Radio-Television Belgrade, featured the song "Za milion godina" ("For a Million Years"); the other was a concert held at Red Star Stadium.

It was a wonderful evening, replete with engaging company, great food, and the wonderful music enveloping us. I was 25 at the time, and I had not yet decided whether to start a family or get lost in the world...

Fast Forward to July 2021

In the thirty-six years since then I have abandoned the Slavic languages, ended a twenty-five year career in the publishing world, and started to play with the numbers and data that make up the world of investing. I still don't know what I'll do when I grow up. In the meantime, I try to make the most of my investments.

Of all the forms of data available in the investing world, one in particular continues to draw my focus: the Net Asset Value (NAV), especially for the CEFs (Closed-End Funds) that comprise my Cupolone Income Portfolio. This focus has been the subject of many of the articles I've contributed to Seeking Alpha, including my most recent one "My Income Portfolios in the Summer Solstice."

In the nearly three years since I wrote my first article I have given a lot of thought about the best selection parameters for building a portfolio. Over time, my attention has focused more and more on the evolution of a fund's NAV, which represents the fund's total assets less its liabilities, divided by the total number of common shares outstanding. In my view, the NAV provides a series of snapshots showing a fund's health; its ability to maintain or even grow its value over time while consistently distributing its earnings. For me, a negative trend in the NAV is a red flag indicating a fund's loss in value over time.

While it's true that past performance does not guarantee similar results for the future, it's also true that a CEF with a good track record seems more likely to withstand the test of time into the future. Even if the expected prediction of the future obviously exposes you to gross errors, a regular story - with consistent results over time - is also a relatively reliable story. This consistency is what leads me to focus my interest only on CEFs with positive NAV values compared to their launch values.

This focus on consistency takes on greater significance in July 2021, after a year of constant growth of indices and markets after the collapse of March 2020. After the rebound of the last 14 months, if the NAV value compared to the launch value for a given CEF is still negative I prefer to dedicate myself to something else, regardless of fund's performance.

I always apply this metric when I evaluate new funds for their possible inclusion in my Cupolone Income Portfolio. And what about those stocks with a constantly negative NAV compared to the launch value that are already part of my portfolio? In this case the evaluation is more difficult, but sooner or later the reality must be faced. The time has come to make these difficult evaluations.

Ups and Downs of the NAV

I made a fortune getting out too soon." J.P. Morgan

My Cupolone Income Portfolio, which is entirely dedicated to Closed-End Funds (CEFs), currently consists of the following 13 titles:

• DoubleLine Income Solutions (DSL)
• Eaton Vance Tax-Adv. Global Dividend Opps (ETO)
• Eaton Vance Tax-Adv. Dividend Income (EVT)
• Guggenheim Credit Allocation (GGM)
• John Hancock Tax-Adv. Dividend Income (HTD)
• PIMCO Corporate & Income Strategy (PCN)
• PIMCO Dynamic Income (PDI)
• John Hancock Premium Dividend (PDT)
• PIMCO Corporate & Income Opportunity (PTY)
• Cohen & Steers REIT & Preferred Income (RNP)
• Cohen & Steers Quality Income Realty (RQI)
• Cohen & Steers Infrastructure (UTF)
• Reaves Utility Income Trust (UTG)

Of these funds, DSL and GGM continue to be under water with NAV values significantly lower than their launch values. The continued ups and downs for these funds are causing me to question the wisdom of keeping their positions open at all costs. Two other funds, PCN and PTY hover around parity. The remaining funds are all in positive territory, in many cases by double digits.

In the following sections I evaluate the NAV performance since inception for each fund currently in my portfolio and describe my rationale for continuing or discontinuing my position in each.

DoubleLine Income Solutions (DSL)

(Source: Morningstar)

DSL launched in 2013 with an IPO price of $25.00. Since its launch, DSL's NAV performance remains quite negative. In practice, the fund has never risen above the launch price, instead tracing a constant and continuous decline. After the collapse in March 2020 and subsequent rebound, DSL is still a long way from its initial values for both price and NAV.

So, what to expect? I have owned this fund for about six years, from the time when I created my first CEF portfolio. I liquidated it in autumn 2019 with a small gain and bought it back in March 2020 at a lower price. Today I am positive by about 11% on the dollar side. However, given the exchange rate for Euros, my profit is reduced to 5.7 percentage points.

Assuming and not taking for granted that the market will continue to rise in the coming months, is it worth keeping open a position so laboriously hovering just above the carrying price with which it was opened over a year ago? And, in the event of a strong upset in the markets, don't I risk canceling this meager gain and finding myself once again underwater? What resilience should I expect, after such a slow climb during last year's golden period for the financial markets?

Frankly, I am still trying to reach an answer, but more and more I am leaning toward clearing my position, recovering further liquidity, and then waiting for the situation to evolve-both on the global health front and on economic front.

Guggenheim Credit Allocation (GGM)

(Source: Morningstar)

GGM presents a situation similar to that for DSL. It launched in 2013 with an IPO price of $25.00. Today it is sitting at around $21 after reaching a peak around $22 some months ago. I purchased GGM a few years ago at a load price of $21.94 and kept it in my portfolio (also averaging down its price in a recent downturn) despite the awareness of its steady NAV decline since launch. As with DSL, I have long harbored hopes of being able to break even and watch it grow, only to see it plummet to lower values from time to time.

GGM has always held a place in my heart, but now it's time for me to rethink. Will the upcoming GOF merger improve the situation? Frankly, I am a little discouraged and also a little tired of being constantly at a loss. As with DSL, might it be better to accept this loss and liquidate my position in GGM to recover further liquidity and wait for the situation to evolve?

Cohen & Steers REIT-Based Funds

The two REIT-based funds from Cohen & Steers, RNP and RQI, show a certain brilliance in their evolution from the moment of launch, despite their very heavy collapse during the Great Recession of 2009. With the markets recently marking new repeating highs, they show respectively a gain of more than 40% (RNP) and 50% (RQI) in dollars and, due to the exchange rate, a few points lower in Euros.

Cohen & Steers REIT & Preferred Income (RNP)

(Source: Morningstar)

RNP has grown by about 15% since launch despite the disturbing decline of almost 86% in its NAV between November 2006 and March 2009 (much higher than the average decline of the other CEFs in my portfolio), as highlighted by the shorter time frame in the following chart.

(Source: Morningstar)

Cohen & Steers Quality Income Realty (RQI)

(Source: Morningstar)

RQI shows a trend that is quite similar to RNP, partially because the first 25 holdings in this fund overlap those in RNP; they differ only in the percentages held. This fact has been commented on by several of my readers.

RQI has grown by around 14% since launch despite a huge 91% slump in its NAV between November 2006 and March 2009 (much higher than the average decline of the other CEFs in my portfolio), as highlighted by the shorter time frame in the following chart.

(Source: Morningstar)

Perhaps it's time to consider liquidating one of these REIT-based funds so as to avoid any double slips in the event of a market collapse. If I do decide to liquidate one of them, I'll sell RNP and keep RQI. In fact, with RNP-and only RNP, according to the Italian tax legislation-I could liquidate my position to exploit a tax advantage, using its income to compensate for previous losses, thereby avoiding having to pay taxes on the capital gain. In this way I could get about a hundred monthly distributions in one fell swoop! Then I'll sit by the river for a while to see what happens…

PIMCO Funds

The three PIMCO funds in my portfolio oscillate around parity since their launch; only the PDI boasts some positive points compared to its initial position. Investors typically hold these funds because of their high yields and the reliability of their distributions. These factors explain their exorbitant prices when compared to the value of the securities that comprise them. Like much of the market, I continue to have faith in the management for these bond funds. I believe that WYSIWYG ("what-you-see-is-what-you-get") holds true.

I purchased all three funds at a slight discount on the NAV in spring 2020. They offer me an average return of around 10%, and PTY even higher. The distributions have remained constant over the years. These features mean that all three funds will continue to be part of my income portfolio.

PIMCO Corporate & Income Strategy (PCN)

(Source: Morningstar)

The NAV for PCN hovers around parity. The price shows a premium on NAV close to 30%, a sign of great market appreciation for this fund.

PIMCO Dynamic Income (PDI)

(Source: Morningstar)

PDI's trend represents a growth of 5% since launch, while the price shows a premium of about 13% on NAV.

PIMCO Corporate & Income Opportunity (PTY)

(Source: Morningstar)

The NAV for PTY hovers around parity. The price shows a premium on NAV of more than 40%, a sign of special market appreciation for this fund.

The Great Surprise

I have grouped the following six CEFs together because-despite being from different houses and their investment sectors being very different from each other-their results over the past year have been well above my wildest expectations.

• Eaton Vance Tax-Adv. Global Dividend Opps (ETO)
• Eaton Vance Tax-Adv. Dividend Income (EVT)
• John Hancock Tax-Adv. Dividend Income (HTD)
• John Hancock Premium Dividend (PDT)
• Cohen & Steers Infrastructure (UTF)
• Reaves Utility Income Trust (UTG)

All six of these funds have shown excellent resilience compared to the lows recorded in March 2020, with their encouraging NAV trends and capital gains exceeding, in some cases, 50% in dollars and over 40% with the Euro's exchange rate.

Eaton Vance Tax-Adv. Global Dividend Opps (ETO)

(Source: Morningstar)

ETO shows excellent growth over the years since its 2004 launch, although its NAV remains below its 2007 highs. Will it ever reach those highs again? Nobody knows, but its performance since launch is certainly positive overall. A consistent operating history over the years, regular distributions, and its strong recovery and return to pre-pandemic highs following the March 2020 crash are all encouraging indicators for its ongoing durability.

Eaton Vance Tax-Adv. Dividend Income (EVT)

(Source: Morningstar)

Although its performance is lower overall than its cousin fund ETO, EVT shows a similar growth trend. The fact that this fund is from the same investment house and shares the same management philosophy, surely contributes to its performance. Its consistent operating history over the years, regular distributions, and strong recovery from the March 2020 crash make this fund highly satisfying. In addition, EVT too has surpassed its pre-pandemic highs.

John Hancock Tax-Adv. Dividend Income (HTD)

(Source: Morningstar)

HDT, a CEF managed by the investment house John Hancock, shows good NAV performance with a current gain of around 30% compared its launch price. It has not yet fully recovered the loss resulted from the March 2020 crash.

John Hancock Premium Dividend (PDT)

(Source: Morningstar)

PDT, a proven and reliable fund with a long operational history, comes from the same investment stable as HTD. Growth since its launch in 1989 is close to 35%. PDT too has not yet fully recovered the loss resulted from the March 2020 crash.

Cohen & Steers Infrastructure (UTF)

(Source: Morningstar)

The last of the three Cohen & Steers funds in my portfolio, UTF has recently returned to its maximum levels, which were recorded on the eve of the Great Recession of 2009. UTF has a consistent operating history, with NAV growth close to 40% since launch.

Reaves Utility Income Trust (UTG)

(Source: Morningstar)

UTG is the true superstar of my Cupolone Income Portfolio. With a NAV growth exceeding 80% compared to its launch value, it is definitely the best performing fund in my portfolio. Although it is still far from its pre-pandemic value, which was also the maximum level it ever achieved, UTG shows an impressive roadmap forward.

Bottom Line

• By their very nature, CEFs are exposed to the vagaries of the market, above all because of their leverage. My Cupolone Income Portfolio includes both equity- and bond-based CEFs, and comparing their performance can be misleading. Equity funds offer double-digit performance more frequently than bond ones but with greater volatility. Bond funds, on the other hand, offer regular, often high levels of return, but are affected by increasing interest rates.
• For me, "investing forever" does not mean buying stocks and then passively observing their performance. Instead, it means continually monitoring my investments and, when necessary, intervening to keep my portfolio consistent with my goals. As an "income investor," I increasingly wonder what the best strategy is in order to be successful in the "buy and hold" environment.
• As I consider making changes to the structure of my Cupolone Income Portfolio, I find myself wondering whether it would be better to get out of less stable positions and seek refuge in safer havens. The less performing funds can lower the overall performance of my portfolio. Even when I initially believe in a fund, if it does not perform as I expect I would probably do better to free up my resources and mental energy, focus on better opportunities… and wait for the right moment.

Disclosure: I/we have a beneficial long position in the shares of DSL, ETO, EVT, GGM, HTD, PCN, PDI, PDT, PTY, RNP, RQI, UTG either through stock ownership, options, or other derivatives. 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.