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The Chemist's CEF Report Picks Have Substantially Outperformed Over Benchmarks

In the monthly Chemist's CEF Report, I choose my top three picks of each month which are based on my consideration of the data as well as my qualitative judgment. The three picks generally have a decent combination of yield, premium/discount and z-score/distance values.

As stated in at the end of the reports, me designating a fund as a top pick does not mean I am encouraging subscribers to buy the fund, nor am I necessarily going to include the fund in the Cambridge Income Laboratory Portfolio. Moreover, note that some of the picks may have a narrow mandate (e.g. utilities stocks or MLPs), and therefore each investor should consider their own investment objective and risk tolerance before deciding to invest money into any of the picks.

However, with the sixth Chemist's CEF report just recently published, I thought it would be interesting to look back at all of the picks that I have made over the past half a year and see how those picks have fared against their benchmarks. I chose three ETFs as benchmarks:

  1. SPDR S&P500 ETF (NYSEARCA:SPY) representing U.S. equities.
  2. Cambria Global Asset Allocation (BATS:GAA) representing the ultimate passive portfolio as it consists of the universe of investible assets in their market capitalization-weighted proportions.
  3. YieldShares High income ETF (NYSEARCA:YYY) representing a basket of high-yielding CEFs.

To analyze the data, I have calculated the 1-month, 2-month and 3-month cumulative total price return values of the top three picks (as calculated from the start of the month). This is because mean reversion often takes a few months and I thought it would be more informative to look beyond a 1-month time frame (even though picks are refreshed each month).

Sep. 2016

Picks were UTG (NYSEMKT:UTG), CBA (NYSE:CBA) and MFD (NYSE:MFD). UTG showed strong returns over three months while MFD was a laggard. After 3 months, the three picks averaged -0.74% which underperformed SPY (+1.80%) but bested GAA (-2.94%) and YYY (-3.92%). Notably, the average of the three picks beat YYY over 1, 2 and 3-month time frames.

Oct. 2016

Picks were GMZ (NYSE:GMZ), KMF (NYSE:KMF) and GRF (NYSEMKT:GRF). All three picks showed strong performance after 3 months, even though in the first month GMZ and KMF (both MLP CEFs) struggled. After 3 months, the three picks averaged +5.96% which substantially outperformed SPY (+3.80%), GAA (-1.34%) and YYY (-1.44%). The average of the three picks beat YYY over 2 and 3-month time frames.

Nov. 2016

Picks were ETY (NYSE:ETY), EVN (NYSE:EVN) and KYE (NYSE:KYE). All three picks showed good performance after 3 months, even though EVN lagged in the first two months. After 3 months, the three picks averaged +6.44% which underperformed SPY (+7.72%) but bested GAA (+1.98%) and YYY (+4.15%). The average of the three picks beat YYY over 1, 2 and 3-month time frames.

Dec. 2016

Picks were ETY, MFD and IGA (NYSE:IGA). The three picks showed strong performances after 2 months. After 2 months, the three picks averaged +6.63% which outperformed SPY (+3.89%), GAA (+3.56%) and YYY (+5.46%). The average of the three picks beat YYY over 1 and 2-month time frames.

Jan. 2017

Picks were GER (NYSE:GER), MFD and ETY. Impressively, over the the last month, all three of the top picks have outperformed all three of the benchmarks.

Summary

As I have stated many times before, I do not consider the S&P 500 an appropriate benchmark for my CEF strategies and portfolios given that CEFs can invest in a much broader range of assets compared to only U.S. large caps. However, I still include it for comparative purposes. I believe that more appropriate benchmarks for the top three picks are GAA, representing the ultimate passive portfolio as it consists of the universe of investible assets in their market capitalization-weighted proportions, and especially YYY, a basket of high-yielding CEFs that is the 1x leveraged version of the hugely popular ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA:CEFL).

The above results show that the performance of the Chemist's CEF report top three picks have been very strong, and have performed even comparably with the S&P 500 which has itself recently pushed to new all-time highs. Here, one might point out that the my CEF picks have been boosted by recent increases in premium/discount values (see "The Chemist's CEF Report - February 2017: Caution As CEFs Slightly Overvalued"). This is true, of course, but when you compare the top three picks with YYY, which is also comprised solely of CEFs, the outperformance is not lessened, and in fact becomes even more dominating. As described above, the average of the top three picks has regularly bested YYY over 1, 2 and 3-month time intervals, even though YYY should also have benefited from the boost in global premium/discount values.

The chart below shows the average 1-month (n = 5), 2-month (n = 4), and 3-month (n = 3) performances of the top three picks, versus the comparable performances for YYY. The data clearly indicates that by focusing on individual CEFs that show signs of significant undervaluation (coupled with an attractive yield), we can generate outsized returns compared to a basket of high-yielding CEFs such as YYY.

Hopefully, some of you have been able to benefit from the strong performance of the Chemist's CEF picks over the past half a year. Let's hope for an equally strong performance in the 6 months ahead!

*Past performance is not a guarantee of future results.