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Eqcome CEF Jan ’11 Performance: A Draw Indicating Caution

While the S&P 500 advanced a strong 2.3% for the month of Jan ’11, the average of the 13 CEF fund types was a more modest 0.4%. As the chart below demonstrates, there was a mixture of debt and equity-oriented CEFs disbursed among the monthly price changes. This typically indicates investor confusion and a directional shift likely to follow.

One issue of halting concern is that the Eqcome CEF Fear Index[i] and the VIX is diverging in a major fashion. Some of this can be attributable to the debt orientation of the CEF market segment and the heavy weighting of muni fund types. However, the yawning nature of the spread is unusual and should provide an element of caution with regards to over-committing to equities near-term.

Inflation Concerns? Two debt-oriented CEFs were the biggest gainers, LoanPartFnds and ConvtSecFnds, up 3.9% and 3.3%, respectively. The muni categories continued to suffer in the wake of heightened awareness of the problems facing state financial budgets. It is estimated that there is a $140 billion budget shortfall in aggregate state budgets for FY 2012.

CEF TIPs May be Lagging: Based upon the strong price performance of LoanPartFnds that hold floating rate bank loans, it would appear that investors may be positioning themselves for some elevation in inflation.

However, the three TIP CEFs are on average are down 2% for the month versus a flat performance of iShares Barclays TIPS Bond (NYSEARCA:TIP) for the same period. This just may be a function of the sub 4% distribution yield for TIP CEFs versus the 6.2% average yield of LoanPartFnds.

Two TIP CEFs: Two of three TIP CEFs in the Eqcome database are managed by Western Asset Management. Their symbols are WIW and WIA for investors who may be interested in pursuing this thread further based on their expectation regarding inflation and relative valuations. Both WIW and WIA trade at a 3.5% yield and are selling at a 5% discount.

Joe Eqcome (Disclosure: Own WIW and