In May of last year, I produced an article entitled, Eqcome’s Eight CEF Ranking Criteria (May 24, 2010). While the criteria cited in the article remains essentially unchanged, the metrics used to generate the rankings goes through a continuous process of refinement in recognition that valuations are an evolutionary process.
What’s Changed in Version 2.0? The new ranking system places greater emphasis on Total NAV Return (distribution yield and NAV asset changes expressed as a combined percentage on beginning NAV per share). This is a metric that is most reliable as it is not influenced by share price valuations and provides the best assessment of managements’ prowess.
Additional emphasis is placed on the weighted difference (spread) between the Total Share Return (distribution yield and stock price changes) and Total NAV Return. This helps indicate whether management’s performance is being adequately reflected by the markets and whether there is a current valuation opportunity for investors.
While premium and discounts are important indicators of valuation, the new valuation metrics not only take into consideration relative premiums and discounts but also weighs the relative discounts for better comparison with peers.
Does it Make a Difference? Yes. Those CEFs that were benefiting from a large nominal discount no longer gain a disproportionate advance if they suffer from a chronic discount. This is also true for those CEFs whose performance is inconsistent on a NAV basis. (New CEF rankings are available in the “CEF Weekly Information” tab under the “Research” menu tab at the website www.joeeqcome.com.)
Caveats: The Eqcome CEF Historical Performance Index Rankings (“HPIR”) (Version 2.0) is flawed as any backward looking rankings or rating system with regards to its predictive powers. Nonetheless, having a discipline as a guide, a knowledgeable CEF investor can be ready to capitalize on opportunities as they present themselves.