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Going long an ETF for a change

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August 06, 2010 – Comments (6) | RELATED TICKERS: BIF

Normally I stay the heck away from ETFs.  I'd usually rather short them than go long, particularly those idiotic commodity-tracking funds that contango gradually eats away at the value of, like UNG, USO, etc...  Those things are absolutely terrible.  

Having said that, I came across an interesting ETF this afternoon.  It was written up as part of Seeking Alpha's "Just One ETF" series of articles.  I've found some interesting ideas in SA's "Just One Stock" series in the past so I gave the ETF piece a quick read and I liked what I saw.

Just One ETF: A Deep-Discounted CEF With Cash and Insider Backing

In the article Simon Lack recommends taking a long position in a Closed-End Fund called the Boulder Growth and Income Fund (BIF).  Now the "Income" part of this fund's name is somewhat of a misnomer because BIF stopped paying dividends in late 2008.  Lack believes that BIF has accumulated enough cash that there is a good chance that the fund will resume making dividend payments to shareholders (or unit-holders I suppose).

Like most closed-end funds, BIF trades at a discount to its net asset value.  At an 18% discount, only 14 of the 173 closed-end funds that are listed on U.S. exchanges trade at a larger discount to their NAV than Boulder G & I.  If the fund were to reinstate a reasonable dividend payment, not an unsustainable one like it used to pay, it would likely begin to attract more "investors" and its discount to its NAV would theoretically narrow.  Heck, at one time back in 2007 the fund traded at a 50% premium to its NAV.

An 18% discount to its net asset value is great, but exactly what sort of assets are we talking about? Here's a list of BIF's top twenty holdings that I just grabbed from its website:

Berkshire Hathaway Inc., Class A  27.01%

United States T-Bill due 3/25/10  13.30%

Wal-Mart Stores Inc  6.28%

Johnson & Johnson  6.10%

Cohen & Steers REIT  4.58%

Ithan Creek Partners, L.P.  3.06%

Becton Dickinson & Co.  2.64%

Advent Claymore CVT W7 VAR%  2.48%

Heineken Holding NV  2.37%

Kiwi Income Property REIT  1.67%

ConocoPhillips  1.51%

New Zealand GOVT 11/15/11 6% 1.29%

Great Plains Energy  1.29%

Gabelli Dividend & Income B T7 VAR% 1.18%

Hang Lung Properties  1.11%

Cheung Kong Holdings  1.09%

Claymore Total Return Fund  1.04%

Berkshire Hathaway Inc., Class B  0.97%

Procter & Gamble Co  0.92%

Wheelock & Co Ltd  0.88%

A number of the fund's large positions are actually reasonably attractive.  I can see the logic behind owning Berkshire, Wal-Mart, Johnson & Johnson, Becton Dickinson, Great Plains Energy, and ConocoPhillips right now.  

Treasuries are, well Treasuries.  I wouldn't buy them...unless I could do so at an 18% discount to their face value :).  

I have absolutely no idea what things like Hang Lung Properties and Cheung Kong Holdings are.  If I was going to invest real money in this fund, I'd try to find out, but since they only represent 2% of its assets and I'm only picking this stock in CAPS I'm not going to.

One has to wonder about the efficiency of a small fund like this holding 80 positions, nonetheless I am intrigued by its significant discount to NAV and the potential catalyst of a reintroduction of a dividend.  I don't have a whole lot of experience with purchasing shares of closed-end funds that are trading at steep discounts in real life, so this will make an excellent experiment for my CAPS portfolio.  Today I am going long BIF in CAPS at around $5.91/share.

Deej

6 Comments – Post Your Own

#1) On August 06, 2010 at 2:24 PM, Valyooo (99.35) wrote:

So they hold treasuries that were due 5 months ago?

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#2) On August 06, 2010 at 2:27 PM, Valyooo (99.35) wrote:

Also where do you find the NAV? Yahoo isn't showing it.

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#3) On August 06, 2010 at 2:38 PM, TMFDeej (99.43) wrote:

Good observation, Valyoo.  That's the latest reported fund holdings on the Boulder's website.  They were last updated on 2/28/10.  the list has a disclaimer stating "Holdings will be updated as of the end of each fiscal quarter and published on this webpage no sooner than 60 days after quarter end."

One would think that it will provide an update shortly.  Perhaps the fund did something useful with its cash instead of stuffing it in new Treasuries.  If so, I might find it even more interesting.

Deej 

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#4) On August 06, 2010 at 3:04 PM, TMFHelical (98.72) wrote:

I really like closed end funds for some allocation spaces.  Two sites to look at a re www.cefa.com and www.cefconnect.com.  I prefer some of the features and fund sorting tools on the former, but the display tools on the latter.

Never heard of BIF, and it isn't an allocation space I would normally approach with a CEF.  Very odd price and discount history on this fund (Pricing history tab).  Shot way above NAV in 2007.  I would need to better appreciate the funds past to consider it.

In general, I find CEFs to be an excellent place to try to get a handle on market sentiment.

TMFHelical

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#5) On August 06, 2010 at 3:09 PM, Griffin416 (99.98) wrote:

Deej,

 The 52 week average NAV to price is -16.21%. The current NAV to price is now -16.74%. Not that big or a difference. The fund has 2.08% annual fees and used 11.92% leverage.

In my experience, whatever the disconnect between NAV and price is, it tends to stay the same, discount or premium. But if the difference is widely varied from the 52 week average, it should be noted accordingly.

Negative price to NAV usually means it is out of favor, those closed end etf usually do NOT come back in favor...they tend to get worse, IMHO. They do not normally come back like good stock do.

I love ETF's, long and shortin RL too,

Griffin

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#6) On August 25, 2010 at 1:57 AM, walt373 (99.79) wrote:

I thought Hang Lung Properties and Cheung Kong Holdings sounded familiar, and sure enough, they are big holdings in Marty Whitman's Third Avenue Value fund. Cheung Kong is actually the top holding: link

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