Use access key #2 to skip to page content.

MegaEurope (< 20)

Sell these CEFs - CEF premium arbitrage

Recs

10

October 06, 2010 – Comments (17) | RELATED TICKERS: CRF , CLM , PHK

Closed end funds (CEFs) can be a very poor asset class, owned mainly by unsophisticated retail investors.  Since their managers don't get paid for performance (like hedge funds) and they don't need to attract assets (like mutual funds), their performance often reflects the lack of incentive.  Furthermore, unlike mutual funds they regularly trade above or below net asset value (NAV).  Significant premium or discount compared to NAV doesn't make sense, since most CEFs hold publicly traded stocks and bonds and report their value daily.

Retail investors seem to be easily confused by high yields on some CEFs, bidding the price way above NAV.  In fact, many of these funds have totally unsustainable distributions (aka return of capital, not a real dividend).  For example, because of terrible investment performance and distribution policy, CRF lost about 70% of its value over the last 5 years - and is still overpriced.

Here are the CEFs currently trading for the highest premium above NAV.  Data from CEFConnect: http://www.cefconnect.com/Screener/FundScreener.aspx 

PGP           72%
CRF           57%
CLM           54%
PHK           41%
DNP           28%
MCI            26%
BHV           24%
MPV          22%
GUT           21%
PHT           20%
CFP           20%
PCK           16%
SRV           16%

Note, these funds have distributions of 5-18%.  So if you are thinking about shorting them, make sure you have plenty of cash to pay the distribution.  But I think you will come out ahead if you short them patiently as part of a balanced portfolio.

Any CEF investors here?  Hopefully you don't own any of the above...  Don't get me wrong, many other CEFs seem like decent investments.

17 Comments – Post Your Own

#1) On October 06, 2010 at 9:19 PM, Valyooo (99.91) wrote:

Check etfconnect.com   some ETFs tend to trade way above NAV at all times, so if an etf usually trades 20% above NAV and its currently trading at 10% above NAV, it might actually be a good buy

Report this comment
#2) On October 06, 2010 at 9:19 PM, Valyooo (99.91) wrote:

Check etfconnect.com   some ETFs tend to trade way above NAV at all times, so if an etf usually trades 20% above NAV and its currently trading at 10% above NAV, it might actually be a good buy

Report this comment
#3) On October 06, 2010 at 9:44 PM, MegaEurope (< 20) wrote:

some ETFs tend to trade way above NAV at all times

But there is no fundamental basis for this, so eventually the trend will end.  CEF price/NAV histories show this again and again.

Report this comment
#4) On October 06, 2010 at 10:34 PM, Valyooo (99.91) wrote:

Who is to say that trend will end at some point?  People pay way above book value for stocks all the time just because the earnings/dividends are good.  Hows this any different?

Also what histories do you know of that show this ending back at NAV = 1?

Report this comment
#5) On October 06, 2010 at 10:35 PM, Valyooo (99.91) wrote:

When a bond is worth 1000 and the interest rates fall, the price of that bond rises, right?  Even though at the end, you only redeem 1000.  Why?  Because the yield is worth it.

Report this comment
#6) On October 06, 2010 at 10:54 PM, MegaEurope (< 20) wrote:

People pay way above book value for stocks all the time just because the earnings/dividends are good.  Hows this any different?

Book value is an accounting convention that helps provide a rough approximation of the value of a business (like you say, on average it is less than fair market value).  But net asset value IS the value of a fund.  Unlike an operating business, most CEFs keep all of their assets in publicly traded stocks and bonds.

In other words, you could save 50% by buying the stocks and bonds held by CRF or CLM yourself, or buying a mutual fund that holds those kind of assets.

Also what histories do you know of that show this ending back at NAV = 1? 

CEFConnect, click on 'since inception' on the chart.

When a bond is worth 1000 and the interest rates fall, the price of that bond rises, right?  Even though at the end, you only redeem 1000.  Why?  Because the yield is worth it.

Many high yielding CEFs will have to cut their distribution, because they are paying out way more than earnings.  Because they are poorly managed, it is unlikely you will get your money back before they go to 0.

Report this comment
#7) On October 06, 2010 at 11:26 PM, Valyooo (99.91) wrote:

Well that is a different story altogether if they are poorly managed.  But your point of saying I could save 50% by buying the stocks and bonds myself, 1) what if i dont have the money to diversify 2) diversifying costs lots in commissions/fees 3) what if i dont have the knowledge to diversify and manage and watch all of my holdings?

And a lot of companies default on bonds too...doesnt mean the fair market value isnt above the redemption price of the bond when interest rates fall though.

Report this comment
#8) On October 07, 2010 at 12:00 AM, MegaEurope (< 20) wrote:

If you like PHK (one of the few well managed funds on this list) you could instead buy any bond mutual fund run by PIMCO with almost the same holdings.  With a mutual fund you would not have to pay a premium for diversification or management's investment ability.

If you like CLM or CRF, buy SPY and you will crush those funds over the long term.  With a liquid ETF you will not have to pay a premium for diversification.

Not sure what your point is about bonds...  CEFs are not fixed, contractual yield investments.  Some of them have "managed distributions" but they could still change at any time.

Report this comment
#9) On October 22, 2010 at 4:50 PM, kedo76 (< 20) wrote:

Woah, need to get off this blog...sophisticated investors only!  I am one of the unsophisticated...just collecting fat dividends every month since early 2009...with an average of 20% equity gain between CLM, CRF and CFP (CFP being the drag, oh well)...

 Now, where are those unsophisticated blogs?

Report this comment
#10) On October 23, 2010 at 3:09 PM, MegaEurope (< 20) wrote:

Good luck buddy.  Hope you get out before those funds cut their dividends and crash (again).

CRF is now trading at 63% over net asset value, CLM at 58%, CFP at 18%. You should look up your funds on cefconnect.com and see how poorly the people managing your money are actually performing.

Report this comment
#11) On October 23, 2010 at 9:26 PM, kedo76 (< 20) wrote:

Not worried about it; they probably don't even come to a full 1% of my portfolilo...but the dividend!  Yum.  You do understand why they sell at a premium though, right?

Report this comment
#12) On December 02, 2010 at 12:36 PM, MegaEurope (< 20) wrote:

My short positions in CLM and CRF have been successful to the tune of about 11% so far.  There is much further down to go.

Report this comment
#13) On December 21, 2010 at 6:14 PM, MegaEurope (< 20) wrote:

As predicted, the Cornerstone Funds have really started to crash.  Time to start thinking about exiting this trade.

Report this comment
#14) On January 02, 2011 at 6:40 PM, MegaEurope (< 20) wrote:

PGP 50%
PHK 40%
SRV 29%
CFP 28%
PCK 22%
DNP 22%
MCI 21%
BHV 21%
GUT 20%
RFI 19%
KYN 19%
CRF 19%
PSLV 18%
CLM 17%
PMF 17%
PMX 16%
TYG 16%
MPV 16%
BGT 15% 

I am now short PGP and PHK, having exited my shorts of CLM and CRF with large gains.

Report this comment
#15) On February 12, 2011 at 12:57 AM, MegaEurope (< 20) wrote:

PGP 48%
PHK 41%
CFP 39%
TINY 36%
CRF 33%
PCK 33%
CLM 32%
EGX 29%
DNP 27%
PMF 26%
SRV 26%
NOM 24%
MCI 24%
PMX 23%
MPV 21%
EIV 20%
GUT 18%
BHV 17%
EVN 17%
NCZ 16%
PTY 15%

My PGP shares were called in for a loss (might try to borrow some again) but I am still shorting PHK.

Report this comment
#16) On February 13, 2011 at 4:36 PM, MegaEurope (< 20) wrote:

CEFs trading below NAV.  These are potential buys, although many of them have major issues as noted below.

Awful:
EQS
FXBY
RCG
SAR
TTO
MVC
RIF
FOFI
AWP
DCA
PSY
BPP
IRL

Mediocre:
RAP
RIF
GRF
JQC
DHFT
MGU
RMT

Good:
GIFD
CEE

Report this comment
#17) On October 03, 2011 at 12:08 PM, walt373 (99.85) wrote:

Good blog. Many CEF investors don't realize the "dividend" they are receiving partly consists of return of capital. It's like buying a stock, selling 10% of it, and calling that a 10% yield.

Report this comment

Featured Broker Partners


Advertisement