A CRASH COURSE IN CLOSED END FUNDS: BENEFITS AND RISKS FOR A RISING RATE ENVIRONMENT

Transcription

1 A CRASH COURSE IN CLOSED END FUNDS: BENEFITS AND RISKS FOR A RISING RATE ENVIRONMENT CFA Society of Naples, FL December 10, 2013 John Cole Scott, CFS Portfolio Manager, Executive Vice President Closed End Fund Advisors, Inc.

2 Disclaimer Important: The information in this presentation is not for general circulation and should not be considered an offer, or solicitation, to deal in any of the mentioned funds. The information is provided on a general basis for information purposes only, and is not to be relied on as advice, as it does not take into account the investment objectives, financial situation or particular needs of any specific investor. Any research or analysis used to derive, or in relation to, the information herein has been procured by Closed End Fund Advisors ( CEFA ) for its own use, and may have been acted on for its own purpose. The information herein, including any opinions or forecasts have been obtained from or is based on sources believed by CEFA to be reliable, but CEFA does not warrant the accuracy, adequacy or completeness of the same, and expressly disclaims liability for any errors or omissions. As such, any person acting upon or in reliance of these materials does so entirely at his or her own risk. Any projections or other forward looking statements regarding future events or performance of countries, markets or companies are not necessarily indicative of, and may differ from, actual events or results. No warranty whatsoever is given and no liability whatsoever is accepted by CEFA or its affiliates, for any loss, arising directly or indirectly, as a result of any action or omission made in reliance of any information, opinion or projection made in this presentation. The information herein shall not be disclosed, used or disseminated, in whole or part, and shall not be reproduced, copied or made available to others without CEFA expressed written permission. CEFA reserves the right to make changes and corrections to the information, including any opinions or forecasts expressed herein at any time, without notice. 2

3 What Are We Going To Cover? Introduce Overview on Closed End Fund Advisors: Perspective Presentation Goals Crash Course in Closed End Funds: More than Discounts & Yield Educate Two Leverage Benefits with CEFs CEF Key Evaluation Data Points Portfolio Management Process, Why Buy? When To Sell Review / Summary CEF Historical IPOs, Mergers and Deaths 1st Quarter 2014 Outlook, Presentation Summary & Review More Info / CEF Resources & Firm Manager Bios 3

4 What Is CEFA? Investment Management Firm Independent, Fee Only & Family Owned 27 Years on a CEF Board of Directors ( ) Published only Hardback CEF Book in 1991 Scott Letter: Closed End Fund Report 23+ years Daily CEF News Alerts, Weekly Closed End Fund Universe Data, Monthly Best Ideas List. Founder: CEF Network on LinkedIN 4

5 Today s Goal How can a managed portfolio of closedend funds generate above normal income & total return while offering unique ways to reduce many of the risk factors inherit to an income oriented portfolio. 5

6 Closed End Funds 1. Permanent/Fixed Capital 2. Active Management 3. Investor Liquidity 4. Inefficient 6

7 CEF Introduction to the Structure Oldest US Fund Structure 1893 Best Known for Income, International & Municipal Bonds Discounts & Premiums to Net Asset Value Ability to Use Two Unique Types of Leverage Fixed Capitalization (no redemption pressure) Intraday Trading (Control in Price Execution) Stop Loss, Limit & Good Till Cancelled Orders Some Unique Asset Classes: (Covered Call / Senior Loan) A Diversified & Professionally Managed Pool of Assets An Equity that Derives it s Value from Either Stocks or Bonds More info: 7 7

8 Current Closed End Fund Options & Assets There are 599* US listed Closed End Funds 41 US Equity Funds 121 Specialty Equity Funds 63 Non US Equity Funds 225 Total Equity Funds 165 Taxable Bond Funds 105 National Municipal Bond 104 State Specific Municipal Bond 374 Total Bond Funds Source: cefuniverse.com Source: CEFA s CEF Universe Report 12/6/13 (cefuniverse.com) 8

9 Who Invests in CEFs? Investment Company Number of US Households Percentage of US Households Open End Funds 46.2 Million 39.4% Exchange Traded Funds 3.3 Million 2.8% Closed End Funds 2.1 Million 1.8% All Mutual Funds 51.6 Million 44% Total US Households 117.3M 100% All US Households Closed End Fund Mutual Fund Ave Age of Head Income $49,800 $118,000 $80,000 Assets $75,000 $500,000 $200,000 Four Year Degree 31% 63% 46% Retired 29% 55% 25% Source ICI, 2012 Investment Company Fact Book 9

10 Closed End Fund Discounts / Premiums CEFs are often known for their infamous discounts. The discount is the feature built into CEFs that make them unique & potentially quite lucrative. We believe that CEFs historically trade at discounts because they can, and you have to price this into the value of the fund. 10

11 Relative Discount Relative Discount: The current discount/premium of a closed end fund vs. the fund s historical discount/premium. This data point is intended to help identify relative value for the fund vs. the absolute value of the current discount/premium. Templeton Emerging Markets Income Fund: NYSE: TEI Chart Source: CEFconnect.com 11

12 Closed End Current Discounts Avg CEF Discount % as of December 6, [CELLREF]0 Average CEF Discount Non US Equity 9.45 Special Equity 8.65 [CELLREF].00 State Muni Bond US Equity Source: CEFA s Closed End Fund Universe ( 12

13 Closed End Discount Trends As of December 6, Average CEF Discount: 8.88% 3 % All CEFs Average CEF Discount 04 May Dec 13 All CEFs 0 % 3 % 6 % 9 % 12 % 15 % 4 May 12 4 Aug 12 4 Nov 12 4 Feb 13 4 May 13 4 Aug 13 4 Nov 13 Source: CEFA s Closed End Fund Universe ( 13

14 Closed End Discount Trends Main Peer Groups Average CEF Discount 07 Dec Dec 13 US Equity Non US Equity Special Equity Taxable Bond Nat Muni Bond State Muni Bond 10 % 5 % 0 % 5 % 10 % 15 % 20 % 7 Dec 12 7 Mar 13 7 Jun 13 7 Sep 13 7 Dec 13 Source: CEFA s Closed End Fund Universe ( 14

15 Closed End Funds: By Average Daily Liquidity (thousands) 2.3% 0.7% 2.5% 28.4% 9.0% 24.7% 11.5% 20.9% under $100 $100 - $250 $250 - $500 $500 - $1,000 $1,000 - $2,500 $2,500 - $5,000 $5,000 - $10,000 $10,000 + Note: 599 closed-end funds; data as of 12/6/13, Source: CEFA s Closed-End Fund Universe ( 15

16 CEF Volume Trends Fund Grouping Avg Vol 30day Avg Vol 90day Volume Trend US Equity Funds 99,667 95,683 1% Non US Equity Funds 74,500 70,912 5% Specialty Equity Funds 142, ,533 7% Ave Equity CEF 115, ,549 5% Taxable Bond Funds 134, ,937 10% National Muni Bond Funds 115, ,673 14% State Muni Bond Funds 36,838 32,190 17% Ave Bond CEF 101,928 92,880 13% Average CEF 107,002 98,378 10% Data as of December 6, 2013 Source: CEFA s Closed End Fund Universe Report 16

17 Closed End Fund NAV Market Price Correlation Fund Grouping Correlation 30day Correlation 90day Correlation Trend US Equity Funds 64.0% 76.9% 13% Non US Equity Funds 70.9% 85.2% 14% Specialty Equity Funds 54.2% 65.9% 12% Ave Equity CEF 60.6% 73.3% 12% Taxable Bond Funds 22.5% 49.3% 26% National Muni Bond Funds 62.6% 48.3% 14% State Muni Bond Funds 52.9% 43.5% 9% Ave Bond CEF 42.2% 47.7% 5% Average CEF 49.1% 57.1% 8% Data as of December 6, 2013 Source: CEFA s Closed End Fund Universe Report 17

18 Closed End Fund 90 Day NAV Market Price Correlation Main Peer Groups - 90 Day NAV/Price Correlation 22-Jun Dec-13 US Equity Non US Equity Special Equity Taxable Bond Nat Muni Bond 0 22 Jun Sep Dec Mar Jun Sep 13 Source: December 6, 2013 CEFA s Closed End Fund Universe Report 18

19 Closed End Fund Market Price volatility vs. NAV volatility (1 Year) U.S. Equity Funds Non U.S. Equity Funds Specialty Equity Funds Taxable Bond Funds National Muni Bond Single State Muni Bond Price Volatility NAV Volatility Source: December 6, 2013 CEFA s Closed End Fund Universe Report 19

20 Hypothetical Portfolio of CEFs 50% Equity Funds 50% Bond Funds US Gr. & Inc Funds Global Dividend Funds Preferred Equity Funds Covered Call Funds MLP Funds US REIT Funds International REIT Funds Municipal Bond Funds (1/2) Convertible Bond Funds Emerging Markets Income High Yield Bond Funds Investment Grade Bonds Limited Duration Bonds Mortgage Bond Funds Average Blended Portfolio Yield Note: We used CEF category average distribution yields as of December 6, 2013 from our CEFU report. Distribution yield does not take into effect changes in principal or market price values or fluctuations. Dividends are not guaranteed and the past cannot be used to predict future results. 20

21 Closed End Funds: By Yield 7.0% 9.0% Yield Under 5% 23.4% 19.2% Yield 5%-6.5% Yield 6.5%-8% Yield 8% -10% 39.1% Yield Over 10% Note: 599 closed-end funds; data as of 12/6/13, CEFU Report 21

22 Average Distribution Yield for CEFs 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 6.8% 5.6% 9.0% 7.7% 7.0% 7.6% 6.7% 7.9% 8.8% 7.4% 6.9% 7.4% Source: CEFA s Closed End Fund Universe, December 6,

23 Income Only Yield For Closed End Funds Main Peer Groups Income Historical Dividend 07 Dec Dec 13 US Equity Non US Equity Special Equity Taxable Bond Nat Muni Bond 10 % 9 % 8 % 7 % 6 % 5 % 4 % 3 % 2 % 1 % 7 Dec 12 7 Mar 13 7 Jun 13 7 Sep 13 7 Dec 13 Source: CEFA s Closed End Fund Universe ( 23

24 Impact of Fund Leverage Municipal (Tax Free) Bond Funds 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Leveraged NAV Yield 6.30% 6.10% 5.70% 5.60% Unleveraged 4.60% 4.50% 4.60% 3.30% NPI NPM NMO NXZ MTT NIM NXP NXR Credit Quality ranges from A to AAA. Source: CEFA s Closed End Fund Universe, December 6,, 2013 *Currently leverage is giving muni CEFs an average of 1.7% higher distribution yield Past performance is not indicative of future results. This presentation is not intended as an offer to sell any of the funds shown. Rather, funds shown are for illustrative purposes only. 24

25 Discount Yield Benefit Advantage of Paying 90 cents for $1.00 of Assets Example: Nuv Lng/Srt Com Tot Rtn Fd (NYSE: CTF) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% NAV and Market Price Yield for CTF Yield on NAV 11.30% Discount Yield Benefit = 2.3% 9.00% Yield on Market Price Market Price: $16.51 NAV: $20.66 Discount: 20.09% As of December 6, 2013 Source: CEFA s Closed End Fund Universe Past performance is not indicative of future results. This presentation is not intended as an offer to sell any of the funds shown. Rather, funds shown are for illustrative purposes only. 25

26 Key CEF Data For Analysis Price Analysis 1) Current Discount or Premium 2) Relative Discount 3) 52 Week Discount Range 4) 1 Year Z Stat & Relative Z Stat 5) Comparable (Peer) Discount 6) 52 Week Market Price Range & 52 Week NAV Range Yield Analysis 1) Income Only & Total Dist. Yield 2) Leverage Adjusted NAV Yield 3) Peer Yield Comparison 4) Return of Capital %, DRoC & Trend 5) Earnings Coverage and % Trend 6) Last Dividend Change, % and Date 7) Anticipated Div Announcement Date Other Important Data 1) Percent, Type & Cost of Leverage 2) Mkt Pr. vs NAV Volatility 3) Liquidity and Volume Trends 4) Institutional Ownership % 5) Activist/Follower Ownership % 6) Mkt Pr. / NAV Correlation Sector Specific Data 1) Bond Funds: Avg. Duration, Credit Quality, Maturity, % Unrated Bonds. Relative UNII and % Trend 2) MLP Funds: Deferred Tax Liability and Adjusted Discount Note: CEFA uses a CEF s data vs. peer data in addition to market and manager analysis to make investment decisions and models allocations.

27 Relative UNII for CEF Bond Funds Main Peer Groups - Relative UNII 04-May Dec-13 Taxable Bond Nat Muni Bond 60 % 40 % 20 % 0 % 20 % 40 % 60 % 4 May 12 4 Aug 12 4 Nov 12 4 Feb 13 4 May 13 4 Aug 13 4 Nov 13 Source: CEFA s Closed End Fund Universe ( 27

28 Return of Capital (90 Day) For CEFs 50.0 % 45.0 % 40.0 % 35.0 % 30.0 % 25.0 % 20.0 % 15.0 % 10.0 % 5.0 % Main Peer Groups - Historical RoC 04-May Dec-13 US Equity Non US Equity Special Equity Taxable Bond Nat Muni Bond State Muni Bond 0.0 % 4 May 12 4 Aug 12 4 Nov 12 4 Feb 13 4 May 13 4 Aug 13 4 Nov 13 Source: CEFA s Closed End Fund Universe ( 28

29 Destructive RoC Fund Grouping # Funds with Destructive RoC % Funds with Destructive RoC Average Destructive RoC % US Equity Funds 1 2% 42% Non US Equity Funds 6 10% 26% Specialty Equity Funds 14 12% 32% Equity CEF 21 9% 31% Taxable Bond Funds 26 16% 20% National Muni Bond Funds 5 5% 22% State Muni Bond Funds 1 1% 12% Bond CEF 32 9% 20% Average CEF 53 9% 24% *Whitepaper Source: CEFA s Closed End Fund Universe 12/6/13 ( 29

30 Top 10 Funds with Highest Destructive RoC % Rank Ticker Name Classification Destructive RoC % EXD EV Tx-Adv Bnd & Opt Stgs Fd National Muni Bond Funds 96% BCF BR Real Ast Eq Tr Specialty Equity Funds 87% BCX BR Res & Com Stgy Tr Specialty Equity Funds 79% IHD ING Emrg Mkt Hi Div Eq Fd Non U.S. Equity Funds 70% GNT GAMCO NtrRes Gd & Incm Tr Specialty Equity Funds 65% JGT Nuv Divr Crncy Opp Fd Taxable Bond Funds 57% MIN MFS Imd Incm Tr Taxable Bond Funds 53% MGF MFS Govt Mkt Incm Tr Taxable Bond Funds 53% DUC D&P Util & Corp Bnd Tr Taxable Bond Funds 45% SRF Cushing Royalty & Incm Fd Specialty Equity Funds 42% Source: CEFA s Closed End Fund Universe 12/6/13 ( 30

31 Recent Closed End Fund Dividend Increases vs. Decreases Dividend Announcement Number of Announcements Average Percentage Change Dividend Maintains 2874 (91%) N/A Dividend Increases 107 (3%) +5.5% Dividend Decreases 179 (6%) 5.9% Under 5% Increase 83 (78%) +1.5% Over 5% Increase 24 (22%) +19% Under 5% Decrease 87 (49%) 1.9% Over 5% Decrease 92 (51%) 9.63% June 1, 2013 November 30, 2013 Source: Fund Press Releases 31

32 Recent Closed End Fund Dividend Increases vs. Decreases 120 Major CEF Groups: Number of dividend decreases / increases June 1, 2013 to November 30, Div Decreases Div Increases 20 0 U.S. Equity Funds Non U.S. Equity Funds Specialty Equity Funds Taxable Bond Funds National Muni Bond Funds Source: Fund Press Releases 32

33 Premiums: A Worst Case Scenario AGD AOD 6/18/10 Monthly Dividend $0.11 $0.12 6/18/10 Premium +38.5% +31.5% 6/19/10 Monthly Dividend $0.06 ( 45%) $0.055 ( 54%) 6/25/10 Premium +2.96% 4.25% Relative Pricing Change 35.5% 35.8% 33

34 Fear and Greed with Closed End Funds Individual investors (85% of CEF holders) trade for various reasons, many based on fear or greed creating opportunities for diligent and patient investors. CEFs are the best investment structure to take advantage of fear and greed opportunities. They are the only investment vehicles where it is possible to know what it s worth (NAV) versus the current market price or perceived value. If we like the discount AND we like the asset class or fund, there s clear upside when the fund s discount reverts back to normal. 34

35 Q3 & YTD 2013 Closed End Fund NAV / Market Price Performance Fund Grouping Q3 NAV Q3 Mkt Pr YTD NAV YTD Mkt Pr US Equity Funds 5.6% 3.1% 19.6% 19.7% Non US Equity Funds 5.8% 3.9% 6.8% 5.5% Specialty Equity Funds 3.1% 0.9% 10.2% 5.4% Ave Equity CEF 4.4% 1.2% 11.0% 8.2% Taxable Bond Funds 2.1% 0.6% 4.6% 3.0% National Muni Bond Funds 1.7% 3.5% 6.6% 16.3% State Muni Bond Funds 1.3% 4.3% 6.8% 17.1% Ave Bond CEF 0.2% 2.5% 1.9% 10.8% Average CEF 1.7% 1% 3% 3.7% Data as of December 6, 2013 Source: CEFA s Closed End Fund Universe Report 35

36 Closed End Fund Activist Examples Month Filing Closed End Fund Investor Notes Filed Nov 13D/A Western Asset Inflation Bulldog Inc (10.83%) Management (IMF) Nov 13D/A Zweig Total Return Fund (ZTR) Karpus Inc (5.97%) Oct Rights Cornerstone Total Return Fund (CLM) Public 107% of NAV per share Oct 13D/A Special Opportunities Fund Karpus Dec (31.56%) (SPE) Sept Repurchase Swiss Helvetia Fund (SWZ) Buldog 750,000 shares Sept 13D/A American Strategic Income Portfolio Inc III (CSP) SIT Investment Inc (16.21%) Source: AST Group Activist Report: 36

37 CEF Institutions & Activist Holdings Activist Holdings Trends previous 6 months Increase: 209 funds Decrease: 75 funds Source: CEFA s Closed End Fund Universe ( 37

38 Closed End Fund Historical IPOs 2013 YTD Number of IPOs Average Assets In $ millions Total New CEF IPO Assets in $ Billions $599 $517 $316 $451 $200 $131 $690 $506 $452 $462 $591 $14.4 $11.9 $6.0 $7.7 $2.6 $0.3 $27.6 $10.6 $21.2 $23.1 $ Year Average: 28 Funds per year, $433M Ave Fund, $13.9 Billion Per Year Source: SEC Filings, Press Releases and CEF Association 38

39 PIMCO Dynamic Credit Income Fund (PCI) IPOed on January 29, IPO Details Q1 IPO Price: $25.00 IPO Assets: $3,025M Price as of 12/6/13: $22.20 Disc/Prm as of 12/6/13 : 9.13% BlackRock Multi Sector Income Trust (BIT) IPOed on February 26, 2013 IPO Price: $20.00 IPO Assets: $720M Price as of 12/6/13: $16.58 Disc/Prm as of 12/6/13 : 12.78% Nuveen Intermediate Duration Quality Municipal Term Fund (NIQ) IPOed on February 7, 2013 IPO Price: $15.00 IPO Assets: $187.5M Price as of 12/6/13: $11.27 Disc/Prm as of 12/6/13 : 11.88% Eaton Vance Municipal Income Term Trust (ETX) IPOed on March 26, 2013 IPO Price: $20.00 IPO Assets: $205M Price as of 12/6/13: $13.90 Disc/Prm as of 12/6/13 : 12.80% 39

40 Apollo Tactical Income Fund Inc. (AIF) IPOed on February 26, IPO Details Q1 IPO Price: $20.00 IPO Assets: $280M Price as of 12/6/13: $17.29 Disc/Prm as of 12/6/13 : 11.42% Neuberger Berman MLP Income Fund Inc. (NML) IPOed on March 26, 2013 IPO Price: $20.00 IPO Assets: $1,005M Price as of 12/6/13: $17.75 Disc/Prm as of 12/6/13 : 9.94% Brookfield Mortgage Opportunity Income Fund Inc. (BOI) IPOed on March 26, 2013 IPO Price: $20.00 IPO Assets: $420M Price as of 12/6/13: $16.16 Disc/Prm as of 12/6/13 : 12.51% Cohen & Steers MLP Income and Energy Opportunity Fund, Inc. (MIE) IPOed on March 26, 2013 IPO Price: $20.00 IPO Assets: $480M Price as of 12/6/13: $16.97 Disc/Prm as of 12/6/13 : 10.12% 40

41 DoubleLine Income Solutions Fund (DSL) IPOed on April 26, 2013 IPO Price: $ IPO Details Q2 IPO Assets: $2,300M Price as of 12/6/13: $20.06 Disc/Prm as of 12/6/13 : 10.57% Dreyfus Municipal Bond Infrastructure Fund, Inc. (DMB) IPOed on April 29, 2013 IPO Price: $15.00 IPO Assets: $254M Price as of 12/6/13: $10.02 Disc/Prm as of 12/6/13 : 12.26% First Trust Intermediate Duration Preferred & Income Fund (FPF) IPOed on May 24, 2013 IPO Price: $25.00 IPO Assets: $1,420M Price as of 12/6/13: $20.48 Disc/Prm as of 12/6/13 : 12.14% Flaherty & Crumrine Dynamic Preferred & Income Fund Inc (DFP) IPOed on May 24, 2013 IPO Price: $25.00 IPO Assets: $450M Price as of 12/6/13: $19.83 Disc/Prm as of 12/6/13 : 12.45% Ivy High Income Opportunities Fund (IVH) IPOed on May 29, 2013 IPO Price: $20.00 IPO Assets: $317M Price as of 12/6/13: $17.57 Disc/Prm as of 12/6/13 : 12.41% 41

42 Guggenheim Credit Allocation Fund (GGM) IPOed on June 26, IPO Details Q2 IPO Price: $25.00 IPO Assets: $150M Price as of 12/6/13: $22.40 Disc/Prm as of 12/6/13 : 8.05% Principal Real Estate Income Fund (PGZ) IPOed on June 26, 2013 IPO Price: $20.00 IPO Assets: $126M Price as of 12/6/13: $16.71 Disc/Prm as of 12/6/13 : 12.83% Eaton Vance Floating Rate Income Plus Fund (EFF) IPOed on June 26, 2013 IPO Price: $20.00 IPO Assets: $135M Price as of 12/6/13: $17.87 Disc/Prm as of 12/6/13 : 8.31% ClearBridge American Energy MLP Fund Inc. (CBA) IPOed on June 26, 2013 IPO Price: $20.00 IPO Assets: $1,050M Price as of 12/6/13: $16.61 Disc/Prm as of 12/6/13 : 7.21% Nuveen Flexible Investment Income Fund (JPW) IPOed on June 26, 2013 IPO Price: $20.00 IPO Assets: $70M Price as of 12/6/13: $16.21 Disc/Prm as of 12/6/13 : 11.13% 42

43 2013 IPO Details Q3 KKR Income Opportunities Fund (KIO) IPOed on July 26, 2013 IPO Price: $20.00 IPO Assets: $305M Price as of 12/6/13: $18.00 Disc/Prm as of 12/6/13 : 8.12% THL Credit Senior Loan Fund (TSLF) IPOed on September 20, 2013 IPO Price: $20.00 IPO Assets: $132M Price as of 12/6/13: $17.76 Disc/Prm as of 12/6/13 : 8.31% Center Coast MLP & Infrastructure Fund (CEN) IPOed on September 26, 2013 IPO Price: $20.00 IPO Assets: $290.5M Price as of 12/6/13: $17.10 Disc/Prm as of 12/6/13 : 8.80% Source: Fund Press Releases 43

44 2013 IPO Details Q4 Royce Global Value Fund (RGT) IPOed on October 18, 2013 IPO Price: $8.88 IPO Assets: $99.5M Price as of 12/6/13: $8.65 Disc/Prm as of 12/6/13 : 11.19% Ares Multi Strategy Credit Fund (ARMF) IPOed on October 29, 2013 IPO Price: $25.00 IPO Assets: $130M Price as of 12/6/13: $20.85 Disc/Prm as of 12/6/13 : 12.21% Goldman Sachs MLP Income Opps (GMZ) IPOed on November 26, 2013 IPO Price: $20.00 IPO Assets: $826.3M Price as of 12/6/13: $20.34 Disc/Prm as of 12/6/13 : 6.77% Source: Fund Press Releases 44

45 IPOs during 4Q Q 2013 Current Discount / Premium Data as of December 6, 2013 Source: CEFA s Closed End Fund Universe Report 45

46 Closed End Fund Mergers 60 Closed End Funds Merged into Other Closed End Funds (November 2013) 50 Number of Closed End Funds Source: Fund Press Releases 46

47 Closed End Fund Mergers Period Average Number of Funds 2013 YTD 37 funds funds funds per year per year per year per year per year Reasons to Merge: 1. Reduce expense ratio 2. Increase liquidity 3. Reduce bid/ask spread 4. Improve cost of future leverage Source: Fund Press Releases 47

48 Closed End Fund Deaths CEF Funds Open Ended, Liquidated or Converted to ETF Converted to ETF Liquidated Open ended Causes: Open ending, liquidation & conversion Source: Fund Press Releases 48

49 Closed End Fund Deaths Period Average Number of Funds 2013 YTD 3 funds funds funds per year per year per year per year per year per year Causes: Open ending, liquidation & conversion Source: Fund Press Releases 49

50 CEFA s Investment Philosophy Adjust Portfolio Allocations Buy at a Discount Actively Monitor Funds CEF Manager Analysis & Results Track Relative Value / Swap Funds Sell at Premium or Set Stops Anticipate Dividend Changes When to Raise Cash? 50

51 Common CEF Mistakes 1. Buying a CEF on the IPO 2. Only buying a CEF at a discount 3. Only buying a CEF because of yield 4. Buying a selection of CEFs and hold them forever (not swapping funds over time) 5. I have lost so much, I just want to get back to even 6. I have made so much, I am happy with whatever happens (I don t care if I lose 10 15% b/c I am up 70%) 7. Unknowingly buying a CEF at a high premium or high relative premium 51

52 CEFA s Outlook for 1Q 2014 Bond Funds vs. Equity Funds Duration& Leverage Think Munis are cheap and properly disocunted Why do you own them? Peer Opportunities We like senior loan funds, emerging market debt, convertibles, US equity, international equity, REIT CEFs. Covered Call / Option Funds The Good, Bad & Ugly Swapping Funds Regularly (month or quarter) Sustainable Dividends Activist Targets: Mid teens Discount & Shareholder base NAV Performance vs. Peers Relative Discount, Z Stat, Disc Range Watch for News / Press Releases Secondary's / Rights 52

53 In Summary: Why We Like Closed End Funds Total Return (Yield Driven) Diversification Professional Management Leverage Used by Fund Leverage of The Discount Control: Limit & Stop Orders Fixed Capitalization: No Redemption Pressures Capitalize on Market Inefficiencies Little Institutional Ownership / Mostly Retail 53

54 For Your Information Free CEF Resources The Closed End Fund Association: EndFunds.com CEF Connect (Nuveen Sponsored): Morningtar's CEF Site: Closed End Funds.aspx CEF Analyzer: Investment Company Institute: CEFNetwork (Pristine Advisers): CEF Insight (Activist Info from AST Fund Solutions): Capital Link's CEF Portal: Morningstar Discussion Board (75K+ posts since 1998): The CEF Network on LinkedIN (1150+ Members): Network.com Seeking Alpha: end funds More Useful Links at: 54

55 Current CEFA Portfolio Models CEFA Diversified Growth (1/1999) 90% equity, 10% bond: tactical and wide mandate w/ 3% 4% est. yield CEFA Growth & Income (1/1999) 85% equity, 15% bond: tactical and wide mandate w/ 4% 5% est. yield International Equity (11/2002) Equity oriented funds w/ little US exposure 2% 3% est. yield Hybrid Income (12/2006) 60/40 split of bond & equity income w/ 7.25% 8.75% est. yield Foundation/Balanced (10/2009) 65/35 balance of equity & bond funds w/ 5% 7% est. yield Conservative Diversified (5/2009) Primarily CEFs (70%), with exposure to ETFs (10%) & mutual funds (20%) for low correlation asset classes for lower volatility Special Situations (6/2013) A focused portfolio of 4 6 CEFs looking for ideas in three areas: 1. Activist Involved Funds 2. Severe Discount Arbitrage 3. Best Fundamental Ideas

56 Principal s Biographies George Cole Scott Sr. Portfolio Manager, President of Closed End Fund Advisors George s investment career started in 1969 when he joined a regional brokerage firm after a career as a journalist. In 1976 he helped a client buy control of a deeply discounted CEF which became Bergstrom Capital (AMEX: BEM). He served on the board of the highly rated fund for 27 years. In 1987 he founded The Scott Letter: Closed End Fund Report which was a top rated print newsletter until he became a shareholder in CEF Advisors in In 1991 he coauthoredtheonlyhardbackand500pagebookoncefswithafinanceprofessor.heisagraduateoftheuniversity of Washington, holds the FINRA 66 License and is a long time member of The Society of Financial Analysts and CFA Virginia. He has been widely published, interviewed as well as consulted with various closed end funds. George is one of two CEF specialists with more than four decades of CEF expertise. John Cole Scott, CFS Portfolio Manager, Executive VP of Closed End Fund Advisors Johnhasworkedatthefirmsince2001.Hesitsonthefirm sinvestmentcommitteeholdsthefinra66licenseand the Certified Fund Specialist designation (CFS). He is a graduate of The College of William and Mary and has been quoted widely in the financial press and presented at conferences and for investment groups. In 2008 John founded CEFA's Closed End Fund Universe, a comprehensive weekly data service covering 125+ data points for all US listed closed endfunds.healsofoundedandmanagesthecefnetworkgrouponlinkedinandiseditorofthefirm s blog. John is a board member of The Richmond Association for Business Economics (RABE), serves on the Investment Committee for The New York State Society of The Cincinnati and is past President and long time Board Member of The William & Mary Society of The Alumni Richmond Chapter. 56

57 CEF Advisors Links (*NEW*) Whitepaper: How to Analyze Destructive Return of Capital for Closed End Funds HowtoAnalyzeDestructiveReturnOfCapitalForCEFs.pdf CEFA Website: CEFA s Blog: Blog.com Published Articles Seeking Alpha: cole scott/articles Wealthmanagement.com: scott Weekly CEF Data 125+ Data Points ($985 per year with a 14 Day Trial) & Daily News Alerts ($104 per year with a 10 Day Trial): Monthly CEF Best Ideas List: $2065 per year (limited to 50 subscribers) CEF Universe Data Definitions: 57

58 THANK YOU! Closed End Fund Advisors, Inc Glen Forest Drive, Suite #105 Richmond, Virginia U.S.A. Toll Free: (800) Local: (804) Sign up or view archive for The Scott Letter: Closed End Fund Report: Check out our blog: blog.com Register for more webinars / view on demand archive: Learn more about our weekly CEF Data Service: 58