Closed-End Fund Report Monthly Income for May 2012

Transcription

1 Closed-End Fund Report Monthly Income for May

2 The S&P 500 is up 12.3% year to date which is roughly 36% on an annualized basis. The appetite for income investments is as big as the increase in the overall market. This income demand has affected CEFs by lowering their discounts as more of these funds are trading closer or above their NAVs. The CEF discount trend for all funds was south of 25% in 2008 but has rebounded to around 3% in April Currently, municipal bond and taxable bond funds are trading at or above their NAVs so there is little value to be found in these asset classes. The best place for identifying discounted funds is in the equity asset classes such as U.S equity and international equity funds. These CEFs are trading at an average discount of 6% as an overall asset class. This is making it more difficult to identify CEFs trading at a discount worth investing in. Why do we care about investing in CEFs at a discount? The biggest factor is the additional distribution when the CEF is trading at a discount. Assume XYZ is trading at $11.00 per share with a 15% discount to NAV. The distribution yield based on the NAV is 8.0%. This is a nice yield but since you are buying at a discount, the distribution yield on price is 9.25%. The difference between the NAV yield and Price yield is 1.25% of distribution yield, your bonus for purchasing at a discount. Now, we never select a CEF investment on yield alone so we must also look at the other factors, such as NAV return, price performance, management, etc., before committing to the trade. The other item related to buying at a discount is called relative discount. This means that a CEF discount has changed over time compared to the CEFs historical premium/discount to NAV. Here, you want to identify a premium/discount trend moving in your favor. For example, if the fund discount has fallen recently (i.e., from -10% to -15%) but has started to rebound back up (i.e., from -15% to -13%), then the CEF is moving up in price providing a potential for a capital gain. This is a nice little trick to add to your CEF selection process. The first few slides of this month s newsletter display this information. May 2012 CEF Strategy This strategy involves investing in closed-end funds that trade at a discount to net asset value that offer a relative distribution yield. In addition, these funds have a positive 1-year NAV return and a positive market return year to date. I narrowed the choices by focusing on equity and multi-asset funds. 2

3 CEF Discount Trends The CEF discount has continued to move back to the mean since the 2008 crisis. 3

4 CEF Current Discounts The best CEF discounts can be found in equity-based CEFs. 4

5 CEF Discount Sweet Spot The CEF discount sweet spot is around the 9.0% discount as the good CEFs will begin reverting up to their mean at this point. 5

6 CEF 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. Delaware Inv Div & Inc: DDF 6

7 Table 1: CEFs at a discount with relative yield CEF Name Symbol Market Price Prem/ Disc (1 Mon Avg) Total Distributi Total on Rate Distributi (Market on Rate Price) (NAV) Market Price Perf (YTD) Total Leverage Ratio Total Expense Ratio Adjusted Return of Capital (TTM) NAV Total Return (Month- End 1 Yr) Market Price Total Return (Month- End 1 Yr) Asset Class Relative Yield ** EATON VANCE ENHANCED EQUITY INCOME II EOS $ % 9.63% 8.32% 6.76% 0.00% 1.14% % -4.79% US Stock 1.31% EATON VANCE ENHANCED EQUITY INCOME EOI $ % 9.44% 8.14% 7.86% 0.00% 1.15% % -0.83% US Stock 1.30% LAZARD WORLD DIVIDEND & INCOME LOR $ % 6.70% 5.95% 9.39% 15.15% 2.06% % International -1.95% Stock 0.75% LAZARD GLOBAL TOTAL RETURN AND INCOME LGI $ % 6.51% 5.78% 11.13% 11.15% 1.54% % International 4.44% Stock 0.73% EATON VANCE TAX ADVANTAGED DIVIDEND INC EVT $ % 7.77% 7.08% 13.70% 25.20% 1.20% % 2.86% US Stock 0.69% LMP REAL ESTATE INCOME RIT $ % 6.73% 6.10% 15.68% 21.51% 1.82% % 7.49% US Stock 0.63% CALAMOS GLOBAL DYNAMIC INCOME FUND CHW $ % 8.45% 7.85% 20.55% 26.46% 1.93% % 9.60% Multi-Asset 0.60% CALAMOS STRATEGIC TOTAL RETURN CSQ $ % 8.50% 7.90% 18.32% 25.99% 1.41% % 10.71% Multi-Asset 0.60% DELAWARE INVESTMENTS DIVIDEND & INCOME DDF $ % 8.70% 8.11% 12.12% 24.36% 1.51% % 8.11% Multi-Asset 0.59% International CBRE CLARION GLOBAL REAL ESTATE INCOME IGR $ % 6.55% 5.97% 20.61% 6.78% % 5.11% Stock 0.58% BLACKROCK CREDIT ALLOCATION INC TRUST 4 BTZ $ % 7.10% 6.52% 9.14% 31.31% 0.99% % 15.81% Multi-Asset 0.58% NUVEEN CREDIT STRATEGIES INCOME FUND JQC $ % 8.71% 8.17% 14.16% 28.01% 1.65% % 10.04% Multi-Asset 0.54% JHANCOCK TAX-ADVANTAGED DIVIDEND INC HTD $ % 6.64% 6.11% 2.60% 32.01% 1.03% % 19.99% US Stock 0.53% FRANKLIN UNIVERSAL FT $ % 6.52% 6.20% 4.48% 18.63% 1.11% % 13.72% Multi-Asset 0.32% International EATON VANCE TAX ADV GLOBAL DIVIDEND INC ETG $ % 8.51% 8.21% 18.33% 27.09% 0.87% % 6.66% Stock 0.30% NUVEEN PREF INCOME OPPS FUND JPC $ % 8.39% 8.12% 12.98% 27.80% 1.70% % 14.58% Multi-Asset 0.27% CALAMOS CONVERTIBLE & HIGH INCOME FUND CHY $ % 8.11% 7.88% 8.82% 25.27% 1.20% % 1.68% Multi-Asset 0.23% JHANCOCK PREMIUM DIVIDEND FUND PDT $ % 6.66% 6.52% 1.26% 32.25% 1.37% % 24.26% Multi-Asset 0.14% ** relative yield between Price yield and NAV yield. 7

8 Eaton Vance Enhanced Equity Income II (EOS) The fund invests in domestic large-cap growth stocks, loosely following the S&P 500 Index's sector concentrations. It also implements a covered-call overlay, writing at-the-money call options on 50% of underlying holdings. The call options are intended to generate additional income for distributions and should limit the volatility of the fund's holdings. Overall, the fund has not been successful in meeting these metrics. The current holdings are in line with guidelines of the strategy, and the portfolio is well-diversified with nearly 150 individual holdings. As expected, the entire portfolio is invested in domestic equities and the majority of those stocks are large capitalization. The fund's top 10 holdings make up about 35% of the entire portfolio and include blue chip companies like Apple, IBM, Exxon Mobil, Google, and Coca-Cola. Call options are written on less than 50% of the portfolio, which is aligned with the strategy. The average duration of the call options is 35 days. 8

9 Eaton Vance Tax Advantaged Dividend Inc (EVT) Dividend-seeking investors should consider this fund for its strong distribution policy that includes qualified dividends (taxed at 15% instead of an investor's ordinary income tax rate). Historically, all of its distributions have qualified for preferential tax treatment. This fund has also posted decent performance as measured by calendar-year returns, but a big drop in 2008 has weighed heavily on longer-term rolling-period returns. The fund invests 80% of its assets in dividend-paying common and preferred stock that is eligible to pay qualified dividends which are taxed at a lower rate. It also utilizes a dividend-capture strategy on a portion of the portfolio. This encourages managers to take capital losses after a security's price drops following a dividend payment. These losses offset capital gains from other holdings, making it tax-neutral from a capital gains and losses perspective. 9

10 BlackRock Credit Allocation Inc Trust 4 (BTZ) This fund underwent a strategy shift in late 2009, and in June 2011 a new management team took over. Performance since the strategy change has been good and the new managers have had decent returns during their short tenure. As of Dec. 31, 2011, the fund's holdings were aligned with its broad, flexible fixed-income strategy. Fifty-three percent of assets were invested in investmentgrade corporate bonds, 28% in high-yield bonds, and 16% in preferred stock. The fund has slowly increased its holdings of both investment-grade and high-yield corporate bonds while decreasing its preferred share holdings. The fund's current discount has narrowed a bit to 8.8%. Over the past three years, the fund has traded between a discount of 20% and a discount of 1%. The threeyear average discount is 10.8%, and the six-month average discount is also 9.71%. 10

11 CEFs with Dividend Increases John Hancock Preferred Income Fund III (HPS) announced an increase in its monthly distribution rate by 8.91% to $ per share, up from the previous month's distribution rate of $ per share. The increased distribution rate is effective with the Fund's next distribution payment on April 30, 2012 and is payable to holders of record on April 12, 2012 with an ex-dividend date of April 10, LMP Corporate Loan Fund Inc. (TLI) announced a monthly distribution of $ per common share for May The Fund had previously paid a monthly distribution of $ Kayne Anderson Midstream/Energy Fund, Inc. (KMF) announced a quarterly distribution of $0.425 per share for the quarter ending February 29, The Q distribution represents an increase of 1.8% from the prior quarter s distribution of $ per share. ClearBridge Energy MLP Opportunity Fund Inc. (EMO) announced a quarterly distribution of $ per common share payable in May The Fund had previously paid a quarterly distribution of $ per share. First Trust Energy Income and Growth Fund (FEN) has increased its regularly scheduled quarterly distribution to $0.485 per share from $0.480 per share. The distribution will be payable on April 30, 2012 to shareholders of record as of April 24, The exdividend date is expected to be April 20, Fiduciary/Claymore MLP Opportunity Fund (FMO) a closed-end management investment company, announces that it is increasing its quarterly distribution to $0.371 per share. The increased distribution compares to $0.363 per share for the Fund s most recent distribution. 11