/ Closed-End Fund Advisors Diversification, Income, & Tactical Management Introduction to Closed-End Funds VCU MBA Capital Markets Class November 18, 2010
Today s Goal To give you an overview on closedend funds and how to analyze them compared to other investment vehicles and where they might fit in an investment portfolio. 2
What Are We Going to Cover? Introduce Overview on CEFA Crash Course in Closed-End Funds Four C s in CEFs, IPO s, Fear & Greed Educate Leverage, Discounts & Yield, Sector Average Yield Hypothetical Portfolio CEF Portfolio Management Process & Risk Factors Execute & Evaluate Key Advantage of CEFs CEF Resources Net Performance & Firm Bios 3
What is CEFA? SEC Registered Investment Advisory Firm Investment Management Firm 50 years Combined Manager Experience Independent, Fee Only & Family Owned Published only Hardback CEF Book in 1991 27 Years on a CEF Board of Directors (1976-2003) Scott Letter: 18 years & CEF Universe: 2 ½ Years $70 Million in Assets Under Management Clients in 17 states with Average Assets of $500K+. Publically Publish Performance to 2000+ Subscribers 4
Current CEFA Portfolio Models CEFA Diversified Growth (1999) - 90% equity, 10% bond: tactical and wide mandate w/ 3%-4% yield CEFA Growth & Income (1999) - 80% equity, 20% bond: tactical and wide mandate w/ 4%-5% yield International Equity (2002) Equity oriented funds w/ little US equity exposure 2%-3% yield Hybrid Income (2006) 50/50 balance between bond & equity income funds w/ 7%-10% yield Balanced/Foundation (2009) 60/40 balance between bond and equity funds w/ a 5%-7% yield Conservative Diversified (2009) Primarily CEFs, w/ significant exposure to ETFs and mutual funds. Seeking low correlation asset classes for reduced volatility. 5
Closed-End Funds: Overview Oldest US Fund Structure 1893 Best Known for Income, International & Municipal Bonds Discounts & Premiums to Net Asset Value Ability to Use Three Types of Leverage Fixed Capitalization (no redemption pressure) Intraday Trading (Control in Price Execution) Stop Loss, Limit & Good Till Cancelled Orders Most CEFs Listed on The New York Stock Exchange Best Way to Capture Market Inefficiency's: Fear & Greed A Diversified & Professionally Managed Pool of Assets More info: http://www.cefadvisors.com/closed_end_funds.html 6
Closed-End Funds vs. Open-End Mutual Funds & Exchange Traded Funds Discount Trading Capitalization Redemption Pressure Leverage Active Management Expense Ratios CEFs Yes Intraday Fixed at IPO* (except DRIPs, Warrants, tender, etc.) None, manager can make pure investment decisions Yes, if the fund wishes Yes Often lower than comparable MF peers ETFs No* Intraday Creation Unit Redemption Not really as not managed No* No Tends to be lowest Mutual Funds No After 4pm post trading Constant in and out flow Yes, can force manager to make buy/sell decisions No* Yes Can be higher, many have load fees and 12b1 fees. 7
Closed-End Fund Discounts CEFs are 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. 8
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. Example: MHI 52 Week Premium/Discount Chart 08/03/10 Templeton Emerging Markets Income Fund: NYSE: TEI Chart Source: CEFconnect.com 9
Four C s to Consider with CEFs Characteristics of The CEF portfolio Calendar: seasonal trends & exdividend dates Consistency Managed Distributions Level Distributions Composition (of Dividend) Income UNII & Relative UNII Capital Gains Return of Capital 10
Buying on the IPO? Built-in sales charges on CEF IPOs that range from 4 % to 5 ½ %. The majority of CEFs trade at a discount to NAV soon after the IPO and in regular market situations. Wait 3-9 months. Learning the ebb & flow of a CEF discount/premium trend is a great way to increase your chance for beneficial trading decisions. Peer to peer and peer group comparisons. If you trade on the secondary market, you can use stop, limit and good till canceled orders. If all other CEFs covering the investment focus are at premiums, there are no suitable open-end funds or ETFs and you HAVE to have this exposure, then you can consider buying the CEF IPO. 11
Fear and Greed with Closed-End Funds Individual investors (85% of CEF holders) often trade for reasons based on fear or greed. This can create opportunities for a diligent and patient (professional) investors. CEFs are the best investment structure to take advantage of fear and greed as they are the only investment structure where it is possible to know what it s worth (NAV) versus the current market price or perceived value. Discount to NAV is a measurable and ongoing way to see market sentiment or popularity. ** 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 levels. 12
Impact of Leverage NAV Yield 7.0% Leveraged 6.33% Unleveraged 6.0% 5.0% 5.37% 5.71% 5.43% 4.50% 4.72% 4.86% 4.97% 4.0% 3.0% 2.0% 1.0% 0.0% NEA NIO NPX NPT NXR NUV NXQ NXP Credit Quality ranges from AA- to AA+. Source: CEF Connect: August 30, 2010 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. 13
Discount Yield Benefit Advantage of Paying 90 cents for $1.00 of Assets Example: Alpine Global Premier Property (NYSE: AWP) NAV and Market Price Yield for AWP 7.0% 6.0% 5.0% 6.61% Discount Yield Benefit = 1.17% 4.0% 3.0% 2.0% 1.0% 5.44% Market Price: $5.99 NAV: $7.30 Discount: -17.95% As of August 30, 2010 0.0% Source: CEF Connect Yield on NAV Yield on Market Price 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. 14
Closed-End Funds: By Yield 8.5% 15.5% Yield Under 5% 17.6% Yield 5% - 6.5% Yield 6.5% - 8% 26.4% Yield 8% - 10% Yield Over 10% 32.8% Core Income Universe Note: 625 closed-end funds; data as of 11/16/10, CEFConnect.com 15
Average Distribution Yield for CEFs as of November 12, 2010 12.0% 10.0% 8.0% 6.0% 4.0% 5.8% 4.3% 10.1% 6.1% 6.4% 7.8% 7.5% 8.8% 6.6% 6.5% 7.2% 2.0% 0.0% Source: CEFA s Closed-End Fund Universe, November, 12, 2010 16
Hypothetical Portfolio of CEFs 60% Equity Funds 40% 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 Convertible Bond Funds Emerging Markets Income High Yield Bond Funds Investment Grade Bonds Limited Duration Bonds Mortgage Bond Funds Average Blended Portfolio Yield Note: Used category average distribution yield as of November 12 th, 2010. 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. 17
Closed-End Fund Risk Factors Discount widens Liquidity risk: wide bid/ask and low trading volume on some funds. Dividend cuts usually leads to a strong market price pull back. Volatility and intraday trading. Return of Capital / Principal Can stem from managed / level distribution policy 18
Dividend Cut 11/14/09 by CRF Source: Yahoo Finance 19
CRF Dividend Info 20 Source www. Cefconnect.com
CEFA s Investment Process Adjust Portfolio Allocations Buy at a Discount Actively Monitor Account CEF Manager Analysis Track Relative Value Sell at Premium or Swap Funds When to Raise Cash? Anticipate Dividend Changes 21
Key CEF Advantages Registered Investment Company: Diversification & Transparency Control in Execution Set & Trailing Stop Orders 85% Income Oriented Paid to Wait Tactical Swapping to Reduce Risk Buying at A Discount to NAV No Redemption Pressures 22
Next Steps Learn More / Stay in Touch Use CEFs on Your Own Ask Questions? Sign up for Scott Letter & Updates @ ScottLetter.com Try Our Weekly Data Service CEFuniverse.com 23
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. 24
Contact Information Thank you for your time and attention, feel free to call or email with any questions.. Closed-End Fund Advisors, Inc. 7204 Glen Forest Drive, Suite #105 Richmond, Virginia 23226 Phone: (804) 288-2482 / (800) 356-3508 Email: jcs@cefadvisors.com www.cefadvisors.com 25
For Your Information Free CEF Resources Investment Company Institute www.ici.org CEF Association www.cefa.com Nuveen s CEF Website www.cefconnect.com The Scott Letter: Closed-End Fund Report www.scottletter.com CEF Quarterly Commentary: Jeff Margolin First Trust: http://www.ftportfolios.com/retail/commentary/cefcommentarymain.aspx CEF Quarterly Commentary & Research Nuveen http://www.nuveen.com/cef/info/commentaryresearch.aspx LinkedIn CEF Network: http://www.linkedin.com/groups?about=&gid=1172377&trk=anet_ug_grppro Morningstar CEF Discussion Group http://socialize.morningstar.com/newsocialize/forums/100000006.aspx Seeking Alpha key word closed-end fund - www.seekingalpha.com Yahoo Discussion Group: Closed-End Funds 2: http://finance.groups.yahoo.com/group/closedendfunds2/ More Useful Links at: www.cefadvisors.com/investres.html 26
Intl Equity 2010 YTD CEFA Portfolio Performance (NET) Diversified Growth Growth & Income Hybrid Income Balanced / Foundation Conservative Diversified First Quarter +3.71% +3.60% +4.88% +5.56% +6.00% +2.81% April +1.27% +2.76% +2.16% +1.20% +2.28% +0.84% May -8.97% -9.15% -7.93% -3.96% -5.51% -3.59% June -0.55% -1.93% -0.67% +1.46% +0.46% -0.24% July +7.44% +6.72% +5.96% +5.08% +3.66% +2.05% August -1.12% -1.78% -1.01% +0.12% +0.30% -0.03% Sept. +9.52% +9.19% +7.12% +4.70% +4.03% +4.06% YTD +10.09% +8.57% +10.63% +14.65% +11.32% +5.86% Performance is net of fees & commissions and includes all account s in each composite. Past performance cannot predict future results and investments with CEFA may lose value and are not guaranteed. Data as of 9/30/10. 27
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 1996. In 1991 he co-authored the only hardback and 500 page book on CEFs with a finance professor. He is a graduate of The University of Washington, hold the Series 66 License and is a long time member of The Society of Financial Analysts and CFA Virginia. He has been widely published, and interviewed as well as consulted with various Closed-End Funds. George is one of two CEF specialists with more than four decades CEF expertise. John Cole Scott, CFS Portfolio Manager, Executive VP of Closed-End Fund Advisors John has worked at the firm since early 2001. He sits on the firm s investment committee holds the Series 66 License and 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 around the country. In 2008 John founded CEFA's Closed-End Fund Universe, a comprehensive weekly data service covering the closed-end fund industry. John is a long time 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 Treasurer and Membership Chair for The Virginia Museum of Fine Arts Business Council. 28