QUARTERLY CLOSED END FUND REVIEW & OUTLOOK 4th Quarter 2012 Review & 1st Quarter 2013 Outlook Intermediate/Advanced CEF Skill Level January 8, 2013 John Cole Scott, CFS Portfolio Manager, Executive Vice President Closed End Fund Advisors, Inc.
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
Current Closed End Fund Options & Assets 4Q 2012 Ended with 596* US listed Closed End Funds 43 ( 1) US Equity Funds 113 (+2) Specialty Equity Funds 63 Non US Equity Funds 219 Total Equity Funds 157 ( 1) Taxable Bond Funds 103 ( 7) National Municipal Bond 117 ( 3) State Specific Municipal Bond 377 Total Bond Funds Source: ICI Source: CEFA s CEF Universe Report 12/28/12 (cefuniverse.com) 3
Closed End Current Discounts All Funds - Current Average CEF Discount December 28, 2012 2.00% 0.00% State Specific Muni Bond Funds 0.25% National Muni Bond 0.53% Taxable Bond Funds 1.47% Average CEF Discount 2.00% 4.00% 6.00% 8.00% Specialty Equity 4.95% Non US Equity 8.84% 10.00% US Equity 10.8% 12.00% 14.00% Source: CEFA s Closed End Fund Universe (www.cefuniverse.com) 4
Closed End Discount Trends 4Q 2012 Ended with an average CEF Discount of 3.18% 5.00% All CEFs - Average CEF Discount April 7, 2008 - December 28, 2012 All CEFs 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% Source: CEFA s Closed End Fund Universe (www.cefuniverse.com) 5
Closed End Discount Trends 5.00% Peer Group - Average CEF Discount December 30, 2011 - December 28, 2012 US Equity Non US Equity Special Equity Taxable Bond Nat Muni Bond All CEFs 0.00% 5.00% 10.00% 15.00% 30/Dec/11 30/Mar/12 30/Jun/12 30/Sep/12 31/Dec/1 Source: CEFA s Closed End Fund Universe (www.cefuniverse.com) 6
Relative UNII for CEF Bond Funds Main Peer Groups - Relative UNII April 11, 2008 - December 28, 2012 Taxable Bond Nat Muni Bond 100 80 60 40 20 0 20 40 60 Source: CEFA s Closed End Fund Universe (www.cefuniverse.com) 7
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% 0.0% Historical Return of Capital April 16, 2010 - December 28, 2012 US Equity Non US Equity Special Equity Taxable Bond Nat Muni Bond State Muni Bond Source: CEFA s Closed End Fund Universe (www.cefuniverse.com) 8
Return of Capital (90 Day) For CEF Sub Sectors Historical Return of Capital December 30, 2011 - December 28, 2012 100.00% Equity Tax Advantage General Equity Funds US Growth & Income Global Growth & Income Asian Equity Single Country Covered Call Funds Energy Natural Resources MLP Funds Preferead Equity Leveraged US Real Estate Funds Utilities Funds 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 30/Dec/11 30/Mar/12 30/Jun/12 30/Sep/12 31/Dec/12 Source: CEFA s Closed End Fund Universe (www.cefuniverse.com) 9
Earnings Coverage Ratio For Closed End Funds Main Peer Groups - Earnings Coverage Ratio % June 1, 2012 - December 28, 2012 120 All CEFs All Equity All Bond US Equity Non US Equity Specialty Equity Taxable Bond Nat Muni Bond 100 80 60 40 20 0 1 Jun 12 1 Jul 12 1 Aug 12 1 Sep 12 1 Oct 12 1 Nov 12 1 Dec 12 1 Jan 13 Source: CEFA s Closed End Fund Universe (www.cefuniverse.com) 10
Income Only Yield For Closed End Funds Main Peer Groups - Historical Dividend - Yield Income December 30, 2011 - December 28, 2012 US Equity Non US Equity Special Equity Taxable Bond Nat Muni Bond 10 9 8 7 6 5 4 3 2 1 0 30/Dec/11 30/Mar/12 30/Jun/12 30/Sep/12 31/Dec/12 Source: CEFA s Closed End Fund Universe (www.cefuniverse.com) 11
4Q 2012 Closed End Fund Dividend Increases vs. Decreases Dividend Announcement Number of Announcements Average Percentage Change Dividend Maintains 887 (84%) N/A Dividend Increases 55 (5%) +13.41% Dividend Decreases 111 (11%) 6.99% Under 5% Increase 35 (63.5%) +2.14% Over 5% Increase 20 (36.5%) +33.13% Under 5% Decrease 57 (51.5%) 3.21% Over 5% Decrease 54 (48.5%) 10.98% Source: Fund Press Releases 12
Recent Closed End Fund Dividend Increases vs. Decreases Source: Fund Press Releases 13
CEF Press Release Summary (1347 CEF PRs in 4Q) Announcement Type 4Q 2012 2012 Investment Policy Change 12 84 Leverage Amount Change 0 46 Name Change 14 42 Rights Issue 3 18 Tender Offer 19 107 Director Change 0 19 Fund Manager Change 15 56 Secondary Offering 2 67 Distribution Policy Change 0 5 Leverage Type Change 0 17 Source: Fund Press Releases 14
4Q & 2012 Closed End Fund NAV / Market Price Performance Fund Grouping 4Q NAV 4Q Mkt Pr 2012 NAV 2012 Mkt Pr US Equity Funds 0.8% 4.8% 12.1% 11.8% Non US Equity Funds 2.0% 7.5% 18.2% 20.4% Specialty Equity Funds 1.8% 5.5% 11.2% 12.4% Ave Equity CEF 0.4% 3.1% 13.5% 14.7% Taxable Bond Funds 3.8% 3.0% 17.7% 15.7% National Muni Bond Funds 1.9% 3.2% 15.2% 11.6% State Muni Bond Funds 1.2% 1.9% 12.5% 11.1% Ave Bond CEF 2.4% 2.7% 15.3% 13.1% Average CEF 1.3% 2.8% 14.7% 13.7% Source: CEFA s Closed End Fund Universe Report 15
Closed End Fund Activist Update Month Filing Closed End Fund Investor Notes Filed Dec 13D/A Aberdeen Emerging Markets Telecommunications (ETF) Lazard Dec (22.59%) Dec Rights Cornerstone Total Return Fund (CRF) Public 1 new share for every 3 rights held Dec 13D/A Greater China Fund (GCH) Bulldog Inc (6.46%) Nov 13D/A American Strategic Income Portfolio II (BSP) Nov Rights Cornerstone Strategic Value Fund (CLM) SIT Investment Inc (16.30%) Public 1 new share for every 3 shares held Oct 13D/A Diamond Hill Fincls Trnd (DHFT) Bulldog Vote: continuing or liquidation Oct Tender Macquarie Global Western 20% Tender @ 95% Infrastructure TR (MGU) Oct Tender Morgan Stanley Source: AST Asia Pacific Group Activist Report: www.cefinsight.com Public 5% Tender @ 98% Fund (APF) 16
Net Flows from Activist Investors Courtesy AST Fund Solutions / CEFInsight.com 17
Activist Investment Behavior: Ave CEF Discount vs. Ave Dist. Yield Courtesy AST Fund Solutions / CEFInsight.com 18
Closed End Fund Deaths Period Average Number of Funds 2012 6 funds 2011 5 funds 2008 2011 8.5 per year 2004 2007 11 per year 2000 2003 12.5 per year 1995 1999 11.6 per year 1990 1994 4.2 per year 1990 2012 8.5 per year Source: CEF Press Releases Causes: Open ending, liquidation & conversion Source: Fund Press Releases 19
Closed End Fund Deaths Number of CEF Funds Open Ended, Liquidated or Converted to ETF 16 14 12 10 8 6 Converted to ETF Liquidated Open ended 4 2 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Causes: Open ending, liquidation & conversion Source: Fund Press Releases Source: Fund Press Releases 20
Closed End Fund Mergers Period Average Number of Funds 2012 57 funds 2012 4Q 12 funds 2011 5 funds 2008 2011 7.3 per year 2004 2007 8.5 per year 2000 2003 11.3 per year 1995 1999 5.6 per year 1995 2012 10.7 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 21
Closed End Fund Mergers 60 Closed End Funds Merged into Other Closed End Funds (December 2012) 50 Number of Closed End Funds 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Fund Press Releases, Herzfeld Research 22
Closed End Fund Historical IPOs 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 Number of IPOs 23 19 17 13 2 40 21 47 50 48 77 Average Assets In $ millions Total New CEF IPO Assets in $ Billions $523 $316 $451 $200 $131 $690 $506 $452 $462 $591 $209 $12.0 $6.0 $7.7 $2.6 $0.3 $27.6 $10.6 $21.2 $23.1 $28.4 $16.1 10 Year Average: 28 Funds per year, $432M Ave Fund, $14 Billion Per Year Source: CEF Association 23
2012 IPO 4Q Details Babson Cap Global Short Duration High Yield Fund (BGH) IPOed on October 26, 2012 IPO Price: $25.00 IPO Assets: $462.5M Year end Price: $23.83 Year end Discount/Premium: 1.85% Nuveen Long/Short Commodity Total Return Fund (CTF) IPOed on October 26, 2012 IPO Price $25.00 IPO Assets: $470M Year end Price: $21.44 Year end Discount/Premium: 5.92% Stone Harbor Emerging Markets Total Income Fund (EDI) IPOed on October 26, 2012 IPO Price: $25.00 IPO Assets: $240M Year end Price: $24.84 Year end Discount/Premium: +0.08% Nuveen Intermediate Duration Municipal Term (NID) IPOed on December 6, 2012 IPO Price $15.00 IPO Assets: $630M Year end Price: $14.95 Year end Discount/Premium: +6.18% 24
2012 IPO 4Q Details Continued Prudential Global Short Duration High Yield Fund (GHY) IPOed on December 21, 2012 IPO Price $20.00 IPO Assets: $740M Year end Price: $20.00 Year end Discount/Premium: +4.99% Ares Dynamic Credit Allocation Fund (ARDC) IPOed on November 28, 2012 IPO Price $20.00 IPO Assets: $320M Year end Price: $20.01 Year end Discount/Premium: +4.27% First Trust MLP and Energy Income Fund (FEI) IPOed on November 28, 2012 IPO Price $20.00 IPO Assets: $830M Year end Price: $20.36 Year end Discount/Premium: +7.66% 25
2012 Closed End Fund IPOs Source: CEFInsight 26
2012 IPOs after 90 days (premium to NAV) Tortoise Energy Independence (NDP) = +3.52% BlackRock Muni Target Term Tr (BTT) = +2.17% Doubleline Opportunistic Credit (DBL) = +7.91% PIMCO Dynamic Income Fund (PDI) +0.68% Cushing Royalty & Income Fund (SRF) = +3.36% Clearbridge Energy MLP TR Fund (CTR) = +1.24% Mainstay DefTerm Muni Opps (MMD) = +0.81% Average Premium to NAV: 2.81% 27
Closed End Fund 90 Day NAV Market Price Correlation Fund Grouping NAV/Mkt Cor US Equity Funds 80.7% Non US Equity Funds 83.2% Specialty Equity Funds 66.5% Ave Equity CEF 74.1% Taxable Bond Funds 21.5% National Muni Bond Funds 50.7% State Muni Bond Funds 61.1% Ave Bond CEF 41.7% Average CEF 53.6% Source: CEFA s Closed End Fund Universe Report 28
90 Day NAV/Price Correlation For Closed End Funds Main Peer Groups - 90 Day NAV/Price Correlation % June 22, 2012 - December 28, 2012 100 All CEFs All Equity All Bond US Equity Non US Equity Specialty Equity Taxable Bond Nat Muni Bond 90 80 70 60 50 40 30 20 10 0 Source: CEFA s Closed End Fund Universe (www.cefuniverse.com) 22/Jun/12 22/Jul/12 22/Aug/12 22/Sep/12 22/Oct/12 22/Nov/12 22/Dec/12 29
New Data We Track / Follow During 4Q 2012 Average Maturity Average Duration Credit Quality Rating Unrated Bonds (%) Fund Sponsor Expected Dividend Declare Date Net Deferred Tax Liabilities per Share" (DTL / Share) DTL Adjusted Premium / Discount" (DTL Adj Disc) Return of Capital (RoC) Trend Shares Outstanding *We are open to ideas on what to include 30
CEFA s Outlook for 1Q 2013 Bond Funds vs. Equity Funds Dividend Cuts & Premiums Still very cautious of muni bond CEFs downside risk Relative Pricing, UNII and Earnings Trend We like senior loan funds, emerging market debt, convertibles, US equity, international equity, REIT CEFs /MLP Leveraged Equity & Cov Call Funds Swapping Funds Regularly As Needed Watch UNII Trend, RoC % / Trend and Earnings Coverage Sustainable Dividends, Leveraged Adjusted NAV Yield NAV Performance vs. Peers Relative Discount and Z Stat, Relative Discount Range 31
What You Asked Us to Cover In Webinar Registration Difference between NAV and Mkt Price Disc/Prem / Opportunistic Trades / Trends / Historical Trends vs. market conditions Bond Funds / Munis & Recent Volatility (Dealing w/) Real Estate Funds / MLP Funds Buy/Write / Option Income Funds Contrarian Plays / Undervalued for Income Investors Unwarranted Selling by retail in down markets Distributions / Net Investment Income / UNII / RoC Distribution or Principal Speaking with Clients About CEFs Research Sources Leverage / Fees / Expenses Correlation of Commodity CEFs vs. Commodity Outlook for Credit CEFs in 2013 CEF Market liquidity Leverage Option / Cost of Leverage 32
For Your Information Free CEF Resources The Closed End Fund Association: www.closed EndFunds.com CEF Connect (Nuveen Sponsored): www.cefconnect.com Morningtar's CEF Site: http://www.morningstar.com/cover/cef Closed End Funds.aspx Investment Company Institute: http://www.ici.org/research#fact_books CEFNetwork (Pristine Advisers): www.cefnetwork.com CEF Insight (Activist Info from AST Fund Solutions): www.cefinsight.com Capital Link's CEF Portal: http://cef.capitallink.com/ Morningstar Discussion Board (60K+ posts since 1998): http://socialize.morningstar.com/newsocialize/forums/100000006.aspx The CEF Network on LinkedIN (915+ Members): www.cef Network.com Seeking Alpha: http://seekingalpha.com/articles?filters=closed end funds Jeff Margolin at First Trust: http://www.ftportfolios.com/retail/commentary/cefcommentarymain.aspx Cohen & Steers: http://www.cohenandsteers.com/ii_closed end funds investment.asp Nuveen CEF Commentary (Investment Professionals Only): www.nuveen.com/cef/info/commentaryresearch.aspx More Useful Links at: www.cefadvisors.com/investres.html 33
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