1) Discounts, premiums, total returns and other
- Barron’s publishes a list of closed-end fund prices and their net asset values and current pricing
3) CEF Site
4) The Securities and Exchange Commission
“beneficial ownership report.” The term “beneficial owner” is defined under SEC rules to include any person who directly or indirectly shares voting power or investment power (the power to sell the security) in a particular company.
This form is used when a buyer in a particular security has a passive interest onlyand has no intention to taking a proactive or activist approach. The buyer must own between 5% and 20% of a company or fund to use a 13G. If they buy over 20%, they must file a 13D. The 13D carries more weight for our purposes, but even a 13G indicates that the buyer is willing to own a significant amount of the fund at current prices, so the target must be investigated. These filing searches turn up a lot of filings that are 13D/A or 13G/A. These are amended reports.
They can indicate that a buyer has added to their position, but they can also be used to report that they have been selling and now own less than 5%. They are also used to report interaction or correspondence with management. An amended report that shows buying or an initial 13D or 13G filing means that we can move to analyzing the fund based on its sector or asset class. I am going to lay this process out for you in the next section. The closed-end fund strategy works just fine on its own, as reversion to the mean is a powerful force when it comes to fund discounts and premiums, but having activist and institutional involvement just gives us a little
5) Type of CEF
o Rich people love municipal bond
o They really are something of an “only in a crisis” opportunity along the lines of equity and high-yield funds
o Global income funds are another tool to use our closed-end fund strategy to take advantage of the volatility in global markets and exploit short-term market panics for our personal gain.
o These funds have become a staple of the closed-end fund strategy, as they serve as a great place to earn high returns using the expertise of the world’s best private equity managers. The loans these funds own are the highest in the borrowers’ capital structure and get paid back
o first in the event of a default. Most of them are floating rate so if rates go up, so does the interest charged on the loan.
o The major risk for these funds is credit risk, and no one understands credit risk better than private equity funds.
o Private equity funds didn’t invent leverage, but they have pretty much perfected the use of it to fund and grow businesses and make deals. This is an area that banks have pulled away from in the aftermath of the credit meltdown and the increased regulatory scrutiny they now face.
o I am not a huge fan of trying to time tops and bottoms in the commodities market because I just don’t think most people can do it. However, if we let discounts drive our decisions, we can
o use closed-end funds to take advantage in big selloffs in oil and gas.
o I am really not a fan of precious metals, since they, especially gold, are basically just rocks that produce no cash flows, but at times, the share price of some precious metals funds will trade
o far below the quote value of the shares they own.
o I am a big fan of the single-country and regional funds because we get localized market meltdown all over the world and regions can often fall to steep discounts to the rest of the world. When that happens, folks’ lizard brains kick in again and they sell in a panic and closed-end funds specializing in that region or country will fall to huge discounts
o These are just basic fixed income funds and include things like government bond funds and high quality corporate mortgage-backed securities.
o From time to time, we will get selloffs related to interest rates and economic concerns and discounts on these funds will drift over 10%. It makes sense to buy them when they reach that level.
o These are a favorite of banks and other financial institutions looking to earn higher yields in their security portfolios, and sometimes their buying and selling will widen and narrow discounts.
o We will often to be able to take advantage of
o temporary widening. Again, the strategy is about looking for singles and doubles rather than home runs, but it all
o adds up to solid long-term returns.
o This is another sector that we will pay the most attention to when the markets are being shredded.
o My general rule of thumb is to not even be interested in high-yield bond funds until we have a whiff of napalm in the morning surrounding the markets and we can buy funds with discounts of more than 15%.
o Real Estate Investment Trusts (REITs)
o Using the closed-end fund strategy with REIT funds gives us the best possible situation. We own securities that have a long history of outperforming stock with less risk, and we can buy them at much better prices than other investors.
o The loans these funds own are the highest in the borrowers’ capital structure and get paid back first in the event of a default. Most of them are floating rate so if rates go up, so does the interest charged on the loan.
o The major risk for these funds is credit risk, and no one understands credit risk better than private equity funds
- When the doom-and-gloom crowd targets a particular state or the markets are hit with a wave of interest rate fears, we will employ the bear market end of the world tax-free closed-end fund strategy. When we have lots of funds trading at double-digit discounts to net asset value, we load the proverbial boat with tax-free closed-end funds. We should be able to earn high teens returns from the storm tax-free and the eventual closing of the discount from what is in reality a fairly low-risk investment vehicl
- When we have strong market sell-off and there is widespread selling in stocks, we will employ the Richard Rainwater closed-end fund strategy and buy deeply discounted funds that own stocks. Here it will make sense to check the portfolio holding before hitting the “buy” button.
- Make sure you are comfortable with the type of stocks the fund owns before you buy. There will be a difference between a discounted collection of blue chips and a fund with the same discount that owns small biotechs and other risky securities. We will use the same strategy on sector funds when a sector of the market blows up for one reason or another and the closed-end sector funds trade at a substantial discount to the underlying securities.