For those who know me, then this is old news. I have been investing for a long time. My first stock purchased was in 1969, or maybe 1968-the decades start to blend together now, and it was Hospital Corporation of America after its IPO when they owned one hospital called Parkview near Vanderbilt. Being involved in something for a long time does not make me an expert, nor does it necessarily impart wisdom. It does give me though a kind of institutional memory in one brain. So far, the current market is not as bad as 1973 to 1974. I am seeing prices on some securities that I have never seen or at least remember seeing. One area that I will mention today is the discounts to net asset value in closed end funds. I just scanned the pages in the market data section of the WSJ that contains closed end fund information. I do not recall anything close to what I am seeing now and I will just highlight some example. I bought this morning shares of the Advent Claymore Global Convertible Securities fund (AGC) at 5.55, a new position for me. As I said, I am just nibbling. The discount to NAV for AGC as of yesterday was 32.69%.
The other funds in the convertible section in the WSJ, like the three from Nicholos, were selling at 26 to 29% discounts.(see, e.g. Allianz Global Investors: Closed End Funds | Performance
A balanced international fund, Evergreen International Balanced (EBI) found in the world income section,was selling at a 29.37% discount to NAV. Some of the emerging market debt funds in that section were selling at discounts over 30%.
The JQC that I bought yesterday, found in the preferred section, closed yesterday at a 34.21% discount to NAV. I would urge anyone to scan this section to see what may be the largest discounts that have existed for the closed end investment companies as a group, at least in my memory.
Since I bought AGC, I will just discuss it briefly. Overview - Advent/Claymore Global Convertible Securities & Income Fund - AGC - Claymore Securities, Inc. As the name implies, it invests globally in convertible securities. It pays a monthly dividend at the current rate of 9.5 cents or $1.14 per year which gives it a yield of 20.54% at my cost of $5.55 per share. It is certainly possible that the dividend will be cut. It is also a leveraged fund which I do not like, especially in the current market conditions. I am making an exception due to the 35%+ discount to NAV. It goes ex dividend tomorrow.
The expense ration at 1.22%, before taking into account the interest expense, is reasonable for this category of fund. The fund's reports can be found at the SEC.Gov website by the way, which is true for all of the funds. It is Form N-Q. The last quarterly for AGC is for the period ending 7/31/08 which I reviewed prior to investing. I would anticipate that many of these funds which are paying high dividends will report that some of the dividends are returns of capital at year end. I am used to keeping track of returns of capital but others may find it burdensome. The part of the dividend declared as return of capital is not included by the brokerage fund as a taxable dividend. Instead, the cost basis of the shares is adjusted down by the amount of the return of capital. This will result in an increase in the amount of gain on the sale or a decrease in the loss, as the case may be, so the return of capital is "recaptured" when the securities are sold. If the original dividend is a short term capital gains or ordinary interest or dividends that would otherwise have been taxable at the highest tax rate but for its classification as a return of capital, then it is conceivable that by holding the security for more than a year and selling for a long term capital gain- taxed currently at a lower rate than interest, ordinary dividends and short term capital gains -would be beneficial from a tax viewpoint. I am used to this kind of stuff and keep detailed records. Others may not want to fool with it.
In full disclosure, I own shares of AGC and will continue to buy additional shares at or below the current price, or even slightly above. This is not a recommendation to buy or to sell. Trade at your own risk, and perform research about this security by reading the information available at the Advent/Claymore web site and at the SEC and becoming familiar with the pros and cons of closed end investment companies. One of the advantages is that these funds can sell at steep discounts to Net Asset Value but that can also be a disadvantage if purchased at a smaller discount to NAV where the widening of the discount and market losses on the portfolio increase the holder's unrealized loss on a position. Consult with your financial advisor prior to making any purchase. In this blog, I am merely describing my reasons for purchasing this security and the potential pitfalls that I identified prior to purchase. This security may not be suitable for others based on their unique financial position and risk profile. THE repoorts on this closed end investment company CAN BE FOUND AT SEC.GOV http://www.sec.gov/edgar/searchedgar/webusers.htm