A closed end investment company is similar to a mutual fund but with several important differences. Unlike the mutual fund, the shares of a closed end fund trade on the stock exchange at either a discount or a premium to its net asset value. So, the price of the shares is determined by both the rise and fall of the assets under management, and by supply and demand for the shares by investors. During the Fall of last year, the discount for numerous closed end funds expanded to over 30% during widespread investor panic. The fund has a fixed capitalization after its original IPO, except that some funds occasionally raise additional funds by a rights offering to existing shareholders usually at a discount.
I have been investing in closed end funds at least since 1984. Prior to 2008, my investment strategy for this category worked reasonably well and was simple. I would buy them when they were trading at large discounts to their net asset value, and then sell shares once the discount narrowed to an atypically small amount. I would generally only reinvest the dividends during down markets. I also used them to supplement my asset allocation particularly in areas where I would normally not buy large individual positions. I previously discussed how this strategy failed during 2008. CLOSED END INVESTMENT COMPANIES: Hopefully Lessons Learned and To be Applied
Also, as a general rule, I prefer those that pay monthly dividends over those that pay quarterly.
One purpose for owning them is to generate cash flow.
Tonight, I just wanted to discuss briefly the closed end funds that I currently own, or have owned in the natural resource sector.
When making decisions in this area, it is always important to look at the relationship between the current share price and the net asset value. I will not buy a fund selling at a premium to its NAV. NEVER. This data can be checked daily at sponsor's web site or at the closed end fund section of the WSJ. The funds that I am about to mention can be found at WSJ.com . These are the five funds in the natural resource area, along with the Premium/Discount percentages as of Friday's close (6/26/2009):
Blackrock Energy & Resources (BGR) (not owned): -5.95
Sponsor's web page:BlackRock Internet
Blackrock Real Asset (BCF)(owned) -10.99
Sponsor's web page: BlackRock Internet
DWS Global Commodities (GCS)(owned) -7.93:
ING Risk Managed Resources (IRR)(owned) +3.43
Sponsor's web page:ING Risk Managed Natural Resources Fund - Overview
Annual Report 2/2009 LinK: Prospectuses & Reports > Annual Reports >
Petroleum & Resources (PEO)(not owned) -11.81
Sponsor's web page: Petroleum & Resources Corporation - Welcome
2008 annual report: www.peteres.comannualreport_2008.pdf
None of these funds are selling at a large enough discount to cause me to add shares with the possible exception of BCF and then only if I sell another closed end fund in this sector. The ING Risk Managed Resources fund is selling at a premium to its NAV and would not be bought for that reason. If that premium continues to expand some, it would instead be a candidate for a sell, possibly with the proceeds used to buy more shares in BCF.
As with mutual funds, it is important to pay attention to the firm's expense ratio. Petroleum and Resources has the lowest expense ratio in this group at .51% for 2008. I do own it primarily due to its concentration in energy production and service companies. When I invest in this sector, I prefer investing in a fund with much broader exposure to natural resource stocks.
I like the diversity of Blackrock's Real Asset fund. It pays quarterly dividends, and has a total expense ratio after fee waivers of 1.09% (1.29% before waivers, as of 10/2008, see page 75 of Annual Report). It also sells call options to manage risk and to generate additional income. That strategy could be a negative during a major bull move in this sector since positions might be called away prematurely or the option contract settled for a loss. BGR, another offering from Blackrock, has an expense ratio of 1.07% after fee waivers (p. 70 annual report). I own BCF rather than BGR because it is more widely diversified in the natural resource space (pp. 45 et seq).
These funds also file their reports with the SEC:
BCF: SEC Filing
PEO: www.sec.gov
GCS: www.sec.gov
BGR: SEC Filing
IRR: www.sec.gov
GCS pays an annual dividend and I am currently unlikely to add to it. I did not care much for a very large capital gains distribution last year. Currently, if I was going to buy shares I would be adding to my holdings in BCF, particularly if the discount to NAV increases some, while I may trim IRR due to its premium price over its NAV. I am not likely to buy PEO and BGR due to their more narrow focus in this space. If I wanted exposure to large energy production and service names, I would just buy XLE which is an ETF with a lower expense ratio. Energy Select Sector SPDR Fund
Another ETF that I will consider as an alternative to closed end funds in this space is IGE: iShares S&P North American Natural Resources Sector Index Fund (IGE): Overview
and sometimes MXI: iShares S&P Global Materials Sector Index Fund (MXI): Overview
I have owned all of these funds, but I currently own only BCF, IRR and GCS.
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