Thursday, August 27, 2009

Added to RVT/WL Upgrade/KBC statement on Deferral

1. Wilmington Trust (owned Lottery Ticket purchase): WL is one of the bank lottery tickets that I purchased, with the intent of holding them as a group, hoping for survival, and a return to more normal valuations in a few years. Occasionally, I will discard one of them when, in my opinion, the news just becomes too bad. After visiting WL, an analyst for SunTrust Robinson Humphrey upgraded WL to a buy from neutral and raised his price target to $16, based on his view of improving credit trends. Once the economy is on the road to recovery, which hopefully has already started, I would generally expect the credit problems to stabilize and even to improve. My purpose in buying WL as a Lottery Ticket, however, is not to capture, a gain from $10 to $16, but more like a gain from $10 to $25-$30.

2. Added to Existing Position in RVT at $9.69 (see Disclaimer): Royce Value Trust (RVT) is part of the Royce family of Closed End Investment funds (CEF). As of yesterday, this CEF was trading at a 15.21% discount to Net Asset Value (NAV). This data is published daily in Market Data section of the WSJ for CEFs. Closed-End Funds by Category - Markets Data Center - WSJ.com This discount will change constantly during the trading day based on the value of the assets and the price of the transactions on the stock exchange. Unlike a mutual fund, the CEF trades like a stock which creates both discounts and premiums to NAV. The chart of the price of RVT at the Royce web site shows good performance until 2007. Royce Value Trust Then, there was a crater. The fall was caused in part by the tremendous fall in the market. Part of the fall could be attributed to the fact this fund is leveraged. If you borrow money to buy a declining asset, you will simply lose more in two ways, the losses attributable to the extra assets bought with borrowed money and the interest paid on those funds.

I made the mistake, discussed many times in this blog, of keeping two Royce CEFs that invest in small cap stocks after I made the decision to unload small cap positions prior to 2008 due to my views of a likely bear market developing in 2007.

As I discussed in connection with my recent add of shares in RMT, keeping the Royce funds were justified as a bet against that opinion. The opinion proved to be justified and these leveraged small cap funds, RVT and RMT, proved in 2008 to March 2009, to be inappropriate choices for a bet against that opinion. Two things happened, one was the discontinuation of the managed distribution policy which I believe caused a spike in the discount to NAV, and the deleterious effects of leverage on NAV. Now, with a more positive tone in the market, I am willing to add nibbles to these positions in an effort to dig myself out of the hole.

The operating expense ratio is around 1.38% Royce Value Trust which is not out of line with small cap funds, though I am familiar with a few small cap mutual funds that have lower expense ratios including one that I jettisoned entirely prior to 2008 which had done well for me. Another one was from Rice James group which I recall selling all shares during the 1st half of 2007. . RHJSX: Summary for RICE HALL JAMES MICRO CAP PORTF - Yahoo! Finance That fund has a similar expense ratio to RVT.

3. KBC Statement Clarifying Deferral of Interest Payments: For those following the EC wannabe imitators of Hugo Chavez, the link in the title to #3 relates to a statement from KBC that clarifies which dividends from it will be deferred, and this does contain a suggestion that even the EC will not want to cause a violation of Mandatory Payment Events. I just read this statement this afternoon. Prior to about a week ago, I had never heard of KBC. Perhaps, someone who agrees with the EC's burden shouldering policy, which is simply a penalty for one class of securities, can explain how that policy actually furthers the goals of the common market, as opposed to just harming it.

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