I am going to make a resolution to keep the foregoing CEF positions stable, hopefully for the remainder of the year. I have modified the table to reflect yesterday's purchases of GDO and the prior omission of NFJ. The prior table, along with links to some discussions about CEFs, can be found in the this post: CLOSED END FUNDS: TABLE AND LINKS
If I can leave this CEF portfolio alone, I can better assess how this portfolio within a portfolio is doing in the months to come. This CEF portfolio is balanced containing domestic and international bond and stock funds, with some CEFs containing mixtures such as domestic bonds and stocks, or global stocks and bonds, etc. The two Royce Funds give me some small cap exposure which is my favorite sector in the market.
1. Added 100 GDO at $18.63 in the ROTH IRA & 100 GDO in Taxable Account at $18.58 (See Disclaimer): After selling the Entergy Mississippi first mortgage bond in the ROTH yesterday, I went to my default option as a replacement. The default option was to buy the closed end bond fund GDO again, for the third time in the last week or so. From my perspective, the benefits in favor of GDO are that it will liquidate in 2024, pays monthly distributions, and sells at a small discount to its net asset value. Based on the current dividend of 13 cents per month, my yield would be about 8.37% annualized. The liquidation date takes away some of the interest rate risk associated with a bond fund. I discuss this particular CEF in more detail in a prior post: Bought 100 of the CEF GDO at 18.6/ GDO is primarily a world, investment grade corporate bond fund. Legg Mason - GDO - Western Asset Global Corporate Defined Opportunity Fund Inc. It is ex dividend today. The fund liquidates on or about 12/2/2024. I then bought 100 GDO in the main taxable account to replace EHL. GDO became my largest single position in the CEF asset category yesterday.
2. Asset Allocation Within the CEF Portfolio: I am now going to try and figure out how the CEF Portfolio is allocated between bonds and stocks. Some of the stock CEFs are mostly domestic, though a few may have some foreign stocks in them. I will simply classify those as 100% Domestic Stocks. I going to classify those CEFs with a lot of trust preferred stocks as bond funds, since that is the essence of a TP. I will make an approximation by asset class for those CEFs that have a mix of different categories. I will be using the ending values as of 3/16/2010:
ADX 100% DOMESTIC STOCK = $3,421
BCF 46% DOMESTIC STOCK= $2,708 54% FOREIGN STOCK = $3180
BDJ 100% DOMESTIC STOCK= $2238
BDT 100% DOMESTIC STOCK= $ 953
BDV 100% DOMESTIC STOCK = $ 1492
BTF 88% DOMESTIC STOCK =$ 1294 11% FOREIGN STOCK=$164 1%FOREIGN BOND=$15
BTO 100% DOMESTIC STOCK = $ 1519
BTZ 6% DOMESTIC STOCKS = $73 94% DOMESTIC BONDS=$1139
CSQ 52% DOMESTIC STOCK= $470 48% DOMESTIC BONDS= $433
DVM 100 % DOMESTIC STOCK =$ 1,940
EBI 60% FOREIGN STOCK= $2524 40% FOREIGN BOND= $ $1683
EOI 100% DOMESTIC STOCKS= $1,615
ERC 100% DOMESTIC BONDS =$3,685
ETW 54% DOMESTIC STOCKS=$2693 46% FOREIGN STOCKS= $2294
GCS 53% DOMESTIC STOCK= $437 47% FOREIGN STOCK=$387
GDO 60% DOMESTIC BONDS=$ 4120 40% FOREIGN BONDS=$ 2747
GDV 100% DOMESTIC STOCK = $1363
IAE 100% FOREIGN STOCK = $1,844
IGD 42% DOMESTIC STOCK= $1223 58% FOREIGN STOCK=$1,689
IGI 100% DOMESTIC BOND = $2,912
IGR 35 % DOMESTIC STOCK=$705 25% DOMESTIC BOND= $504 40% FOREIGN STOCK=$ 806
JDD 50% DOMESTIC STOCK= $528 25% FOREIGN BOND =$264 25% DOMESTIC BOND=$264
JGT: 100% FOREIGN BOND= $1,522
JQC 30% DOMESTIC STOCK= $ 1,039 70% DOMESTIC BOND= $2424
JSN 100% DOMESTIC STOCK =$1448
JTD 59% DOMESTIC STOCK=$1,435 FOREIGN STOCKS 17%=$413 24% DOMESTIC BONDS =$584
NFJ 100% DOMESTIC STOCK=$1,609
OLA 100% DOMESTIC STOCK=$3,661
PSY 100% DOMESTIC BOND=$ 2190
RMT 100% DOMESTIC STOCK=$2,875
RVT 100% DOMESTIC STOCK=$3,541
SWZ 100% FOREIGN STOCK = $ 3,004
WIW 100% DOMESTIC BOND = $3,576
DOMESTIC STOCK=40280 47.586%
DOMESTIC BOND = 21831 25.79%
FOREIGN STOCK= 16305 19.262%
FOREIGN BOND=6231 7.361%
TOTAL $84,647
I am satisfied with that allocation. 66.85% Stocks/33.15% Bonds Within those broad categories there are a number of sub-asset classes, like TIPs in bonds, small cap, trust preferred, senior investment grade domestic bonds, etc. Many of the stock funds use a buy-write strategy to generate additional income and/or to hedge risk.
My overall strategy is to keep the CEFs until my Vix Asset Allocation model flashes the next Trigger Event coming out of a bull cycle lasting several years. I will then jettison most, if not all of them, and then look for an opportunity to start adding them back at large discounts to NAV. CLOSED END INVESTMENT COMPANIES: Hopefully Lessons Learned and To be Applied Vix Asset Allocation Model Explained Simply With as Few Words as Possible
3. Income Generation Within the CEF Portfolio: When assessing how much income this portfolio will generate, I divided the CEFs in those that generally pay a constant amount and those that pay variable amounts depending primarily on a year's capital gains:
Constant=$5604 25 CEFs (Monthly Payments by EBI, BTZ, CSQ, EOI, ERC, GDO, GDV, IGD, IGI, IGR,PSY, WIW)(Quarterly payments by BCF, BDJ, BDT, DVM, ETW, IAE, JDD, JPC, JQC, JSN JTD, NFJ & OLA)
ESTIMATED BASED ON LAST 12 MONTHS= $361 (4 CEFS)
RVT, RMT and BTF are currently not paying dividends. I would expect the two Royce funds to start paying dividends within a year. I view the CEFs as just one component in my overall strategy to generate a constant stream of cash flow to invest mostly in other income generating securities.
Total = $5965 7%
4. More On the TC GJX: This TC was delisted from the exchange on March 8, 2010 after Burlington Northern notified the exchange that it would no longer be filing periodic reports with the SEC after its acquisition by Berkshire Hathaway. I bought and quickly sold GJX twice over the past six months, and no longer own it. I have been checking the pink sheet exchange to see if trading had resumed on the grey market or elsewhere. I have yet to find anything.
I did look at the prospectus again last night and found a passage at the bottom of page S-7 that may be relevant on what will happen next. www.sec.gov It basically says that the trust "must be liquidated or the Underlying Securities distributed" to the owners of the GJX when Burlington Northern gives notice that it intends to permanently refrain from filing reports with the SEC.
5. Anika Therapeutics (owned- 2010 Speculative Strategy): Anika reported its 4th quarter results before the bell this morning: www.sec.gov Revenue grew 18% in the quarter. ANIK earned 17 cents on a Non-GAAP basis which excludes certain charges related to the acquisition of Fidia near the end of that quarter. ANIK ended the quarter with 24.427 million in cash.
There are no earnings estimates for this small company. ANIK: Analyst Estimates for Anika Therapeutics Inc.
From my perspective the main event this year will be the FDA's decision on MONOVISC which has already been approved in Europe. See Item # 6 Bought 50 ANIK at 6.3 I currently own 150 shares.
6. Glacier Bancorp, Inc (own- Regional Bank Stocks' stratagem): GBCI sold 8,941,000 shares yesterday at $14.75 per share with an over-allotment option of an additional 1,342,365. I discussed this offering in more detail in ITEM # 3 Bought 50 HFFC at 10.12/Sold EHL at 25.7/ SOLD EMO AT 25.8/GBCI KMB LGF STL/
Rick: One thing that I try to monitor with the CEFs is how much of a dividend is classified as a return of capital. That part is not earned by the fund. I view it as a dividend illusion. I talked about one CEF in a post a few days ago that was selling at close to a 50% premium to its net asset value where most of its monthly dividend distribution was a return of capital: (GUT).
ReplyDeletePart of ERC's dividends paid to me in 2009 was classified as a return of capital, but not a significant amount. The total was about $29. The return of capital creates a tax event for the investor as your cost basis has to be reduced by the amount of the return of capital. The return of capital portion of the dividend is not included in taxable dividends in the year paid, but is recouped when the security is sold due to the tax basis adjustment.
Some CEFs maintain a high dividend level, not by earning it, but giving their shareholders part of their capital back to them and calling it a dividend. Evergreen will reduce a dividend when the return of capital becomes significant which happened a few months ago with EBI which I also own, which had a more significant return of capital classification in 2009.
ERC closed today at a 6.68% discount to NAV. I added 50 shares on 2/16 at 14.14 when the discount was 9.42%. The NAV was 15.53 then and 15.89 now. So that is positive, when the discount narrows at the same time as the NAV rises. But, it makes it slightly less attractive to me now for an add.
Also, the NAV is adjusted by the 11 cent dividend on the ex dividend date. I have received 2 dividends on those shares bought in February so the adjusted NAV from would be $16.10 per share adding back those dividends. If and when ERC sells at close to NAV or above it, I would consider selling it and moving into another bond CEF. I would never buy one that sells at a premium and several do.
The reports of the CEFS are also filed with the SEC. http://www.sec.gov/Archives/edgar
/data/1227073/000113322810000244/
e155484ncsra.htm
That is a link to the last ERC report
Rick: At least in a retirement account, you do not have to keep track of the cost basis adjustment associated with a return of capital.
ReplyDeleteThe CEFs as a class behaved very badly after the Lehman failure. In many cases the discounts to NAV expanded to over 30% as the NAV fell precipitously due to the fall in the market, a double whammy for a CEF investor. Part of the NAV expansion had to do with individual investor panic, as they started to dump the CEFs in mass starting in October 2008. The main buyers for these securities are individuals. In retrospect, I would have been better off dumping most of the CEFs when I pared my mutual fund positions in 2007 and then wait for an opportunity to buy them back at some point during the double whammy period, when the discounts expand beyond historical patterns as the NAV falls due to the bear market. This is why I will change my approach the next time. While this is market timing, which many frown upon, I have always been a practitioner of dynamic asset allocation which has a market timing element to it. I will time my en masse selling of the CEFs, possibly keeping a few, shortly after the next Trigger Event occurs in my Vix Asset Allocation Model. This means that I will likely hold for several more years.
Generally, after the VIX forms a stable pattern of continuous movement below 20 lasting 3 months, historically speaking, the market can enter a cyclical bull phase lasting several years. When the VIX bursts out of that pattern, moving toward 30, this would be a marker to change my stock allocation which I did in 2007 after the August 2007 Trigger Event. The market has been moving toward a Stable Vix Pattern for months but has not yet established one yet under my model. If the stable pattern is established, and the VIX has been moving below 20 for almost two weeks now, then that would establish a marker for me to keep the CEFs until the Trigger Event. At some point after that Event, I would sell them en masse.