Closed End Funds A Unique Opportunity a ValueX Presentation
We are posting ValueX Vail presentations, lots of great ideas and not all of them are up yet so make sure to check back (or even better… sign up for our newsletter to ensure you do not miss any). Also see our prior coverage of ValueX Vail here and here.
Essential Investment Partners
Closed End Funds – A Unique Opportunity
EIP is an independent investment counsel and wealth management firm
– More than $120 million in AUM as of 5/31/14
– Wealth management: 25 clients and 85% of AUM
– Separate accounts for third party advisers: 15% of AUM
Two main disciplines are available as separate accounts
– Essential Growth Portfolio? (launched 12/31/2003)
– Essential Absolute Return Portfolio?(launched 3/31/2009)
Will be talking about investing in closed end funds today, as used in the Absolute Return Portfolio strategy
Closed End Fund (CEF) Market Overview
Sold to individual investors at launch based on yield or a current investment fad
– Closed end structure allows leverage which amplifies yield and NAV volatility
– Fixed pool of assets for the manager — attractive from business perspective and investment perspective (no need to reserve liquidity for redemptions)
– Attractive to brokers as commission is builtering into price;o regular
calendar oferingso provides supply of new income ideas
Highly inefcient market
– Most funds are relatively small (less than $1 billion) so trading volume is thin and spreads are relatively wide
– Little or no professional research coverage
– Very few professional investors in the space. RiverNorth is one of the biggest non-activist investors. Bulldog and Karpus are the biggest activists
Overall market is small (approximately $225 Bil)
– Not attractive to large institutions as investments can’t be scaled
The ultimate indicator of retail sentiment
– Requires contrarian instincts to be successful
Lessons from Sumo
The match is quick
– And may well be over sooner than you think
The tide can change quickly
– Be prepared for unanticipated events
If you want to watch from close up, don’t relax
– It is dangerous to be a passive spectator
Opportunity Set Constantly Shifting
Corporate Actions — generally lower risk, lower return
Fund mergers — most often consolidations of similarfered byfundssameo sponsors
Open ending — relatively rare, usually forced
Tenderfoers — usually at a small discount to NAV for a minority of shares. Losing favor lately, replaced by buybacks
Reversion Trades — higher risk, higher potential return
Out of favor asset class — munis in late 2013, for example
Interest rate scare — double whammy for levered FI CEFs
Dividend cut — overreaction
Anomalies — one fund of a group trades away from the others
Full presentation below Closed-End-Funds-A-Unique-Opportunity