Closed-End Fund Advisors Diversification, Income, & Tactical - - PowerPoint PPT Presentation

Closed-End Fund Advisors

Diversification, Income, & Tactical Management

“Introduction to Closed-End Funds”

VCU MBA Capital Markets Class November 18, 2010

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Today’s Goal

To give you an overview on closed- end funds and how to analyze them compared to other investment vehicles and where they might fit in an investment portfolio.

What Are We Going to Cover?

Introduce

• Overview on CEFA
• Crash Course in Closed-End Funds
• Four C’s in CEFs, IPO’s, Fear & Greed

Educate

• Leverage, Discounts & Yield, Sector Average Yield
• Hypothetical Portfolio
• CEF Portfolio Management Process & Risk Factors

Execute & Evaluate

• Key Advantage of CEFs
• CEF Resources
• Net Performance & Firm Bios

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What is CEFA?

• Investment Management Firm
• 50 years Combined Manager Experience
• Independent, Fee Only & Family Owned
• Published only Hardback CEF Book in 1991
• 27 Years on a CEF Board of Directors (1976-2003)
• Scott Letter: 18 years & CEF Universe: 2 ½ Years
• $70 Million in Assets Under Management
• Clients in 17 states with Average Assets of $500K+.
• Publically Publish Performance to 2000+ Subscribers

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SEC Registered Investment Advisory Firm

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Current CEFA Portfolio Models

• International Equity (2002)

– Equity oriented funds w/ little US equity exposure 2%-3% yield

• Hybrid Income (2006)

– 50/50 balance between bond & equity income funds w/ 7%-10% yield

• Balanced/Foundation (2009)

– 60/40 balance between bond and equity funds w/ a 5%-7% yield

• Conservative Diversified (2009)

– Primarily CEFs, w/ significant exposure to ETFs and mutual funds. Seeking low correlation asset classes for reduced volatility.

• CEFA Diversified Growth (1999)
• 90% equity, 10% bond: tactical and wide mandate

w/ 3%-4% yield

• CEFA Growth & Income (1999)
• 80% equity, 20% bond: tactical and wide mandate

w/ 4%-5% yield

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Closed-End Funds: Overview

• Ability to Use Three Types of Leverage
• Fixed Capitalization (no redemption pressure)
• Intraday Trading (Control in Price Execution)
• Stop Loss, Limit & Good Till Cancelled Orders
• Most CEFs Listed on The New York Stock Exchange
• Best Way to Capture Market Inefficiency's: Fear & Greed
• A Diversified & Professionally Managed Pool of Assets

More info: http://www.cefadvisors.com/closed_end_funds.html

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• Oldest US Fund Structure – 1893
• Best Known for Income, International

& Municipal Bonds

• Discounts & Premiums to Net Asset Value

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Closed-End Funds vs. Open-End Mutual Funds & Exchange Traded Funds

Discount Trading Capitalization Redemption Pressure Leverage Active Management Expense Ratios

CEFs

Yes Intraday Fixed at IPO* (except DRIPs, Warrants, tender, etc.) None, manager can make pure investment decisions Yes, if the fund wishes Yes Often lower than comparable MF peers

ETFs

No* Intraday Creation Unit Redemption Not really as not “managed” No* No Tends to be lowest

Mutual Funds

No After 4pm post trading Constant in and out flow Yes, can force manager to make buy/sell decisions No* Yes Can be higher, many have load fees and 12b1 fees.

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• CEFs are known for their ‘infamous’ discounts. The

discount is the feature built into CEFs that make them unique & potentially quite lucrative.

• We believe that CEFs historically trade at discounts

because they can, and you have to price this into the value of the fund.

Closed-End Fund Discounts

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Relative Discount

Relative Discount: The current discount/premium of a closed-end fund vs. the fund’s historical discount/premium. This data point is intended to help identify relative value for the fund vs. the absolute value of the current discount/premium. Example: MHI 52 Week Premium/Discount Chart

08/03/10

Templeton Emerging Markets Income Fund: NYSE: TEI

Chart Source: CEFconnect.com

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Four C’s to Consider with CEFs

– Characteristics of The CEF portfolio – Calendar: seasonal trends & ex- dividend dates – Consistency

• Managed Distributions
• Level Distributions

– Composition (of Dividend)

• Income
• UNII & Relative UNII
• Capital Gains
• Return of Capital

• Built-in sales charges on CEF IPOs that range from 4 %

to 5 ½ %.

• The majority of CEFs trade at a discount to NAV soon

after the IPO and in regular market situations. Wait 3-9 months.

Buying on the IPO?

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• Learning the ebb & flow of a CEF discount/premium trend is a

great way to increase your chance for beneficial trading decisions.

• Peer to peer and peer group comparisons.
• If you trade on the secondary market, you can use stop, limit

and good till canceled orders.

• If all other CEFs covering the investment focus are at

premiums, there are no suitable open-end funds or ETFs and you HAVE to have this exposure, then you can consider buying the CEF IPO.

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Fear and Greed with Closed-End Funds

Individual investors (85% of CEF holders) often trade for reasons based on fear or greed. This can create

• pportunities for a diligent and patient (professional)

investors.

CEFs are the best investment structure to take advantage of fear and greed as they are the only investment structure where it is possible to know what it’s worth (NAV) versus the current market price or ‘perceived value’. Discount to NAV is a measurable and ongoing way to see market sentiment or popularity. ** If we like the discount AND we like the asset class or fund, there’s clear upside when the fund’s discount reverts back to normal levels.

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Impact of Leverage

Credit Quality ranges from AA- to AA+.

5.37% 5.71% 5.43% 6.33% 4.50% 4.72% 4.86% 4.97% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

NAV Yield

NEA NIO NPX NPT NXR NUV NXQ NXP

Leveraged Unleveraged

Source: CEF Connect: August 30, 2010

Past performance is not indicative of future results. This presentation is not intended as an offer to sell any of the funds shown. Rather, funds shown are for illustrative purposes only.

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Discount Yield Benefit

Advantage of Paying “90 cents for $1.00 of Assets”

Example: Alpine Global Premier Property (NYSE: AWP)

Market Price: $5.99 NAV: $7.30 Discount: -17.95% As of August 30, 2010

5.44%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

NAV and Market Price Yield for AWP

Yield on NAV Yield on Market Price

6.61%

Discount Yield Benefit = 1.17%

Source: CEF Connect Past performance is not indicative of future results. This presentation is not intended as an offer to sell any of the funds shown. Rather, funds shown are for illustrative purposes only.

Closed-End Funds: By Yield

15.5% 26.4% 32.8% 17.6% 8.5%

Yield Under 5% Yield 5% - 6.5% Yield 6.5% - 8% Yield 8% - 10%

Yield Over 10%

Note: 625 closed-end funds; data as of 11/16/10 , CEFConnect.com

Core Income Universe

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Average Distribution Yield for CEFs

as of November 12, 2010

Source: CEFA’s Closed-End Fund Universe, November, 12, 2010

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

5.8% 4.3% 10.1% 6.1% 6.4% 7.8% 7.5% 8.8% 6.6% 6.5% 7.2%

Hypothetical Portfolio of CEFs

Note: Used category average distribution yield as of November 12th, 2010. Distribution yield does not take into effect changes in principal or market price values or fluctuations. dividends are not guaranteed and the past cannot be used to predict future results.

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• US Gr. & Inc Funds
• Global Dividend Funds
• Preferred Equity Funds
• Covered Call Funds
• MLP Funds
• US REIT Funds
• International REIT Funds

60% Equity Funds

• Municipal Bond Funds
• Convertible Bond Funds
• Emerging Markets Income
• High Yield Bond Funds
• Investment Grade Bonds
• Limited Duration Bonds
• Mortgage Bond Funds

40% Bond Funds

Average Blended Portfolio Yield

Closed-End Fund Risk Factors

• Discount widens
• Liquidity risk: wide bid/ask and low

trading volume on some funds.

• Dividend cuts usually leads to a strong

market price pull back.

• Volatility and intraday trading.
• Return of Capital / Principal

– Can stem from managed / level distribution policy

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Dividend Cut 11/14/09 by CRF

Source: Yahoo Finance

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CRF Dividend Info

Source www. Cefconnect.com

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CEFA’s Investment Process

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Buy at a Discount Actively Monitor Account Track Relative Value Anticipate Dividend Changes When to Raise Cash? Sell at Premium

• r Swap Funds

CEF Manager Analysis Adjust Portfolio Allocations

Key CEF Advantages

• Registered Investment

Company: Diversification & Transparency

• Control in Execution
• Set & Trailing Stop Orders

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• 85% Income Oriented
• Paid to Wait
• Tactical Swapping to Reduce Risk
• Buying at A Discount to NAV
• No Redemption Pressures

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Next Steps

Ask Questions

?

Sign up for Scott Letter & Updates @ ScottLetter.com Try Our Weekly Data Service CEFuniverse.com

Learn More / Stay in Touch Use CEFs on Your Own

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Disclaimer

Important: The information in this presentation is not for general circulation and should not be considered an offer, or solicitation, to deal in any of the mentioned funds. The information is provided on a general basis for information purposes only, and is not to be relied on as advice, as it does not take into account the investment objectives, financial situation or particular needs of any specific investor. Any research or analysis used to derive, or in relation to, the information herein has been procured by Closed-End Fund Advisors (“CEFA”) for its own use, and may have been acted on for its own purpose. The information herein, including any opinions or forecasts have been obtained from or is based on sources believed by CEFA to be reliable, but CEFA does not warrant the accuracy, adequacy or completeness of the same, and expressly disclaims liability for any errors or omissions. As such, any person acting upon or in reliance of these materials does so entirely at his or her own risk. Any projections

• r other forward-looking statements regarding future events or performance of countries, markets or

companies are not necessarily indicative of, and may differ from, actual events or results. No warranty whatsoever is given and no liability whatsoever is accepted by CEFA or its affiliates, for any loss, arising directly or indirectly, as a result of any action or omission made in reliance of any information, opinion or projection made in this presentation. The information herein shall not be disclosed, used or disseminated, in whole or part, and shall not be reproduced, copied or made available to others without CEFA expressed written permission. CEFA reserves the right to make changes and corrections to the information, including any opinions or forecasts expressed herein at any time, without notice.

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Contact Information

Closed-End Fund Advisors, Inc. 7204 Glen Forest Drive, Suite #105 Richmond, Virginia 23226 Phone: (804) 288-2482 / (800) 356-3508 Email: jcs@cefadvisors.com www.cefadvisors.com

Thank you for your time and attention, feel free to call or email with any questions..

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For Your Information

Free CEF Resources

Investment Company Institute – www.ici.org CEF Association – www.cefa.com Nuveen’s CEF Website – www.cefconnect.com The Scott Letter: Closed-End Fund Report – www.scottletter.com CEF Quarterly Commentary: Jeff Margolin First Trust: http://www.ftportfolios.com/Retail/Commentary/CEFCommentaryMain.aspx CEF Quarterly Commentary & Research – Nuveen http://www.nuveen.com/CEF/Info/CommentaryResearch.aspx LinkedIn CEF Network: http://www.linkedin.com/groups?about=&gid=1172377&trk=anet_ug_grppro Morningstar CEF Discussion Group http://socialize.morningstar.com/NewSocialize/forums/100000006.aspx Seeking Alpha – key word “closed-end fund” - www.seekingalpha.com Yahoo Discussion Group: Closed-End Funds 2: http://finance.groups.yahoo.com/group/closedendfunds2/ More Useful Links at: www.cefadvisors.com/investRes.html

2010 YTD CEFA Portfolio Performance (NET)

Intl Equity Diversified Growth Growth & Income Hybrid Income Balanced / Foundation Conservative Diversified

First Quarter +3.71% +3.60% +4.88% +5.56% +6.00% +2.81% April +1.27% +2.76% +2.16% +1.20% +2.28% +0.84% May

• 8.97%
• 9.15%
• 7.93%
• 3.96%
• 5.51%
• 3.59%

June

• 0.55%
• 1.93%
• 0.67%

+1.46% +0.46%

• 0.24%

July +7.44% +6.72% +5.96% +5.08% +3.66% +2.05% August

• 1.12%
• 1.78%
• 1.01%

+0.12% +0.30%

• 0.03%

Sept. +9.52% +9.19% +7.12% +4.70% +4.03% +4.06% YTD +10.09% +8.57% +10.63% +14.65% +11.32% +5.86%

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Performance is net of fees & commissions and includes all account s in each composite. Past performance cannot predict future results and investments with CEFA may lose value and are not guaranteed. Data as of 9/30/10.

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John Cole Scott, CFS

Portfolio Manager, Executive VP of Closed-End Fund Advisors

John has worked at the firm since early 2001. He sits on the firm’s investment committee holds the Series 66 License and the Certified Fund Specialist designation (CFS). He is a graduate of The College of William and Mary and has been quoted widely in the financial press and presented at conferences and for investment groups around the country. In 2008 John founded CEFA's Closed-End Fund Universe, a comprehensive weekly data service covering the closed-end fund industry. John is a long time member of The Richmond Association for Business Economics (RABE), serves on the Investment Committee for The New York State Society of The Cincinnati and is Treasurer and Membership Chair for The Virginia Museum of Fine Arts’ Business Council.

Principal’s Biographies

George Cole Scott

• Sr. Portfolio Manager, President of Closed-End Fund Advisors

George’s investment career started in 1969 when he joined a regional brokerage firm after a career as a journalist. In 1976 he helped a client buy control of a deeply discounted CEF which became Bergstrom Capital (AMEX: BEM). He served on the board of the highly rated fund for 27 years. In 1987 he founded The Scott Letter: Closed- End Fund Report which was a top rated print newsletter until he became a shareholder in CEF Advisors in 1996. In 1991 he co-authored the only hardback and 500 page book on CEFs with a finance professor. He is a graduate

• f The University of Washington, hold the Series 66 License and is a long time member of The Society of

Financial Analysts and CFA Virginia. He has been widely published, and interviewed as well as consulted with various Closed-End Funds. George is one of two CEF specialists with more than four decades CEF expertise.