Value Oriented Closed-End Funds Trading Below NAVVW Staff
Stifel analysts Alexander Reiss and Thomas Boyes have a look at closed-end funds for October 2013. Two funds trading at a discount from big value firms, GAMCO and Royce popped up, so it looked interesting. Below is a brief excerpt from the report which discusses some of those equity CEFs trading below NAV.
The S&P 500 hit an all time high of 1725.52 after the Federal Reserve announced that it would not alter the pace of its asset purchase program. The index finished the month with an 3.14% gain. The average equity closed-end fund rose by 2.27% and 3.61% on a share price and NAV basis, respectively. The average discount for the peer group widened to 7.80% from 6.67% as NAVs increase outpaced share price increase.
Fixed-income closed-end fund gain
In the wake of the Fed’s announcement, long-term interest rates declined boosting the value of fixed income assets. The average taxable fixed-income closed-end fund gained 1.28% on an NAV basis, while the average share prices rose by 1.71%. The average discount for the peer group contracted by 45 basis points and as of September 30, 2013 was 6.12%. Municipal closed-end fund share prices performed well in September gaining 3.46% on a share price basis. The average municipal closed-end fund NAV gained 3.96% on a total return basis. As NAV performance exceeded share price returns, discounts grew to 5.92% from 5.46% in September.
Correlation of Fed’s tapering and market gains
In the near term we believe investors should remain cautious. Despite the Fed’s reluctance to alter the pace of asset purchases this month, it will eventually, in our opinion. Importantly, the timing of the Fed’s tapering has caused the market to interpret economic data counter-intuitively. The market now gains when lackluster economic data implies the Fed’s support might persist longer, while losing ground after positive data suggests otherwise. We believe that additional volatility will be created by the market as it debates the signals coming out of the Federal Reserve. It is our belief that this will ultimately provide investors with attractive entry points in which to purchase high quality closed-end funds.
An additional factor for investors to take into consideration is the possibility for closed-end funds to be effected by tax-loss selling and gains harvesting. The large correction that has taken place in the fixed income market this year has made many funds candidates for tax-loss selling, in our opinion. Investors may be seeking to pair off gains made in the equity market, which has had a strong run this year. Tax loss selling has historically begun in mid-November and can last into early December. We believe that some closed-end fund share prices may be further pressured by liquidity constraints.
Closed-end funds using leverage
Importantly, as mentioned in past monthly reviews many closed-end funds use leverage to enhance their income or growth potential. Leverage magnifies performance and can increase volatility significantly. Leveraged funds should be used carefully. We strongly recommend that investors review their closed-end fund holdings regularly to ensure proper risk tolerance.
Equity Funds – Leveraged
We strongly urge investors to be respectful of the role of leverage in their closed-end funds’ portfolios. Leverage can greatly magnify the volatility of closed-end funds. In our opinion, closed-end equity funds that use leverage are only suitable for investors with above-average risk tolerance. Although we feel confident about the long-term performance of the funds, their use by conservative investors may not be appropriate. The eight funds we rate Buy are: The Eaton V.Tax-Advantaged Dividend Inc Fund (NYSE:EVT), the Lazard Global Total Return & Income Fund (NYSE:LGI), the Macquarie Global Infr Total Rtrn Fnd Inc (NYSE:MGU), the Royce Value Trust Inc (NYSE:RVT), the The Gabelli Dividend & Income Trust (NYSE:GDV), the Nuveen Tax-Advantaged Ttl Rtrn Strtgy Fd (NYSE:JTA), the Nuveen Preferred Income Opportunities Fd (NYSE:JPC) and the Cushing Renaissance Fund (NYSE:SZC).
Cushing Renaissance Fund
We currently cover the Cushing Renaissance Fund (NYSE:SZC) with a Buy rating. The fund invests in a nondiversified portfolio of energy, industrial, and manufacturing via common stock, senior loans, and Master Limited Partnerships (MLPs). As of June 30, 2013, the fund had 52.06% of its holdings in common stock, 23.07% in MLPs and 24.87% in senior notes. The top five sectors in the equity portion of SZC’s portfolio consisted of 9.86% transportation, 8.69% chemicals, 7.53% E&Cs, 7.02% refiners, and 4.92% utilities as of June 30, 2013. SZC pays $0.41 to investors on a quarterly basis and currently distributes 7.22%. The fund trades at a 10.70% discount to its most recently reported NAV of $25.64, which was reported on September 25, 2013. Lastly, the fund was leveraged 15.17% as of June 30, 2013.
Nuveen Tax-Advantaged Ttl Rtrn Strtgy Fd
We maintain a Buy rating on the Nuveen Tax-Advantaged Ttl Rtrn Strtgy Fd (NYSE:JTA). The fund invests in a diversified portfolio of equity securities and senior loans. As of August 30, 2013, 70.9% of JTA’s portfolio was invested in common equity, while 17.4% was invested in senior loans. The top five sectors in JTA’s portfolio consisted of 12.2% pharmaceuticals, 11.3% media, 8.7% insurance, 5.9% software, and 5.9% diversified financial services. JTA has a Managed Distribution Program (MDP) that pays $0.23 to investors on a quarterly basis and currently distributes 7.35%. Currently, the fund trades at a 7.87% discount to NAV. Lastly, the fund was leveraged 31.47% as of August 30, 2013.
Nuveen Preferred Income Opportunities
Additionally, we rate the Nuveen Preferred Income Opportunities Fd (NYSE:JPC) a Buy. The fund invests in a portfolio primarily of preferred securities and other credit opportunities. As of February 28, 2013, 90.1% of JPC’s portfolio was invested preferred stock, 5.2% net other assets, 2.1% corporate bond, 1.8% common stock, and 0.7% in cash and equivalents. The top five sectors in JPC’s portfolio consisted of 31.1% insurance, 18.8% commercial banks, 17.2% diversified financial services, 15.1% real estate investment trusts, and 6.5% capital markets as of August 30, 2013. The fund was leveraged 29.38% as of August 30. 2013. The Nuveen Preferred Income Opportunities Fund distributes $0.0633 cents per share on a monthly basis and currently distributes 8.75%. Lastly, the fund trades at an 12.23% discount.
Macquarie Global Infr Total Rtrn Fnd
The Macquarie Global Infr Total Rtrn Fnd Inc (NYSE:MGU) invests in a combination of common stocks of global infrastructure companies and domestic master limited partnerships (MLPs). As of August 31, 2013, the fund had approximately 85.2% of its investments in developed markets. The fund is heavily exposed to Europe, with 32.9% of its portfolio being in European holdings. The fund’s five largest sector allocations within the infrastructure sector were 20.5% invested in pipelines, 15.3% invested in electric utility, 12.7% invested in seaports, 11.9% invested in toll roads, and 7.6% invested in electricity and gas distribution. We believe that the fund’s investments in infrastructure assets are an attractive feature to investors wishing to diversify their equity exposure. The fund has a leverage ratio of 29.70% as of August 31, 2013. The fund pays a quarterly dividend of $0.3200. MGU trades at a 12.07% discount and distributes 5.91%.
Eaton V.Tax-Advantaged Dividend Inc Fund
The Eaton V.Tax-Advantaged Dividend Inc Fund (NYSE:EVT) invests in a combination of common equity and preferred stock. As of June 30, 2013, the fund had 50.20% of its portfolio invested in domestic common stock, 31.33% invested in preferred stock, 16.96% invested in foreign stock, and 1.51% invested in cash. Most issuers of preferred stock are companies in the financial industry. Largely due to its preferred stock holdings, the fund had a concentration in financials with 41.06% of the portfolio invested in that industry. EVT has a leverage ratio of 23.90% as of June 30, 2013. The dividend of $0.1075 per share is paid monthly and the fund currently distributes 7.16%. The fund trades at an 9.45% discount to NAV.
Lazard Global Total Return & Income Fund
The Lazard Global Total Return & Income Fund (NYSE:LGI) invests in a combination of common equity and emerging markets’ currencies. As of August 31, 2013, the fund had approximately 74.0% invested in global equities, and 25.0% invested in emerging market currency & debt. The portfolio’s top five industry concentrations were 19.7% in healthcare, 19.2% in financials, 17.8% in information technology, 11.6% in energy, and consumer staples at 9.3%. It is important for investors to note that the fund was leveraged 23.30% and was 39.50% invested in Europe. The fund pays a monthly dividend of $0.0907 per share and currently distributes 6.50%. The fund trades at a 11.29% discount to NAV.
Gabelli Dividend & Income Trust
The Gabelli Dividend & Income Trust (NYSE:GDV) is primarily invested in large-cap companies. In addition to its common stock holdings, the fund held minimal convertible preferred stock and convertible corporate bond positions, totaling less than 1% of total assets of the fund. The fund had an annualized portfolio turnover of 15.60%. The fund’s assets are invested in various sectors. As of June 30, 2013, the portfolio’s top five industry concentrations were 14.0% financial services, 12.1% food & beverage, 8.8% oil utilities, 6.1% healthcare, and 5.0% in telecommunications. GDV has a leverage ratio of 25.56% as of June 30, 2013. The fund pays a monthly dividend of $0.0900 per share and distributes 5.43%. The fund currently trades at a 10.77% discount to NAV.
Royce Value Trust Inc
The Royce Value Trust Inc (NYSE:RVT) is a small-cap equity fund that is approximately 7% leveraged. As of June 30, 2013, the fund’s total investments were $1.26 billion. The portfolio’s top five industry concentrations were 29.4% in industrials, 21.9% in information technology, 17.5% in financials, 14.9% in consumer discretionary, and 7.5% in healthcare as of June 30, 2013. RVT, as of June 30, 2013, has 23.4% of its portfolio invested outside of the U.S. Each quarter, the fund will pay out 1.25% of the fund’s average NAV at the end of the prior four calendar quarters to shareholders. RVT’s quarterly dividend is currently $0.2000 in accordance with its distribution policy. The fund trades at a 12.59% discount to NAV and distributes 4.97%.
On September 5, 2013, stockholders of Royce Value Trust Inc approved forming a new diversified, closed end fund. This new company will be called Royce Global Value Trust, Inc. The Royce Global Value Trust, Inc. is to be funded by approximately $100 million dollars derived from RVT and focus on global investment opportunities. The expected exchange ratio is one share of the Royce Global Trust common stock for every seven shares of Royce Value Trust common stock. Common shareholders will hold shares of both RVT and the new fund and see their aggregate NAV unchanged. The total NAV of RVT and the new fund will equal the NAV of RVT prior to the transaction. The costs of this transaction will be paid by the Royce & Associates, LLC.