AICAlliance - Excellence Beyond Indexing

AICAlliance – Excellence Beyond IndexingAICAadmin2020-02-21T07:49:59-05:00

Average CEF Universe Data

Data Table
Performance Table

	#Funds	Current Disc/Prm	10 Yr Avg Disc/Prm	Market Yield	3 Yr Div Growth	3 Yr RoC %	Leverage	Net Assets (MM)	1 Yr Price St. Dev	3 Yr NAV St. Dev	90 Day $ Liquidity (M)	90 Day Volume Trend	90 Day Price/Nav Corr	Corr to 12 Sectors Index	Beta to S&P 500
US / Global Equity CEFs	89	-14.75%	-8.72%	11.34%	19.27%	23.58%	12.25%	$341	37.24	20.50	1408	39.30%	97.55%	89.84%	0.94
Sector Equity CEFs	108	-10.16%	-3.90%	18.38%	-10.33%	39.11%	20.05%	$446	54.28	27.96	2606	55.19%	97.89%	89.80%	1.10
Taxable Bond CEFs	151	-12.52%	-2.97%	11.27%	-2.81%	11.55%	25.89%	$347	34.43	8.99	2048	44.14%	92.30%	88.18%	0.49
Debt Focused BDCs	44	-56.55%	-1.22%	24.39%	26.74%	2.99%	48.35%	$966	66.81	5.27	4001	60.23%	N/A	88.48%	1.39
Municipal (tax-free) CEFs	145	-9.28%	-3.09%	4.54%	-21.59%	1.11%	31.72%	$411	23.75	7.46	1201	57.48%	92.41%	83.97%	0.39
All Listed CEFs/BDCs	542	-15.59%	-4.39%	11.89%	-4.62%	15.39%	25.83%	$431	38.76	14.10	1970	50.67%	86.06%	87.40%	0.62

Data as of 04/03/2020 from CEFData.com

	1 Week(%)		1 Month(%)		3 Month(%)		6 Month(%)		1 Year(%)		3 Year(%)		5 Year(%)		10 Year(%)		QTD(%)		YTD(%)
	Price	NAV	Price	NAV	Price	NAV	Price	NAV	Price	NAV	Price	NAV	Price	NAV	Price	NAV	Price	NAV	Price	NAV
US / Global Equity CEFs	-6.19%	-3.22%	-30.07%	-24.06%	-33.84%	-28.32%	-27.64%	-21.85%	-27.27%	-21.78%	-5.26%	-3.44%	-1.65%	-0.47%	3.08%	4.19%	-6.42%	-4.23%	-33.37%	-27.87%
Sector Equity CEFs	-5.51%	-1.40%	-39.16%	-33.95%	-42.08%	-37.09%	-38.41%	-33.35%	-35.39%	-31.27%	-13.18%	-11.44%	-7.66%	-6.86%	3.25%	4.14%	-5.31%	-3.69%	-41.89%	-37.01%
Taxable Bond CEFs	-3.91%	-0.26%	-26.99%	-18.50%	-27.04%	-18.26%	-23.91%	-15.93%	-20.10%	-13.42%	-4.17%	-1.33%	0.04%	1.41%	3.64%	5.02%	-5.60%	-1.70%	-26.93%	-18.11%
Debt Focused BDCs	-19.78%	0.00%	-52.70%	2.69%	-55.12%	3.47%	-52.79%	4.82%	-52.55%	6.41%	-20.45%	6.98%	-9.31%	7.15%	2.67%	10.59%	-13.58%	0.00%	-55.03%	3.47%
Municipal (tax-free) CEFs	-4.00%	-4.66%	-15.67%	-11.37%	-12.58%	-7.55%	-12.02%	-7.42%	-4.59%	-1.12%	0.57%	2.80%	2.01%	2.94%	4.52%	5.61%	-5.63%	-3.74%	-12.47%	-7.40%
All Listed CEFs/BDCs	-5.92%	-2.13%	-29.08%	-18.69%	-29.62%	-18.91%	-26.62%	-16.34%	-22.99%	-13.47%	-6.28%	-1.96%	-2.17%	0.22%	3.65%	5.12%	-6.35%	-2.90%	-29.44%	-18.73%

Data as of 04/03/2020 from CEFData.com

Key Take-Aways from CEF Advisors’ Research Call (3/30/2020)
Discounts Leverage and CEF Outlook Article

Introduction

The average closed-end fund through Friday March 20th is down around 40%. Discounts widened; NAVs and market prices both fell. NAV movements reflect both bear market pricing and a lack of trading in the market, a shortage of bids. Most funds are levered (including 90% of bond funds), and leverage magnifies results on the way up and down.

For those who remember the Financial Crisis, discounts were wider than they ever got on a single day in October 2008. If you’re in closed-end funds, your brokerage statements look scary, reflecting a sentiment of fear in the market. Volatility is something we talk about with every client, but I can essentially guarantee you that every client we’ve brought on in my entire 18-year career has not seen the current level of discounts that we have seen in March 2020.

Remember closed-end funds are not one position; they’re diversified and actively managed. Closed-end funds have a fixed capitalization, and apart from breaking 40 Act leverage terms, they are essentially never a forced seller of assets (unlike ETFs and open-end mutual funds, which must sell to meet redemptions), which is very useful in periods like this. Historically, no closed-end fund has ever gone bankrupt, and no BDC debt has ever gone unpaid.

We never know where the bottoms or tops are, but I see signs that the market is oversold. Based on our models, the market is pricing around an 80% cut in dividends for many sectors. I don’t see that happening. We’re modelling 15% cuts for our portfolios; the average closed-end fund may experience a 20% cut in the next year, though there will be sectors and sponsors who are hit worse. If you stay diversified, haven’t margined positions, and aren’t forced sellers, you’ll be okay in my opinion.

Remember, the fear you feel in situations such as today’s is often positive, because other people feel also that fear and when there’s no one left to sell, asset prices can recover. I think that pain is going to build the base where NAVs can stabilize as the market gains more liquidity and discounts can come back towards normal levels. As in ’08-09, we will observe a slow narrowing of discounts as time heals wounds.

Investment Perspectives and Strategy

At my RIA firm, CEF Advisors, we build multi-sector, multi-manager portfolios, because we believe no one sector or sponsor is perfect. We focus generally on the income side, with some growth component. We look for sustainable dividends, discounts that are more likely to narrow than widen, and net asset value in sectors that we can overweight. We often like managers who can wander and be active, since that’s the point of active management.

In the current turbulent environment, we like munis, senior loans and preferred equity (higher on the capital structure than equity), multi-sector bond fund managers whom we know well, utilities, REITs, and the top 10-15% of BDC managers. Generally, fixed income tends to bounce back much faster than equity funds since there’s a floor—what matters is if the income payments continue coming in.

Munis, for example, I think are very attractive now. Muni funds are typically well diversified investments, and I don’t see any near-term issues for muni bond distributions at the sector level. If interest rates start to rise again, that usually means the economy is getting healthier. We looked at the correlation of a muni fund’s market price to its net asset value over a 90-day rolling period to inform us of how much the current movement is going with or against net asset value. It rarely gets above ninety, but we are there now. When discounts are wide and correlations are up, it’s often the bottom; it doesn’t mean it’s free of volatility, but it’s where a bottom can be formed. There is currently a lack of liquidity in the muni market, but that will at some point be resolved.

Retail-oriented BDCs are the exact place to experience high volatility, the highest levels of fear. Coming into this weekend (March 21, 2020), BDCs showed an average 19% yield and a 47% discount. In this environment, when some BDCs are trading at ten to twenty cents on the dollar, I wouldn’t bottom fish, but I’d look for dislocations that are significant and where liquidity is not going to be an issue. Quality BDCs have one of the best structures to work through the uncertainty, but I would say stick to top tier and high quality.

Last week we refocused parts of portfolios into lower-levered, lower beta, easier dividend policies. A quick and dirty method is to sort by yield: The lower the yield, the safer investors think that dividend is because they’re not requiring high numbers. If you’re currently an owner of funds in the bottom tier, the market is likely telling you it’s expecting a dividend cut

We’re seeing discounts of over 35%; dividends can be cut, and you can still get through it. Our models right now are for 80-85% of diversified income through the next two years based on a negative 25% GDP next quarter and a 20-25% unemployment rate. Bear in mind that leverage is very cheap today; there has never been a better time for prudent use of leverage in a closed-end fund structure.

If you were going to navigate this storm on your own, I would overweight the sectors I mentioned earlier. Lower beta, lower leverage, lower leverage-to-NAV yield are the types of funds I’d be searching for, and a great way to stay invested and remain comfortable as an investor. On portfolio construction, stay diversified, stay active. If you’re an income investor, the yields are immense, and even with 20% haircuts, there’s still a lot of cash flow that can survive the future. As an income investor, you don’t need to primarily worry about the price movement of the investment; of more concern is the direction of the income. I know the pressure is immense out there; but avoid panic selling. We can get through this; closed-end funds are the right structure to do so. It may not feel like it at this moment, but the rear-view mirror will look a lot better down the road.

There is a chance that, with so much pessimism in the market, any good news could turn this around quickly. In the past, we’ve solved hard problems. Markets are pricing as if we can’t solve these hard problems, and that we’ll live in caves and can never go to the office again. My best guess is that, in a matter of weeks or months, this will bottom out. Clients I have who were buying bond funds in ’08 and early ’09 are still bragging about the purchases ten years later.

Active Investment Company Alliance (AICA)

In addition to our weekly NAVigator podcast, we are working on a schedule of webinars through the Active Investment Company Alliance with both our members and participants in the sector. If you would like to be involved, go to AICAlliance.org and let us know. Whether you’re a product manager, a closed-end fund advisor, an analyst, a fund sponsor, or a service provider, we’d be delighted to hear your story or research and for you to have a seat at the table.
AICA NYC 2019 Article (10/24/2019)
AICA NYC 2019 Speakers Quotes Advisor Perspective 1

The Active Investment Company Alliance conference that will be held in New York City on November 6^th is specifically designed for advisors interested in closed-end funds (CEFs), business development companies (BDCs) and interval funds, the conference boasts a diverse and top-notch speaker line-up: Conference Page: www.AICalliance.org/NYC2019Event

The event will highlight topics such as:

How institutions and traders handle moving large buy and sell order in the market efficiently.

Learn from specialists in Business Development Companies (BDC’s) how to analyze and rate the managers, specifically why premiums can be good, and discounts can be bad for some funds that often yield 7% to 9%+.

Interval Funds have had a 300%+ growth in the past 5 years, to almost 160 active funds with $77 Billion in combined $AUM. Why are interval (and tender offer) funds so becoming so popular for alternative investmenting?

The event will feature 7 Panels and 3 presentations and has been approved for 7 CE Credits from the CFP board.

Here is a small sample of what you can expect from our 30+ presenters:

“Nasdaq continues to make it welcoming for BDCs & CEFs to list with a much lower listing fee schedule than for normal corporate common stock. There is a significant listing fee savings for CEFs families, and newly listed BDCs receive a suite of IR services with the Listing.”

-Andy Hall, Managing Director, Nasdaq New Listings

“Conference attendees will learn about the key factors necessary to analyze and trade closed-end funds, including how successful institutional investors weigh the power of discount mean reversion, project the odds of success of activist approaches, and source liquidity when trading.”

-Eric Boughton, Portfolio Manager, Matisse Capital

“BDCs are a gift to credit nerds. Their portfolios are sitting there in broad daylight. Attendees will learn how to comb investments for direct lending mandates, pricing insights, distressed opportunities and more.”

-Kelly Thompson, Founder & Editor, Direct Lending Deals.

“At the Alternative Income session, attendees will learn about different asset classes that help generate income or capital appreciation for portfolios and provide diversity and noncorrelation of returns.”

-Tony Huang, Director, Advent Capital Management

“Takeaway: Sources for Higher Total Returns and Opportunities to Access Alternatives that Cannot Be Accessed via Mutual Funds and ETFs”

-Kimberly Flynn, Managing Director, XA Investments

“The CEF IPO structure has changed dramatically in the last year and now addresses many of the objections to buying on the IPO. This has reopened the IPO market and will hopefully lead to a robust calendar of new and innovative strategies coming to market”.

-Jerry R. Raio, Arbor Lane Advisors, Inc. President and CEO

“Attendees will get a unique insight from a BDC industry veteran about the dramatic changes underway in the BDC sector that will drastically change, within the space of the next two years, the size, composition and focus of the industry, and will just as radically alter the risk-return dynamics for investors.”

-Nicholas Marshi, Publisher, BDC Reporter

“BDCs are arguably exceptionally attractive investment opportunities, provided investors conduct a deep dive on research and understand the business model and the risk taken vs. the reward of the total return”

-Barry Sloane, CEO of Newtek Business Services Corp. (NASDAQ:NEWT):

“Advisors will be introduced to a unique 40 act private equity fund. Once reserved for the ultra high net worth and institutional investor only, Sharespost is on a mission to offer all investors the opportunity to access a diversified portfolio of pre-IPO stock of America’s next generation of great companies like SpaceX and 23andMe.”

-Christian Munafo, Sharespost 100 Fund, Chief Investment Officer and Portfolio Manager

“An approach to investing in CEFs that is likely to be successful over the long term.”

-Phillip Goldstein, Managing Member, Bulldog Investors

“A greater understanding of Interval Fund structures and their acceptance into the marketplace.”

-James J. Curry, AVP, Senior Key Account Consultant, Distribution Services | SS&C ALPS

We hope to see you at our upcoming conference in just under two weeks! As a special benefit for being a reader of Advisor Perspectives we have a 20% discount code to lower pricing to $199 from the regular $249 rate. The code is: AdvisorPerspectives20%. Visit www.AICalliance.org/NYC2019Event to register
AICA Article Bavaria (10/15/2019)
AICA Article-Bavaria

Sophisticated retail investors have known for a long time how closed-end funds and business development companies can provide them with diversified, dependable access to less liquid but higher yielding asset classes than are typically available through mainstream investment products.

Veteran closed-end fund analyst, publisher and data provider John Cole Scott recently launched the Active Investment Company Alliance (link) in order to broaden this base of knowledge, allowing providers of investment products and services within these markets a multi-faceted platform for reaching and educating potential investors, while providing those prospective investors the tools and information they need to get up the knowledge and confidence curve with investment vehicles and asset classes they have not been previously exposed to.

Today we have Steven Bavaria, author of The Income Factory (link) and a long-time user and advocate of closed-end funds in his writings and personal investment strategy, interviewing AICA founder John Cole Scott. Scott is Chief Investment Officer at Closed-End Fund Advisors, Inc. and also founded CEFData.com, a data service covering all US listed and nonlisted closed-end funds and BDCs.

Bavaria: John, for our readers who may not be as familiar with closed-end funds, could you describe some of the features that make them attractive to many investors?

JCS: Many closed-end fund investors are particularly attracted to the idea of having active professional management within a fixed capital structure, so long-term investors don’t have to be worried about a constant inflow and outflow of funds, often at just the wrong times, forcing portfolio managers to make inopportune buy-sell decisions in order to provide instant liquidity to fund investors. This avoids the sort of “run on the fund” risk that investors face with traditional open-end mutual funds, where a relatively few investors panicking and redeeming their shares when markets are depressed can sometimes force fund managers to liquidate what would otherwise be valuable long-term holdings.

Closed-end funds also offer investors an opportunity to take advantage of cheap, institutional leverage, since large funds and other institutional investors often have access to less expensive funding sources than private retail investors, especially investors using IRAs or other tax-deferred vehicles that can’t be easily leveraged. Closed-end funds are generally allowed to leverage themselves up to 50% of their equity capital. Being able to borrow at 2.5% to 3.5% (average is 3.2%), as many funds have in recent years, and re-investing the proceeds at 6-7% or higher, can often add an additional 2% or more to the overall yield on the fund’s underlying earnings. This is the “financial alchemy” that allows a closed-end fund whose asset class (high yield bonds, preferred stocks, convertible debt, utility stocks, etc.) may pay a “natural” (i.e. unleveraged) yield of 4% to 7% (average 5.37%), to distribute, as a result of leverage, a dividend yield of 7% to 9%+ (average 8% for taxable funds).

Of course, if you manage to buy that fund at a 5% or 10% discount to its net asset value, as smart investors can often do, then you have 100 cents on the dollar of assets working for you that you only had to pay 95 cents or less for. That boosts your yield even further.

Bavaria: It is sometimes said that closed-end funds offer thoughtful investors an opportunity to “monetize liquidity” by deliberately trading off liquidity they don’t really need for higher yields and returns. Can you explain this idea for us?

JCS: Liquidity is one of many risks that investors face in making investment choices. Investors can choose to avoid or minimize liquidity risks by sticking to blue chip stocks or to large index or other mainstream mutual funds and ETFs that hold the stocks of broadly traded companies. They know they should always be able to liquidate their holdings either instantaneously at a readily determined market price or through overnight redemption at net asset value from the mutual funds. But there is an opportunity cost to be paid for confining your investment choices to highly liquid securities and asset classes.

As noted above, investors in closed-end funds cannot redeem their shares at their net asset value from the fund itself, the way traditional open-end fund investors can. Closed-end fund investors have to sell their shares in the market, at whatever price the market puts on them at any moment, which may be more or less than the actual net asset value of the fund. For taking this liquidity risk, however, closed-end fund investors can earn the higher yields described above, which are not available to traditional open-end fund investors.

This raises the question for many investors, especially those with a long-term horizon, of how much liquidity do they really need, and is it worth giving up 2 or 3% over the long run in order to get it. Buy-and-hold investors with 20 or 30 year horizons, like those investing for retirement, may well decide that they can afford to live with the short-term volatility and lack of immediate liquidity of many high yielding investments in order to re-invest and compound their returns at the higher rate. This trade-off, some illiquidity in the short term in return for higher income and greater returns a decade or more later, is what we refer to as “monetizing liquidity.”

Bavaria: You have said that you expect AICA to be “more than just a trade association.” What do you mean by that?

JCS: Our goal is to raise the bar beyond just representing closed-end fund and BDC sponsors and managers, although we certainly expect to welcome them and serve their needs. But beyond that we want to be an educational organization that empowers entire new groups of investors to achieve the knowledge base and level of confidence needed to participate in closed-end fund vehicles of various kinds and the asset classes they represent.

We want to be a mecca for discussion forums, podcasts, webinars and conferences, with rich content about investment options that many financial advisors or retail investors have never had a chance to be exposed to in a meaningful way or even knew were easily available.

Bavaria: Closed-end funds, by their nature, are ideal vehicles for holding less liquid, higher yielding and more complex asset classes. Will you be showcasing various asset classes in your educational forums?

JCS: Yes, we have already launched AICA’s weekly podcast series, The NAVigator, with three episodes and a new one getting posted this and every Friday with our experienced host, Chuck Jaffe of MoneyLife. (https://aicalliance.org/alliance-content/pod-cast/) The podcast will feature professional investment managers and other experts on asset classes that are uniquely suited to the closed-ended / BDC structure as well as experienced service providers; think the CEF/BDC ecosystem.

One of our first podcasts focused on credit and alternative structures that have previously been largely confined to institutional investors, but are now finding their way into the retail sector through Closed-ended funds, especially vehicles like non-listed tender offer and interval CEFs. https://aicalliance.org/2019/10/07/alternative-investments/ and the next week we had the index company that created the indexes that power PCEF and XMPT which highlights ways to gain passive exposure to CEFs. https://aicalliance.org/2019/10/11/the-value-of-indexes-made-up-of-closed-end-funds/.

Credit investing, because it is more predictable and returns are more dependent on cash flows than on market appreciation, is uniquely suited to being held in closed-end funds. Similarly other high yielding asset classes, like master limited partnerships, high yield bonds, preferred stocks and convertible bonds, and many others that we will be featuring in future NAVigator podcasts. But we also have on the schedule the attorneys that help create new CEFs / BDCs, CEF / BDC Analysts and commentary and perspective from both The NYSE, where CEFs have traded since 1893 and NASDAQ, where many of the listed BDCs trade today.

Bavaria: I hear you have been developing a website and planning an event in New York City; tell me more about the benefit for visitors to the website and for attendees at the conference?

JCS: We have been programming AICalliance.org for about 6 week and it has been live for only two weeks. It is being powered by our database, CEFData.com via an API feed and programmed to have listed CEF/BDC and nonlisted CEF/BDC filterers, news feed and resources. We expect to have lots of high quality content and help advisors and investors create their own user experience and email updates from the platform.

We have an event in New York City November 6^th from 8am to 7:30pm with 7 Panels, and three presentations. Each speaker has been invited to speak (at no cost to them) on their expertise and attendees will pay a conference fee of $249 to get a full-day of content and networking with the industry’s best. Investors and advisors can view the panels, speakers and register to attend: AICA’s CEF / BDC Bootcamp & Roundtable.

Bavaria: That sounds like a full day. So it sounds like you have high hopes for AICA?

JCS: Yes, we think our timing is right and there is a terrific demand, among retirees and those who are planning to be retired at some point (and their advisors), for higher yielding vehicles of the sort that the closed-end fund and BDC industry has been generating for many years. This will give the ability to create multisector, multimanager custom portfolios based on individual; risk, income and even tax-brackets.

Our mission is to broaden the knowledge-base and help many retail investors, and the financial advisors that serve them, achieve the level of confidence they need to participate in this arena, one that institutional investors have successfully been able to access for generations.

Check out AICalliance.org and download The NAVigator each Friday to follow our progress. We plan to have our first webinar at the end of October.

AICA Nov 6th NYC Event (Archive)

Active Investment Company Alliance CEF / BDC / Interval Fund BootCamp and Roundtable.

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