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

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. 2

What Are We Going to Cover? • Overview on CEFA • Crash Course in Closed-End Funds Introduce • Four C’s in CEFs, IPO’s, Fear & Greed • Leverage, Discounts & Yield, Sector Average Yield • Hypothetical Portfolio Educate • CEF Portfolio Management Process & Risk Factors • Key Advantage of CEFs • CEF Resources Execute & • Net Performance & Firm Bios Evaluate 3

What is CEFA? SEC Registered Investment Advisory Firm • 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 4 4

Current CEFA Portfolio Models • 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 • 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. 5

Closed-End Funds: Overview • Oldest US Fund Structure – 1893 • Best Known for Income, International & Municipal Bonds • Discounts & Premiums to Net Asset Value • 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 6 6

Closed-End Funds vs. Open-End Mutual Funds & Exchange Traded Funds Redemption Active Expense Discount Trading Capitalization Leverage Pressure Management Ratios Fixed at None, IPO* manager Often Yes, if can make lower than (except CEFs Yes Intraday the fund Yes pure comparable DRIPs, wishes investment MF peers Warrants, decisions tender, etc.) Creation Not really Tends to be ETFs No* Intraday Unit as not No* No lowest Redemption “managed” Yes, can Can be After force higher, Constant Mutual 4pm manager to many have No No* Yes in and out Funds post make load fees flow trading buy/sell and 12b1 decisions fees . 7 7

Closed-End Fund Discounts • 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. 8 8

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 9

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 10

Buying on the IPO? • 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. • 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. 11

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 opportunities 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. 12 12

Impact of Leverage NAV Yield Leveraged Unleveraged 7.0% 6.33% 5.71% 6.0% 5.43% 5.37% 4.97% 4.86% 4.72% 5.0% 4.50% 4.0% 3.0% 2.0% 1.0% 0.0% NEA NIO NPX NPT NXR NUV NXQ NXP Credit Quality ranges from AA- to AA+. 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. 13 13

Discount Yield Benefit Advantage of Paying “90 cents for $1.00 of Assets” Example: Alpine Global Premier Property (NYSE: AWP) NAV and Market Price Yield for AWP 7.0% 6.61% 6.0% Discount Yield Benefit = 1.17% 5.0% 4.0% Market Price: $5.99 NAV: $7.30 3.0% 5.44% Discount: -17.95% 2.0% As of August 30, 2010 1.0% 0.0% Source: CEF Connect Yield on NAV Yield on Market Price 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. 14 14

Closed-End Funds: By Yield 8.5% 15.5% Yield Under 5% Yield 5% - 6.5% 17.6% Yield 6.5% - 8% 26.4% Yield 8% - 10% Yield Over 10% 32.8% Core Income Universe Note: 625 closed-end funds; data as of 11/16/10 , CEFConnect.com 15

Average Distribution Yield for CEFs as of November 12, 2010 12.0% 10.1% 10.0% 8.8% 7.8% 7.5% 7.2% 8.0% 6.6% 6.5% 6.4% 6.1% 5.8% 6.0% 4.3% 4.0% 2.0% 0.0% Source: CEFA’s Closed-End Fund Universe, November, 12, 2010 16 16

Hypothetical Portfolio of CEFs • US Gr. & Inc Funds • Global Dividend Funds 60% Equity • Preferred Equity Funds • Covered Call Funds Funds • MLP Funds • US REIT Funds Average Blended • International REIT Funds Portfolio Yield • Municipal Bond Funds • Convertible Bond Funds 40% Bond • Emerging Markets Income • High Yield Bond Funds Funds • Investment Grade Bonds • Limited Duration Bonds • Mortgage Bond Funds Note : Used category average distribution yield as of November 12 th , 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. 17

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 18

Dividend Cut 11/14/09 by CRF 19 Source: Yahoo Finance

20 CRF Dividend Info Source www. Cefconnect.com

CEFA’s Investment Process Buy at a Discount Adjust Actively Monitor Portfolio Account Allocations CEF Manager Track Relative Analysis Value Anticipate Dividend Sell at Premium Changes or Swap Funds When to Raise Cash? 21 21

Key CEF Advantages • Registered Investment Company: Diversification & Transparency • Control in Execution • Set & Trailing Stop Orders • 85% Income Oriented • Paid to Wait • Tactical Swapping to Reduce Risk • Buying at A Discount to NAV • No Redemption Pressures 22

Next Steps Learn More / Use CEFs on Stay in Touch Your Own Ask Try Our Weekly Data Sign up for Scott Questions Service Letter & Updates @ ? ScottLetter.com CEFuniverse.com 23