The CEF Industry Should be Subject to a Mercy Killing

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The CEF Industry Should be Subject to a Mercy Killing

EqIncome 10-15-2008, 8:38 PM | Post #2578303 | 4 Replies

It seems to the casual eye that the CEF sector is doomed to atrophy or be relegated to a backwater status due to its limited, highly unsophisticated investor base (present company excluded).

It is incredible to me that the CEF stocks have fallen way more than the market averages and are generating yields on the average of over 11% and trading at discounts of 14%. I thought that high dividend yields were a cushion in falling stock markets?

Additionally, there is a built in CEF industry “slop” factor. Once the CEF discounts narrow the investment banks roll out new CEFs that almost immediately drop to discounts rapidly burning new CEF investors. (CEFs are sold and not bought.)

What this industry needs is several aggressive investment funds to force the discount to par through converting CEFs into ETFs; or, find new sophisticated investors that recognize the arbitrage value.

Critical to attracting new investors is more and effective research. I find what CEF research there is to be limited. I find the CEF Association to be ineffectual—the association doesn’t even sponsor a CEF stock price index. A measurement like that would be helpful to investors who currently have few benchmarks for comparison. When their stocks go down they just sell. The only one I’ve found is Herzfeld, which you have to subscribe to for a fee to obtain.

While these comments may seem negative, they’re not. What’s key for the health of the CEF industry and better pricing efficiencies is better information and research. It is through knowledge that the industry can expand its investor base and allow the free forces of the markets to play a more efficient role in price discovery.

If not, then CEFs will be subsumed and its death will be a justified mercy killing.

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Re: The CEF Industry Should be Subject to a Mercy Killing

TEDSLINE 10-17-2008, 9:51 PM | Post #2579510

There are plenty of OEFs and ETFs already.

I prefer CEFs to OEFs for the following reasons.

1. I can buy and sell faster, which gives me better control over my investments.

2. They can sell at a discount and can pay better dividends.

3. I can buy and sell them cheaper than OEFs.

I also like ETFs and have a feeling they will eventually replace OEFs.

You have a point about the lack of information and research on CEFs, but I think this forum has better information than most other sources for investing.

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Re: The CEF Industry Should be Subject to a Mercy Killing

lionhead 10-18-2008, 10:09 AM | Post #2579710

I think CEF's perform a needed role in the investment universe; specialized mutual funds that can get into niches that OEF's cannot because of the fund flow or other structural problems.

The problem with CEF's is transparency and shareholder information. They're not adopting to the times and are clinging to 20th Century standards and methods. Change is needed here to broaden participation in the funds. At this point in time, most folks are interested in the leverage issues and whether funds are underwater. Yet, fund sponsors have disseminated limited information on this issue or they might or might not respond to individual shareholders calls or requests. IMHO, that needs to change.

Speaking of Herzfeld, here's a link to his latest free report from June:

http://www.herzfeldresearch.com/Jun08WholeRpt.pdf

Great summary of events to that time frame and he also highlited that UIT's were buying CEF's to bundle into their portfolios. The report is worth a read for the ARPS and leverage issue summaries. His index comprises only 15 funds, so it's a very limited index in its tracking ability. I wouldn't pay too much attention to it.

Since Herzfeld is an insider, he's not going to reveal what's really going on down deep inside the industry or provide us with any metrics for valuation. Simple buy/sell recommedations don't do much for me.

If anyone has a copy of the old printed M* reports from the '90's or any Lipper reports, I'd appreciate seeing a copy to see if there are any metrics for valuation that aren't currently available or used in the current info.

Tim

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Re: The CEF Industry Should be Subject to a Mercy Killing

BOND100 10-18-2008, 10:54 AM | Post #2579738

Hello,

I am not sure I agree with your assamptions.

That CEFs investors are not sophisticated.

ICI research claim CEFs investors are more educated then most investors.

As usual we need to know what we are buying, I do not see anything

wrong with CEFs this time then others. CEFs have advantegas and

disadvantages, and if used correctly investors can benefit.

Just my opinion.

Thomas

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Re: The CEF Industry Should be Subject to a Mercy Killing

EqIncome 10-23-2008, 12:49 PM | Post #2582490

Tim,

Thank you for your thoughts.

The problem with Herzfeld free URL is that there is a lag time with regards to its availability and hence its effectiveness with regards to day-to-day trading.

Some of the conceptual pieces are of strategic value but lack tactical significants due to its staleness.

We should petition Lipper for a CEF index. I'm sure they have the data and it would be of franchise value for them or any other that would undertake the cause.

IMHO

Best, Eqinc

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