Scalper1 News
Summary This balanced closed-end fund has been hurt this year by its energy holdings. The 17% discount to NAV is higher than average due to tax loss selling. The high 10.9% distribution yield helps you earn alpha even if the discount does not narrow immediately. This is a good time of the year to look for closed-end funds that have been beaten down by tax loss selling. There is seasonal tendency for many of these funds to bottom out in late December and then rally the first few months of the next year. The Virtus Total Return Fund (NYSE: DCA ) was formed in February 2005. It is a global balanced fund that invests about 60% in equities and 40% in fixed income. The fund’s objective is total return, consisting of both capital appreciation and current income. (Data below is sourced from the Virtus website unless otherwise stated.) The equity portion of the fund invests globally in owners/operators of infrastructure in the communications, utility, energy and transportation industries. Its performance has been hurt this year by a 21% equity allocation to the energy sector including positions in Williams Companies (NYSE: WMB ), Kinder Morgan (NYSE: KMI ) and Enbridge (NYSE: ENB ) in the top ten holdings. The fixed income portion of the fund is designed to generate high current income and total return using extensive credit research. The fund managers seek to capitalize on opportunities across undervalued sectors of the bond market. About 43% of the fixed income allocation has been in corporate or emerging market high yield which has also hurt performance this year. The fund uses an option income strategy where it purchases and sells puts and calls, creating option spreads. The fund also uses leverage and borrows at short-term rates to invest at higher yields. There could be a good medium-term trading opportunity in DCA setting up from now until year-end because of tax loss selling. Over the last year, the average discount to NAV has been -12.42%, while it is currently around -17%. The 1-year discount Z-score is -1.58, which means that the current discount to NAV is about 1.5 standard deviations below the average. Source: cefanalyzer Five Year Historical Premium/Discount for DCA (click to enlarge) From an overall asset allocation perspective, DCA is similar to a global 60-40 balanced fund, but because of the leverage and sector concentration, it has higher risk than a typical balanced fund you would find at Vanguard or Fidelity. These were the asset allocation breakdowns as of Sept. 30, 2015: Equity Sector Allocation Breakdown Utilities 37.25% Energy 21.85% Telecommunications 18.58% Industrials 14.40% Financials 5.36% Consumer discretionary 2.56% Fixed Income Sector Allocations Corporate- High Yield 38.92% Corporate- High Quality 14.94% Bank Loans 11.55% Non-Agency Residential MBS 7.69% Non-Agency Commercial MBS 6.21% Mortgage Backed Securities 5.11% Asset Backed Securities 4.39% Emerging Market- High Yield 4.00% Yankee- High Quality 3.98% Non-USD 1.54% Treasury 1.52% Taxable Municipals 0.16% DCA has had about average long term NAV performance. But it may be good for a swing trade now because of the very high discount to net asset value. Since inception, it had big losing years in 2007 and 2008, and it is also struggling a bit this year. Here is the total return NAV performance record since 2006 along with its percentile rank compared to Morningstar’s World Allocation category: NAV Performance Table DCA NAV Performance World Allocation NAV Percentile Rank in Category 2006 25.40% 21.21% 100 2007 -41.41% 11.85% 100 2008 -66.08% -39.30% 65 2009 +27.75% +46.71% 91 2010 +48.54% +23.98% 25 2011 +6.29% -3.21% 13 2012 +15.29% +19.81% 78 2013 +13.12% +11.07% 56 2014 +13.60% +6.14% 20 YTD -4.98% -3.05% 64 Source: Morningstar The tables below are compiled as of September 30, 2015: Top 5 Countries United States 49.49% Canada 9.50% United Kingdom 8.43% Australia 5.10% France 3.91% Top 10 equity holdings Williams Companies, Inc ( WMB ) 3.62% Kinder Morgan Inc. class P ( KMI ) 3.57% AT&T Inc. (NYSE: T ) 3.36% Verizon Comm. (NYSE: VZ ) 3.28% Enbridge Inc. ( ENB ) 3.09% National Grid Plc (NYSE: NGG ) 2.87% NextEra Energy, Inc. (NYSE: NEE ) 2.66% Crown Castle Intl. (NYSE: CCI ) 2.25% Transurban Group Ltd. ( OTCPK:TRAUF ) 2.23% Atlantia S.p.A ( OTCPK:ATASY ) 2.13% Fixed Income Ratings Distribution Aaa 8.74% Aa 3.34% A 5.34% Baa 27.87% Ba 23.00% B 18.96% Caa 8.74% Not Rated 3.61% Fund management DCA is run by a team of three portfolio managers. All three managers have been with the fund since 2011. Connie Luecke, CFA Industry start date: 1983 Randle Smith, CFA Industry start date: 1990 David L Albrycht, CFA Industry start date: 1985 Alpha is Generated by High Discount + High Distributions The high distribution rate of 10.90% along with the 17% discount allows investors to capture alpha by recovering some of the discount whenever a distribution is paid. The fund has been paying a $0.10 quarterly distribution since April, 2014. Whenever you recover NAV from a fund selling at a 17% discount, the percentage return is 1.00/ 0.83 or about 20.5%. So the alpha generated by the 10.90% distribution is computed as: (0.1090)*(0.205)=0.0223 or about 2.23% a year. Note that this is more than the 1.58% baseline expense ratio, so you are effectively getting the fund managed for free with a negative effective expense ratio. Here are some summary statistics on DCA: Virtus Total Return Fund ( DCA ) Total Assets: 173 Million Total Common assets: 122 Million Annual Distribution (Market) Rate= 10.84% Last Regular Monthly Distribution= $0.10 (Annual= $0.40) Fund Baseline Expense ratio: 1.58% Discount to NAV= -17.08% Portfolio Turnover rate: 56% Effective Leverage: 27% Avg. 3 month Daily Volume= 75,964 (Source: Yahoo Finance) Average Dollar Volume = $280,000 DCA is a moderately liquid stock and usually trades with a bid-asked spread of one cent. You can often get some price improvement on marketable limit orders and buy or sell between the bid-asked spread. Because the price is so low, some care should be taken when trading DCA. DCA appears to be an attractive purchase for a swing trade at current levels with a discount to NAV of 17%, if you believe that the underlying portfolio has potential to bounce back from tax loss selling early next year. Scalper1 News
Scalper1 News