Tag Archives: closed-end-funds

Adams Diversified Equity: A 6-Month Checkup

Recently renamed ADX turned in a good first half. Health care and consumer saw new additions. Overall, new management is proving solid so far. Adams Diversified Equity Fund (NYSE: ADX ), formerly known as Adams Express, is one of the oldest closed-end funds, or CEFs, around. That said, a management change in early 2013 meant the potential for big shifts at the fund — and a risk that performance might falter. So far, however, investors should be reasonably pleased with how CEO Mark Stoeckle has been running things. And the first half of 2015 bears that out. Things change… Adams changed its management at the start of 2013, which meant that 2013 was a transition year. Notably, portfolio turnover that year basically doubled compared to historical levels. That said, 2014 saw that number come back down to more-normal levels and that trend has continued so far in 2015. Performance-wise, the fund’s total return in 2013 wasn’t great on a relative basis. Based on net asset value, or NAV, and including reinvested distributions, the fund trailed that S&P by around 3.5 percentage points that year. That said, the fund’s return was 28% in 2013, which is a hard number to complain about. The next year, 2014, wasn’t as good on an absolute basis, but the fund closed the gap with the S&P, with ADX lagging the index by roughly half a percentage point. That’s a much better relative showing. And according to the fund, through the first six months of this year ADX’s return of 2.7% compared favorably to the S&P’s gain of 1.2%. Is this a harbinger of outperformance to come? Maybe, maybe not. As we all know, past returns don’t predict future results. But what it shows is that under new management, ADX hasn’t fallen off a cliff. That said, Stoeckle has only been operating Adams in a generally up market, so he still needs to be tested by a downturn. But investors should be reasonably pleased with the fund’s showing over the last two and half years or so that he’s been running things. New holdings With a fund like ADX, things aren’t usually all that exciting at the portfolio level. This is why the portfolio restructuring in 2013 that doubled the turnover rate was so notable. But with things back to normal, change at the fund is more incremental. For example , Stoeckle noted in the fund’s quarterly report that he added to the fund’s positions in Facebook and Comcast, and added new positions in Valeant and Edwards Lifesciences in health care and Kroger and Spectrum Brands in the consumer space. These aren’t huge shifts or changes, and keep with broader themes already present in the fund. Comcast, around 2.2% of assets at the midpoint of the year, is a top-10 holding, the others are not. That said, while the fund is fairly well diversified, there is one concerning holding — Apple. That stock, the fund’s largest holding, accounted for over 5% of assets at the end of June. That’s a fairly hefty exposure to one company and as the recent Apple sell-off attests, is worth keeping in the back of your mind. Still, at 5% of assets, an Apple sell-off would hurt the fund but alone shouldn’t be enough to cause major damage. The fund sold a number of holding in the period, too. The list includes Abbvie, General Mills, Hershey, Micron Technology, and Unilever. Several positions were trimmed, as well, including Aetna, Coca-Cola, Gilead Sciences, Intel, and Disney. Bouncing those names against the additions, you can see the big picture didn’t alter all that much. Looking at the fund from that greater distance, technology, finance, and health care were the three largest sectors at the end of June, making up roughly half the fund. The consumer sector was number four. Utilities, telecom, and basic materials pulled up the rear, representing the fund’s smallest sector weightings. Dividends and more So the first half was relatively uneventful for the fund. It performed well and aside from Apple, which has long been a large holding, there really weren’t any red flags. Moreover, the portfolio changes were largely shifting within the bigger picture. So mostly good news here. Adams also announced another dividend, of $0.05 a share. That’s relatively small, but keeps with the trend of three small quarterly payments and one larger one at the end of the year. The fund’s goal is to distribute 6% of assets on an annual basis. That’s a number that should interest income-oriented investors. There’s no expected change to that, according to Stoeckle. The way in which distributions are paid out, however, isn’t exactly desirable if you are trying to live off of your investment income. So you’ll have to take that into consideration here if you are buying for the distributions. Note, too, that annual distributions will go up and down based on performance since they are a set as a percentage of NAV, not a hard dollar figure. In addition, the fund bought 765,000 of its own shares in the first half at an average discount of just under 14%. That’s roughly where the discount sits today and in line with its average over the past three years. I’d say that’s a reasonable use of cash and helps to support the fund’s NAV over the long term. Remember, that the fund has been in existence since the Great Depression, so this is far from a fly-by-night operation. And as a stand-alone company, there’s no sponsor manipulating things. What you see is what you get at ADX and it’s looking to stay in business for years to come. So while stock buybacks are interesting, they should be seen in light of a longer-term picture — not necessarily as a way to shift market perceptions today. All of that said, ADX often gets chided for being a closet S&P index clone, which isn’t too far off the mark. However, for investors seeking income, the 6% yield target is much better than the yield on the S&P. True, the expense ratio of 0.65% is high relative to an S&P index, but some investors might be willing to make that trade-off. (Note that actual reported expenses this year will be higher because of one-time items related to the termination of a defined benefit retirement plan, which is likely a net positive for the company and its shareholders.) So, in the end, the first half was a good one for Adams. And while it isn’t a perfect investment, it’s a pretty good one if you are looking to outsource some of your investment load. It’s been around for a long, long time and looks like it will continue to be around for a long, long time to come. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

SRV: Trading At 20%+ Discount To NAV Due To Supply/Demand Imbalance

Summary Wave of investor outflows has created a significant dislocation. This provides an opportunity for those constructive on the MLP sector to obtain cheap exposure. For others, it also presents some potential to capture alpha through pair trades. Background on Closed-End Funds For those new to the space, a closed-end fund is a publicly traded investment company that raises a fixed amount of capital, and is then structured, listed and traded like a stock on a stock exchange. Whereas conventional mutual funds and ETFs frequently redeem/issue new shares to ensure that the price per share remains in line with the net asset value of the underlying holdings in the funds, this is not the case for CEFs. Rather, the share price of CEFs is driven by the market forces of supply and demand, which sometimes creates attractive opportunities to buy stakes at big discounts to NAV. This tends to happen when sentiment for the particular sector on which a CEF focuses gets decimated, causing some investors to sell irrespective of price. MLPs are one area where we can see this phenomenon most prevalently today. Amidst plummeting commodity prices and rising rate concerns, investor outflows have caused several MLP-focused CEFs to trade at among the widest discounts to NAV in the CEF universe. This presents some opportunities for those that desire cheap exposure to the sector, as well as those that are agnostic on the sector and just want to collect some alpha. Though there are a few examples of other funds worth considering, including Kayne Anderson Energy Development Co (NYSE: KED ) and Cushing Royalty & Income Fund (NYSE: SRF ), in this article, I focus on the Cushing MLP Total Return Fund (NYSE: SRV ) mainly due to the benefits of its large/liquid portfolio and relatively high institutional ownership. As shown below, SRV is currently trading at a ~22% discount to NAV. (click to enlarge) Source: CEF Connect Cushing MLP Total Return Fund Overview SRV is a moderately sized/liquid fund launched in late 2007, which currently has approximately $209 million of total net asset value. The fund’s mandate is to obtain capital appreciation and current income, typically by investing at least 80% of its NAV in MLPs based upon bottom-up fundamental research. The two partners overseeing the fund (bios included here ) each have several decades of experience in the space. The fund’s performance since inception has been poor, at approximately -7% per annum. However, this largely reflects the general downturn in MLPs/commodities over this period as opposed to poor security selection. As shown below, the current portfolio is diversified across a number of MLP subsectors, and is composed of mostly relatively large, liquid names. Annual portfolio turnover is relatively high (~137%), which I view as a marginal negative due to the fact that this can lead to somewhat higher transaction costs. The fund’s annual management fee is moderate at 0.75%, but its total expense ratio (excluding interest and dividends) is higher than average at approximately 2.6% of NAV. Unlike direct holdings in MLPs, SRV does not generate unrelated business taxable income, and Cushing therefore notes that the fund is suitable for IRAs and other tax-exempt accounts. Source: Cushing What will Cause the Discount to Compress? Whenever sentiment in the MLP sector eventually stabilizes and net investor outflows dry up, it is likely that much of SRV’s discount to NAV will naturally dissipate (for the bulk of the fund’s life, it has actually traded at a premium to NAV as can be seen in the first chart above). However, even if simple supply/demand do not naturally compress the discount, there are a couple of other drivers that could. First, SRV has a moderate annual distribution yield of 6.75% (based on current market price). As part of this represents return of capital, the fund partially self-liquidates over time. In addition, the fund has a reasonably concentrated investor base compared to its peers, with institutions holding approximately 24% of shares outstanding. To the extent that a significant discount were to persist over time, these large investors would be incentivized to pressure management to take additional steps to reduce it (e.g., through buybacks or increased distributions). Source: Nasdaq Trade Structuring For investors that want exposure to MLPs, this CEF provides cheap exposure. However, it also presents some potential opportunity to collect alpha for those that are agnostic (or negative) on the space, through pairing a long position in SRV with a short position in an MLP ETF (either through outright equity or options). Though there are several possible shorts to consider, one of the most actionable is the ALPS Alerian MLP ETF (NYSEARCA: AMLP ). This is a large ETF with approximately $8.4 billion of net assets and average daily trading volume of ~$72 million. It is currently relatively easy to borrow, with a rebate rate under -3.5% through some retail brokers, and also has listed options (which can enable investors to avoid dividend costs). The fund seeks to track the Alerian MLP Infrastructure Index, and 7 of its top 10 holdings overlap with SRV’s top 10. Risks/Considerations The obvious risk of this trade is that the timing of discount convergence is unclear, and if investors’ macro fears over commodities/rates grow, there is a possibility that the discount could grow even larger over the near term. The main mitigants are the facts that, as discussed above, the investor base is relatively concentrated with institutional investors, and the fund pays a moderate distribution yield. Short selling, of course, also comes with added risks (e.g., possibility of force buy-ins, increasing borrow costs, etc.) and likely should not be attempted by those new to the market. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SRV over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

REIT CEFs: What Should You Be Looking At Now?

REIT stocks have taken a hit of late. That’s left REIT CEFs suffering, too. Is now the time to buy in and what kind of REIT CEF’s look best? I decided to look at two intertwined questions based on reader comments to an article I wrote about RMR Real Estate Income Fund (NYSEMKT: RIF ): First, is the REIT sell off over? And Second, what are the best priced REIT CEFs right now? No rush To start with, I don’t think REIT stocks are cheap right now. They are certainly cheaper than they were earlier in the year, but that doesn’t make them a good value. I outlined my concerns in a recent article, which you should read for more depth. But I’ll summarize: Demand for REITs, and other income oriented investments, has been driven by the historically low interest rate environment engineered by the Federal Reserve. That can’t last forever and with the Fed talking about a rate increase, the recent sell off is a sign that investors are getting spooked. And that’s what makes me believe there’s a good possibility for more downside from here. Investor sentiment is what drives market prices over the near term. But investor sentiment moves like a pendulum, going from extreme to extreme. Sure we’ve pulled away from REITs being overvalued and loved by all. But my guess is that we’re just passing through something that approximates fair value right now on our way to the other side, where REITs will be out of favor. That, however, is just my opinion. Brad Thomas, who writes the Intelligent REIT Investor for Forbes, for example, counters that, suggesting that now is a good time to be looking at REITs. That said, he isn’t calling for investors to back up the truck and load up. He suggests what he calls a “patient hand.” Or, more specifically, dollar cost averaging so you don’t put all your capital at risk. In the end, however, Brad and I both agree that REITs can be a great benefit to a portfolio, providing income and diversification. And, frankly, I’m the first to admit that if you need income now, sitting on the sidelines isn’t a workable investment strategy. So, you may, indeed, be in the market now for REITs right now. Clearly sticking with industry leaders is a good call. But outsourcing to a dedicated REIT manager is also an interesting option. And that’s where I’ve seen some readers asking about closed-end funds. What REIT CEFs are good? You could, of course, purchase an open-end fund to get your exposure to REITs. But that means you’ll be paying market price, since open-end funds have to trade at net asset value, or NAV, at all times. Exchange traded funds also tend to trade at or very close to NAV and are often just index offerings. Closed-end funds, on the other hand, are actively managed and frequently trade at a discount to their NAVs. And that’s driven by investor sentiment. When investors are pessimistic, discounts widen. And they are extra wide at a number of REIT CEFs right now. That will boost yields and potentially provides some downside protection (a margin of safety, if you will) if REIT prices fall further-After all, you paid a below market price. But all CEFs aren’t the same and you need to know what you are buying. For example, RIF, which I wrote about recently , is trading with a very large 20% discount to NAV. Its three-year average is around 14.5%. The CEF owns a portfolio of REITs and REIT preferred stocks, almost like a balanced fund, in a way, and sports a yield of around 6.9%. But, you’ll want to keep a few things in mind. First, RIF uses leverage. Leverage stood at about 30% of assets as recently as the end of March. Leverage is great in up markets because it enhances return, but can be damaging in down markets because it exacerbates losses. If you are looking at a REIT CEF, take leverage into consideration. Second, RMR is the fund’s manager. Although this company runs a few public REITs, you may or may not be comfortable with their managing history. That’s where a fund like Cohen & Steers REIT and Preferred Income Fund (NYSE: RNP ) might come in. Like RIF, RNP mixes REITs with REIT preferred stocks and uses leverage (around 25% of assets). Also like RIF, RNP is trading at a wider discount than usual: RNP’s discount is around 17% compared to its three-year average of nearly 11%. However, Cohen & Steers was one of the first asset managers to specialize in REITs and is highly respected in the industry. If you are concerned about RMR but like the idea of RIF, Cohen & Steer’s RNP would be a good alternative. RNP’s distribution yield of 8.3% also offers more income to investors. That said, there’s a reason why these two funds have among the widest discounts in the REIT CEF space: Preferred stocks are likely to take a hit if rates go higher because they are similar in many ways to a bond. Add in leverage and you can see that these CEFs might be riskier then they first appear. And why investors are asking for such notable discounts relative to other REIT CEFs. And that’s why you might prefer a fund like Cohen & Steers Total Return Realty Shares (NYSE: RFI ), which yields around 7.6%, in between the two above REIT CEFs. RFI invests only in REIT stocks and doesn’t use any leverage. That said, its discount is only about 9%. So you aren’t getting as good a deal on an absolute basis. But what about on a relative basis? Total Return Realty Shares’ average discount over the past three years is around 3%, so it’s actually trading much further below its historical range than either RIF or RNP. So, relatively speaking, RFI could be the better deal and it has a lower risk profile. Not the only options This trio of funds obviously aren’t the only RIET CEF options. But they show pretty clearly some of the things you’ll want to look at beyond a steep absolute discount, including management, portfolio structure, use of leverage, and relative discount. I personally like Cohen & Steers as a company and right now I’d suggest pulling back on risk for most investors. Thus, I think starting your research with an unleveraged pure play like RFI is a good idea if you are looking to outsource your REIT exposure. You might decide you are willing to take on more risk, and that’s fine. Just make sure you understand that risk, and the alternatives you have, before you take it. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.