Tag Archives: george-spritzer

Is DCA Ready To Bounce Back From Tax Loss Selling?

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.

New Janus Mutual Fund Uses Tail Risk Analysis

Summary JAGDX is a global allocation fund (70/30) which uses tail risk analysis to mitigate risk. The Fund inception was in June 2015, and it has gotten off to a rocky start. But it may be worthwhile to track this fund to see how they manage a full market cycle. Overall Objective and Strategy The primary objective of the Janus Adaptive Global Allocation Fund (MUTF: JAGDX ) is to provide investors total return by dynamically allocating its assets across a portfolio of global equity and fixed income investments, including the use of derivatives. The fund attempts to actively adapt to market conditions based on forward looking views on extreme market conditions (both positive or negative) with the goal of minimizing the risk of significant loss in a major downturn while still participating in the growth potential of capital markets. On average, the fund provides 70% exposure to global equities and 30% exposure to global bonds (70/30 allocation). But the fund has the flexibility to shift this allocation and may invest up to 100% of its assets in either asset class depending on market conditions. Because of this, JAGDX will likely have above average portfolio turnover compared to other funds. The portfolio managers use two complimentary processes: a “top down” macro analysis and a “bottom-up” risk reward analysis. These processes use proprietary models which seek to identify indicators of market stress or potential upside. These models include an options-implied analysis that monitors day-to-day movements in options prices for indicators of risk and reward between asset classes, sectors and regions. Top-Down Macro Analysis: Focuses on how the Fund assets will be distributed between global equity and fixed income. They use a proprietary options implied information model, among other tools, to monitor expected tail gains and losses across the equity and fixed income sectors and adjust as necessary to mitigate downside risk exposure. Bottom-Up Risk Reward Analysis: Designed to identify underlying security exposures in order to maximize exposure to securities which will realize tail gains while minimizing exposure to securities expected to provide tail losses. Within the Fund’s equity positions, the managers will adjust sector, currency and regional exposures away from market cap weightings based on their evaluation of expected tail loss and gain. Within the Fund’s fixed income positions, they will adjust the credit, duration and regional exposures using the same analysis. The fund managers measure both extreme positive and negative movements known as expected tail gain (ETG) and expected tail loss (ETL). Portfolio construction is driven by the ratio of ETG to ETL, while targeting a desired level of portfolio risk with the goal of maximizing future total return. For more information on expected tail loss, take a look at this Wikipedia page on Expected shortfall . (click to enlarge) Source: rieti.go.jp Fund Expenses The Fund offers several classes of shares. JAGDX is available without a 12b-1 charge, but only if you buy the fund directly from Janus. The expense ratios for some of the share classes are listed below: JAGDX (Class D Shares): 1.01% JVGIX (Class I Shares- Institutional): 0.82% ($1 million minimum) JVGTX (Class T Shares): 1.13% (available on brokerage platforms) JAGAX (Class A): 1.07% (front-end load 5.75%) JAVCX (Class C Shares): 1.82% (deferred load 1%) Minimum Investment JAGDX has a minimum initial investment of $2,500. Past Performance JAGDX is classified by Morningstar in the “World Allocation” or IH category. The fund had unfortunate timing when it was first issued on June 23, 2015. As of the end of the third quarter it had dropped by 9%, although it has recovered a bit since then. It is still very early, but so far the Fund is lagging its peers. 1-Month 3-Month JAGDX +1.18% -4.16% Category(IH) +1.37% -3.89% Percentile Rank 61% 66% Source: Morningstar Mutual Fund Ratings The fund is too new to have a Lipper or Morningstar rating. Fund Management The fund is managed by two individuals: Enrique Chang: Chief Investment Officer, Equities and Asset Allocation. Joined Janus in September 2013, and has previously worked for American Century and Munder Capital Management. Holds a BS in Mathematics from Fairleigh Dickinson and a master’s degree in finance/quantitative analysis and statistics and operations research from NYU. Ashwin Alankar, PhD: Global Head of Asset Allocation & Risk Management. Joined Janus in August, 2014 and has previously worked for AllianceBernstein and Platinum Grove Asset management. Holds a BS in chemical engineering and mathematics and a master of science degree in chemical engineering from MIT. He also holds a PhD in finance from the University of California at Berkley Haas School of Business. Comments Tail risk hedging is designed to enhance return potential by: Helping to mitigate losses when a market storm hits. Provide liquidity in a crisis, allowing you to buy assets at distressed prices when others are forced to sell. Allow investors to take greater risks elsewhere in their portfolios. But as with any market timing strategy, there is always the possibility of market “whipsaws,” where markets trade up and down in a sideways pattern for extended periods and tail risk hedging may become an extra expense instead of a benefit. JAGDX has gotten off to a rocky start, but they have an interesting approach to risk management, and I will be tracking the fund to see how they do over a full market cycle. So far, they have attracted about $50 million in assets, so it is still uncertain whether the fund will be a long term success.

Closed-End Fund IPO Review For 2014 And 2015

Reviews market price and NAV performance for closed-end fund IPOs in 2014 and 2105. Average market performance lagged NAV performance, but their were a few exceptions. Issuers are now offering incentives to encourage investors to buy closed-end fund IPOs. In the past, I have published several performance analyses of closed-end fund IPOs. Quite often, these IPOs provide a buying opportunity as they approach their one year anniversary. The reasons for this are: 1) Closed-end fund IPOs have generally been marketed at a 5% premium over NAV reflecting the sales commission and underwriting expenses. By the time the one year anniversary is reached, underwriters no longer support the price, and the funds often trade at a discount to NAV. 2) Closed-end funds are usually marketed when their underlying asset class is “hot” and in demand. Quite often these asset classes have cooled off a year later which leads to lower prices. 3) When a closed-end fund approaches its one year anniversary, it is quite common the case that most of the shareholder base holds it with an unrealized short term capital loss. There is a strong incentive to sell the fund before one year is up. After one year, it would turn into a long term capital loss which is less valuable for tax purposes. In 2015, there have only been three new closed-end fund IPOs. In many ways, closed-end funds are becoming an endangered species with many of them disappearing in the last year from fund mergers and fund liquidations. Because of this, I also included the 2014 closed-end fund IPOs in this article. Ticker Inception NAV Current NAV NAV Gain Inception Market Price Current Market Price MKT Gain Inception (NYSE: FPL ) 19.06 15.23 -20.1% 20 14.20 -29.0% Mar. 2014 (NYSE: JMLP ) 19.06 11.32 -40.6% 20 12.20 -39.0% Mar. 2014 (NYSE: DSE ) 19.06 9.90 -48.1% 20 10.20 -49.0% June 2014 (NYSE: THQ ) 19.06 20.03 +5.1% 20 18.22 -8.9% July 2014 (NYSE: GER ) 19.06 9.38 -50.8% 20 10.53 -47.4% Sep. 2014 (NYSE: ECC ) 19.93 18.65 -6.4% 20 20.21 +1.0% Oct. 2014 ( BST 19.06 18.33 -3.8% 20 16.62 -16.9% Oct. 2014 (NYSE: HIE ) 19.06 14.79 -22.4% 20 13.72 -31.4% Nov. 2014 (NASDAQ: CCD ) 23.83 21.91 -8.1% 25 19.31 -22.8% Mar. 2015 (NYSE: ACV ) 23.83 21.39 -10.2% 25 18.48 -26.1% May 2015 (JHY) 9.85 9.59 -2.6% 10 10.24 +2.4% July 2015 * NAV values are as of 9/04/2015 except for ECC. The NAV for ECC is as of 7/31/2015. Average NAV gain= -18.9% Average Mkt gain = -24.3% Market Price under performance= 5.4% Just like in previous years, the average market performance for the new IPO funds was worse than the average NAV performance. This generally occurs because the NAV premiums from underwriting fees are replaced by discounts below NAV within six months. Note that for a few of the new IPOs, the closed-end fund wrapper did outperform the NAV. For example, JMLP lost 39% (before dividends). But the NAV value of JMLP lost 40.6%. Something similar happened with GER, where the market price lost 47.4%, but the NAV dropped even more- a whopping 50.8%. Both of these funds are currently trading at a premium over NAV, probably because some investors who own them in taxable accounts may see some value in the large unrealized capital losses that are currently sitting in both funds. A research paper ” A Liquidity-Based Theory of Closed-End Funds ” tries to develop a rational liquidity-based model to explain why investors are willing to buy a closed-end fund at a premium at the IPO price when they know that it will soon fall to a discount. They reason that many closed-end funds hold illiquid, hard-to-trade underlying assets. Retail investors would find it very difficult to trade these assets directly, so they are willing to pay a premium to avoid the large illiquidity costs, especially if there are no equivalent no-load funds available for those assets. But more and more closed-end investors have learned that it usually pays to wait for six months before buying closed-end fund IPOs. In order to market new funds, some of the management companies are now offering special incentives like term limits or share buyback programs. For example, CCD has offered a term limit that allows shareholders to vote on a share liquidation after 15 years. Calamos, the fund manager, has committed to purchase up to $20 million in CCD common shares in the secondary market whenever the discount exceeds 2%. Starting in late July, they have been purchasing about 6,000 shares a day, but they have been unable to reduce the discount by much and it is currently -11.9%. ACV, recently issued by Allianz, has offered similar features with a 15-year limited term structure and a share buyback program of up to $125,000 a day for around 6 months, when the discount exceeds 2%. The buyback program for ACV should begin this week, and it will be interesting to see how much they can narrow the discount which is currently -13.6%. JHY offers a shorter term limit of only five years and marketed the fund for only $10 when the original NAV was $9.85. JHY is still pretty new, but so far it has retained its premium over NAV. It will be interesting to watch this one going forward. It looks like the closed-end fund industry may be waking up to the new reality and will be offering IPO investors somewhat better deals in the future. Later this year, there should be plenty of good opportunities in closed-end funds because of tax loss selling, not only in busted IPOs. Almost all of the MLP and commodity closed-end funds are greatly depressed, and there also many bargains in fixed income closed-end funds where discounts have widened out. Disclosure: I am/we are long CCD. (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.