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How Do You Look At CEF Performance?

Closed-end fund GGN’s share price has felt the hit of weak gold and oil prices. But it pays out big dividends using return of capital. That makes figuring out your return more difficult than you might imagine. Closed-end funds like GAMCO Global Gold, Natural Resources & Income Trust (NYSEMKT: GGN ) and sibling GAMCO Natural Resources, Gold & Income Trust (NYSE: GNT ), two closed-end funds, or CEFs, I have written about recently are odd beasts. They trade like a stock, but are pooled investment vehicles like open-end mutual funds. That not only leads to a disconnect between market price and net asset value, or NAV, but it also makes it harder to decide how you should judge their performance. And, in the end, beauty is in the eye of the beholder on this front. The investment world’s El Camino If you’re as old as I am, or older, you remember the Chevy El Camino. It was an unusual combination of a pickup truck flatbed and a sedan/station wagon front end. Some might call at ugly, some might call it sexy, I would say it’s so weird it’s kind of cool. But, in the end, your individual judgment is what goes for you. Closed-end funds are very similar to El Caminos. That’s not the most flattering complement, but it’s true. They are a “stock-like” front end hitched up to a pooled investment medium. It’s really an ugly stepchild in the investing world, even though CEFs offer some desirable attributes. The big one that catches people’s eye is usually income. A facet of the investment space that CEFs do much better than open-end mutual funds. However, what you get may not be what it appears to be. On the surface you are getting dividends, just like any other stock. But there’s more going on than that and it changes the whole picture. When a stock pays a dividend the money is coming from what it earns (technically it comes out of cash flow). When a closed-end fund pays a distribution (note the different term) it comes out of… the income received from the securities it owns in its portfolio, proceeds from asset sales, and for some funds income from options transactions. ( This article covers some basics on distributions and return of capital, which are beyond the scope of what I’m trying to discuss here.) That’s a big difference. For example, presumably a company that just paid a dividend still has everything in place to earn more money. That’s why stock prices generally don’t fall when a dividend is paid even though the company is, technically, worth less since it just gave its shareholders a chunk of its bank account. The market’s assumption is that it can repeat the process because it’s an ongoing business. A pooled investment vehicle’s value is just the assets it owns, which are all securities. It doesn’t own machinery or patents or stores. When a mutual fund, closed-end or open-end, pays a distribution its value goes down because it just gave away part of what gave it value in the first place. Indeed, net asset value, or NAV, is just the fund’s assets divided by its share count. Give away some of those assets and the NAV has to go down. Performance So when you get a distribution from a closed-end fund how should you think about it? To be fair, it’s a part of your total return. For example, Morningstar’s trailing five-year return for GGN through year-end 2014 is about -5.5% annualized. But a quick look at a graph of GGN’s share price over that time period tells you that it was down nearly 60%. Those two numbers don’t jive. That’s because Morningstar is calculating performance as if the distributions were reinvested. It’s the same way open-end mutual funds are handled. It is, technically, the correct way to look at a closed-end fund’s performance. It’s a pooled investment vehicle, not a stock. But if you are buying a closed-end fund for income, you aren’t likely to be reinvesting those distributions. You are probably living off of them. That means you likely don’t think about performance as a mater of total return (which adds distributions to share price changes). You look at the CEF’s price as the value of what you own and distribution as income you receive, and don’t mix the two. Looked at in that way, GGN is a lousy investment-it’s down 60%! Looked at via total return, reinvesting the distributions, however, it really hasn’t been a bad performer. For example, the Vanguard Precious Metals And Mining Fund (MUTF: VGPMX ) posted an annualized loss of about -11.5% over the trailing five year period though the end of last year. That makes an annualized loss of -5.5% look much better. But that won’t matter to you if your frame of mind is to look at this investment El Camino in a different way. Beauty is in the eye of the beholder I like closed-end funds for the income they offer. They are an easy way to get professional management and income, but they aren’t perfect and they aren’t right for everyone. If you want a long-term investment that appreciates in value and pays you a large dividend, you are probably better off investing directly in stocks. Not too many closed-end funds pull that combination off. If you can get your head around total return as your benchmark, then CEFs can work for you as long-term holdings. That said, there are other ways to look at investing in CEFs. For example, trying to capture a shrinking discount when that discount gets unusually wide for some reason. That, in the end, is the play I’ve highlighted with both GGN and GNT. However, even this doesn’t change the need to get a handle on how you want to look at CEF performance and what that means for your investment approach.

Sri Lanka – Do The Elections Represent A Green Or Red Light To Investors?

Summary 2-term President Rajapksa loses despite calling election 2 years early. President Sirisena calls for National Government in ‘Rainbow Coalition’. China’s Economic Influsence likely to be reduced, but any shortfall likely to be made up from elsewhere. India likely to play a more prominent role in economic activity. The election is a milestone in Sri Lanka’s maturing democracy and may well represent a milestone in its economic progression. Background On Thursday January 8th 2015, Sri Lanka went to the polls in a Presidential election. This election had been called 2 years early by President Rajapaksa following evidence of declining support for a President that had once been hailed as a national hero . Indeed, his party’s previous dominance had allowed him to change the constitution and permit his seeking a third term. However, despite this wavering support, few expected him to actually lose the election. In the event, Maithripala Sirisena, a former health minister in Mr. Rajapaksa’s cabinet, won the election and was immediately installed as President. Whilst polls had shown the 2 candidates to be level pegging, this result remained shocking. It is thus necessary to consider whether this is evidence of a maturity in Sri Lankan politics or a dangerous change of course following a period of solid economic advance. The Election Despite rumors that elements of the police and army were intimidating anti-Government supporters prior to the election, the poll went ahead in a relatively peaceful fashion. Around lunchtime on the 9th, President Rajapaksa conceded defeat and left the Presidential Residence. That evening, President Sirisena was inaugurated as President and congratulations poured in on a smooth transition from the country’s neighbours and indeed from US Secretary of State Kerry . However, on January 11th, news emerged that the transition may not have been as smooth after all. An aide to President Sirisena announced that President Rajapaksa had approached the police and military seeking support to remain in office. An attempted coup was claimed . However, even if this is correct, the police and military refused to support Mr. Rajapaksa and a peaceful transition has been effected. It seems highly unlikely that Mr. Rajapaksa will make any further attempt to unseat his successor following his rejection by the security forces. Moreover, it is likely that this initiative will be used by President Sirisena and his supporters led by the United National Party (‘UNP’), as a way of pressuring Mr. Rajapaksa’s Sri Lankan Freedom Party (‘SLFP’) ahead of April’s parliamentary elections. From this perspective, it seems likely that the Rajapaksa family’s dominance of Sri Lankan politics (and indeed business life) is at an end. Winners and Losers The principle losers from this election are the Rajapaksa family and China. It was no secret that members of the Rajapaksa family had benefited from their family connection to the President. Whether by holding official office or by their involvement in business deals, the ‘first family’ had clearly benefited. One of the first questions private equity or strategic investors made was which part of the family would be involved and what their expectations would be. Their involvement in the country’s business life cannot be removed overnight. A comparison may be made with some of the business associates of President Suharto of Indonesia whose influence certainly waned following his removal from office, but didn’t disappear. However, it is equally clear that Mr. Rajapaksa’s loss was at least partially owing to discontent with the nepotism that had marked his rule. Many of the transactions in which they had been involved were with Chinese investors . Indeed, a simple overview of Sri Lanka’s international relations during President Rajapaksa’s rule involves China supplying the armaments and finance required to extinguish the LTTE and in return being given a prominent role in the country’s economic expansion. Whilst this certainly involved providing access to money and equipment that has propelled the rebuilding of Sri Lanka’s infrastructure at a rapid rate, critics pointed to the Chinese investment as being a quid pro quo for securing a naval base in the Indian Ocean. Such Chinese involvement naturally put pressure on Sri Lanka’s relationship with neighbouring India. President Sirisena has already talked about China being a good friend to Sri Lanka but warned about not being behoven to any one nation. Additionally, his election manifesto included the cancellation of the Colombo Port City project, a US$1.3 billion project to reclaim land and build everything from high rise offices and apartments to a Formula 1 Grand Prix track. If he carries out these promises, it is clear to annoy China on both economic and strategic grounds. Indeed some have hailed the defeat of President Rajapaksa as destroying China’s overall Indian Ocean Foreign Policy and placing a dent in its ambitions to build a global network of ports. This is likely to be exaggerating things a little, at least at this stage. It is easy to point to India as being the strategic winner from this election. It understandably held concerns about China’s influence both economically and militarily in Sri Lanka. Additionally, the economic policies of the ruling BJP are more in line with the UNP in Sri Lanka than they were with the more left wing Rajapaksa administration. Additionally, the religious minorities of Sri Lanka were solidly behind President Sirisena, and polls indicate that the size of their turn out was a major influence in his victory. Whilst President Sirisena and his key supporters are Sinhalese, it is likely that their policies will be more accommodative of minorities than had been the case with the previous administration. Hence his call for a ‘rainbow coalition’ Invest or Wait? Let’s consider the key questions at this time: · Will President Sirisena change economic course in Sri Lanka to the detriment of investors? o Highly unlikely. His key supporters (UNP) have a more pro-business posture than the SLFP and have been critical of policies (such as the land reform bill) that were deterring to foreign investors. · What will the impact be of cancelling the Colombo Port City project and the planned integrated resorts (casinos)? o The Port City was certainly a massive project and the construction and engineering would certainly have added to the local economy. However, there were major doubts about its ambition and viability. o Given recent revenue contraction in casinos from Macau to Singapore and the planned launch of casino based projects in many other East Asian countries, it is questionable whether building such projects in Colombo would have had a big impact on tourist arrivals and expenditure. Sri Lanka has a wealth of attractions for tourists and many would argue that it can continue to accelerate its tourism industry without resorting to gambling. · Are the upcoming Parliamentary Elections important? o President Sirisena has pledged to reverse the trend of increasingly centralized Presidential power that evolved during President Rajakasa’s terms and strengthen parliament. However, this may be the largest uncertainty given the composition of the coalition which supported his candidacy. o There is little doubt that this coalition was more ‘anti-Rajapaksa’ than it was ‘pro-Sirisena’. Equally, that Sirisena comes from the left-leaning SLFP but now is supported by the right-leaning UNP creates uncertainty. He talks of a “rainbow cabinet’ but this may turn out to be a more effective sound bite with echoes of Mandela than a sustainable coming together of previous enemies. o President Sirisena now has 3 months during which he must bring together elements of multiple parties into a coalition which will support him and demonstrate leadership prior to the election. This will require an impressive level of political maneuvering and only time will tell whether he can pull this off to create a balanced but effective government. The worst case scenario is for the coalition to fracture and leave him without a power base. o His Prime Minister, Ranil Wickremsinghe, was the driving force behind the selection of Mr. Sirisena and is the leader of the UNP. The day to day relationship between these two gentlemen is going to be critical as if Sirisena is regarded as being a puppet of the UNP, then the coalition could fracture rather easily. · Should we be concerned about China being annoyed? o In a word…’No’. Whilst there is little doubt that a return of Rajapaksa would have been China’s preference, they will not want to endanger their access to this strategically important island. Whilst the military benefits of Sri Lanka were often focused upon, the economic benefits of having a trans-shipment option that is lower cost and arguably more convenient to Singapore or Malaysia is also key to Chinese interests. o As mentioned above, this may also allow India and Sri Lanka to become friendlier, particularly given the friendship of Messrs Modi and Wickremsinghe. It would be no surprise if Mr. Modi was one of the first visitors to Sri Lanka, bringing with him promises of additional trade and support. · What about the response of other Countries? o The removal of Mr. Rajapaksa who was the architect of the crushing of the Tamils may bring Sri Lanka closer to its Commonwealth brethren as well as the US. This may well translate directly into expanded financial support as well as giving the country the ability to face the events that accompanied the ending of the civil war without being punished for retaining as President the architect of these events. o It is likely that international relations will improve under Mr. Sirisena and Sri Lanka may once again focus on promoting its many strengths rather than defend its recent history. Conclusion Whilst there are reasonable uncertainties about President Sirisena’s political leadership and his ability to build a sustainable coalition, the positives from this election exceed the doubts. International investment will be more balanced and strategic investors are less likely to be frozen out by preference for ‘first family’ initiatives or Chinese investment. Despite this, credit has to be given to President Rajapaksa for the great strides that Sri Lanka has made over recent years. The country now has a solid foundation of infrastructure including power generation and transportation from which it can build. In m y previous article , I argued that there were many reasons to be positive about Sri Lanka over the coming decade. I see no reason for concern that these reasons have been diluted and indeed believe that stronger growth can now be achieved. Today, Pope Francis arrives in Sri Lanka on an official Papal visit. The timing is appropriate as he will be being greeted by a President who has made reconciliation between religions a key issue. From this perspective, it is an effective ‘Christening’ of the new administration. Only time will tell whether President Sirisena will reward the electorate’s confidence, but the signs are positive and assuming that he can harness the spirit of co-operation and renewal that Pope Francis is certain to preach, the country is set for strong further growth. Investment options for prospective investors in Sri Lanka remain limited. The Ceylon Stock Exchange is small, illiquid and volatile. In essence, it is more of a private equity market for the time being. However, we believe that this will change over coming months as Sri Lanka focused investment vehicles emerge. To this end, emerging market investors should keep at least one eye on Sri Lanka given its strong potential.

The Main Reason Why Indexers Will Likely Beat Active Stock Pickers

As we know most investors do not get the market returns that are available. Too many investors practice ‘loss aversion’ and sell stocks or funds when they see the stock markets collapse – this can contribute to losses and lower returns. Indexing is called ‘passive investing’ on the investment selection front; but its greatest gift is allowing investors to be passive on the emotional front. Vanguard research shows that indexers and those in low fee funds were able to stay the course and not react emotionally. Most of us likely know that most investors have historically underperformed the broad market indices and benchmarks to a very large degree. It is a very unfortunate trend and it is the reason why I write today, and the reason why I made the switch to a career in the land of finance and investing. Here’s a study that found that investors have turned very generous market returns into very modest returns. In 2001 Dalbar, a financial-services research firm, released a study entitled “Quantitative Analysis of Investor Behavior”, which concluded that average investors fail to achieve market-index returns. It found that in the 17-year period to December 2000, the S&P 500 returned an average of 16.29% per year, while the typical equity investor achieved only 5.32% for the same period – a startling 9% difference! It also found that during the same period, the average fixed-income investor earned only a 6.08% return per year, while the long-term Government Bond Index reaped 11.83%. Investors are attracted by the lure of the stock markets, company ownership, the juicy returns in robust bull markets, and they’re attracted by that gambling mentality – the chance that they might beat the markets, beat their neighbour and beat their brother-in-law. The studies on poor investor behaviour suggest that most investors are simply taking on too much risk. The problem is that gambling has not paid off; emotion gets the better of most investors whether they are individual stock pickers, holders of professionally managed mutual funds or index investors. There’s lots of bad behaviour to go around amongst all types of investors. That’s certainly why for most investors it’s prudent to evaluate that personal emotional risk tolerance level and match the risk or volatility level of the portfolio to said risk tolerance level. Investing should start with a few areas of questions or self-reflection, one being can I watch my paper net worth (the investment portion) get chopped in half or more and not panic? Find your risk tolerance level, create the matching portfolio. The bad behaviour and bad decision-making is across the board. We might conclude that humans do not make very good investors, for the most part. The task at hand might be to convince investors to stop looking, stop reading; even STOP THINKING! There is that wonderful expression that goes something like this … a portfolio is like a bar of soap, the more you handle it the smaller it gets. The most important part of investing is not stock selection or even style of investing. It’s about being able to stay the course. If you are an investor that has an incredibly high risk tolerance level (a very rare breed indeed), then it makes sense to seek out the assets that might deliver the greatest potential returns, risk can take a seat. For the risk averse investors (arguably that list would include the majority of investors), the greatest total return is achieved through the act of matching your portfolio to your risk tolerance level and simply taking the returns offered by that asset mix. The most important factor that might determine an investor’s success is patience, and being able to stick to the plan through thick and thin. Having a plan is key, sticking to that plan is crucial. It will come down to boring consistency and patience. Doing nothing is doing it right. OK, what we can do is invest on a regular schedule and that can often be set up so that the dollar cost averaging happens with a set-it-and-forget-it automatic investment plan. Vanguard has found that those who adopt a long term strategy in their 401k accounts and invest in the indexes or low fee managed funds have recently been able to ignore the market noise and simply stay the course. In 2011 during the European debt crisis the S&P 500 lost nearly 20% Vanguard investors didn’t panic (the correct move in hindsight). This comes from a previous study: In the first eight trading days of August [2011], including two of the most volatile days since 2008, just under 2% of 401(k) participants at Vanguard made a change to their portfolios. In other words, over 98% stayed the course. Ninety-eight percent took no action. Ninety-eight percent took the long-term view. Now it’s true, if choppy markets continue, we’ll see this number inch down. Ninety-eight percent of participants staying the course might become 97%. In October 2008, during the depths of the financial crisis, it became 96%-in other words, 4% of participants made a move. But the fact remains: those trading are a very small subset of investors. When we consider the findings of that Dalbar study and see only 4% of Vanguard 401k investors making any kind of move (reaction) during the most severe market correction since the Great Depression, I think that is very telling. There is value in being a passive investor in the emotional sense. There is value in investing without emotion. Don’t invest like the emotional James T. Kirk, invest like Spock. Letting the index or low fee fund manage your holdings for you simply means that you don’t have to watch, you don’t have to be emotionally involved. That detachment can pay dividends. Not to be morbid but studies have shown that the portfolios of the deceased have done quite well. Portfolios of investors who have forgotten that they have stock and bonds investments can also do quite well. It’s ironic that non-thinking (or less thinking) typically beats thinking when it comes to investing. This from a business insider article and a discussion between Barry Ritzhold and James O’Shaughnessy … O’Shaughnessy relays one anecdote from an employee who recently joined his firm that really makes one’s head spin. O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was…” Ritholtz: “They were dead.” O’Shaughnessy: “…No, that’s close though! They were the accounts of people who forgot they had an account at Fidelity.” Apparently the forgetful make for wonderful investors. I get to deliver that wonderful surprise once a week or more to Tangerine clients. Some investors will forget that they moved some monies to an investment account 3, 4 or 5 years ago and I can deliver the good news on the returns. It’s certainly an opportunity to then remind investors that leaving their investments alone is often wonderful behaviour. Getting emotionally involved with your investments and your ability to fund your retirement years can be dangerous. It’s not surprising that for many, the further they can stay away from their investment decisions, the better. The passive nature of indexing allows for this detachment. We know that most professional managers will not get the market returns that are available, over time. And the Dalbar study shows that individual investors can hamper returns by an even larger degree. Also from that Business Insider Article, here’s an interesting (and very famous chart) that makes the rounds in discussions about investor returns. Please note, the editorial comment (IN RED) is from the link, and perhaps was added by Mr. Ritzhold. 🙂 (click to enlarge) Now that’s not to say that an individual stock picker cannot be a successful investor. If a stock picker is well diversified, is investing within his or her risk tolerance level, and that investor is then very patient and able to stay the course, that investor might do quite well. But again, it might come down to that investor being able to invest without emotion. Investing without emotion appears to be a tough task for the professionals and retail investors alike. I love reading the comments of Seeking Alpha reader and commentor buyandhold 2012 . The comments are generally the same theme … buy and hold, don’t sell. buyandhold states that he has never sold a stock, the holdings can only come and go if a company is acquired or goes out of business. He makes investing more about marriage than dating. He claims to have beat the markets over the decades, and even though this is the world wide web and mr buyandhold is anonymous I believe him. He follows the suggestions of Mr. Benjamin Graham and largely buys companies that have paid dividends (and dividend aristocrats) for an extended period. And then he holds. Buy. And then hold. That seems like a simple strategy that all of us can understand, but very few of us would be able to execute. Here’s one of his recent comments on an Exxon Mobil (NYSE: XOM ) article. DGI, what trips up many investors is that they focus on the short term rather than the long term. It is true that Exxon Mobil is not going to be a rock star growth stock on the price appreciation side in the next 12 months. But Exxon Mobil has a good chance of being a rock star growth stock on the price appreciation side over the next 25 to 50 years. I have been an Exxon Mobil shareholder for 44 years so I know that this stock really delivers the goods over the long term. That comment post says so much in the context of all of the noise surrounding the energy space and energy aristocrats and long term dividend payers. Buy, and hold. On the other side of the ledger and on Seeking Alpha, even within the dividend space, we hear so much on buy and selling and we see chart tools with buy and sell signals, there’s plenty of debate on what to do on a dividend cut or dividend freeze. Buyandhold has a suggestion, buy more when they’re on sale. Investing should be easy. For many it will come down to the advice of Mr. Warren Buffett – buy the broader market indices in the most cost effective manner possible and stay the course, and reinvest on a regular schedule. For stock pickers it may come down to the advise of buyandhold 2012 – buy great companies when they are at reasonable valuations and stick with your companies through thick and thin. Leave that SELL button alone. Thanks for reading. Happy investing, always know your risk tolerance level, and give a thought to the notion of international diversification. Dale Additional disclosure: Dale Roberts is an investment funds associate at Tangerine Investment Funds Limited. The Tangerine Investment Portfolios offer complete, low-fee index-based portfolios to Canadians. Dale’s commentary does not constitute investment advice. The opinions and information should only be factored into an investor’s overall opinion forming process. The views expressed are personal and do not necessarily represent those of Scotiabank