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.