Adams Express: A Good Fund, But Recent Changes Are A Risk
ADX has a storied history unique in the CEF space. That said, ADX recently went though a management change resulting in a new investment approach. Although history suggests ADX is a solid CEF offering, the new manager has yet to be tested by a notable downturn. Adams Express (NYSE: ADX ) traces its history back to 1929 . It’s paid a dividend consistently since 1935. Unlike most closed-end funds, or CEFs, it is its own company with no sponsor to appease. The longevity, a mandate to distribute at least 6% of assets annually, and low expenses are all good reasons to own Adams. However, you’ll need to take a step back and consider the new guy at the top before you pull the trigger. I did it my way Adams Express really is an odd duck for a CEF. While most CEFs are sponsored by major financial companies, which get paid to manage the funds, Adams is a company unto itself. In fact, the CEO heads up the investment process. I highly doubt the CEO of Eaton Vance Corp (NYSE: EV ) has anything to do with the closed-end funds his company sponsors. And Adams Express has an impressive history of paying dividends. For example, between 2007 and 2014 the CEF paid out $18 a share in distributions. It started that period out with a market price of around $13 a share. It’s recently been trading hands at around $13.50 a share. If you lived off of those dividends you can’t exactly brag about capital appreciation, but you certainly can’t complain that your capital has been slowly returned to you, bleeding the fund’s assets in the process. And the CEF has an extremely low expense ratio at around 0.6%, according to the Closed-End Fund Association . It isn’t unusual to see closed-end funds with expense ratios two to three times greater than that. Low costs are a true benefit to shareholders over the long term. But what about management? All of the above points are solid reasons to consider Adams Express as a long-term holding for your portfolio. That said, there are some reasons to avoid it, too. For starters, the 6% dividend policy ensures that distributions will fluctuate from year to year. And, generally, the CEF pays three small distributions and then one large one at the end of the year. If you are looking for regular income, this isn’t the best option. But the bigger issue is actually management. In 2013 , Mark Stoeckle replaced long-time CEO Douglas Ober. Stoeckle has over 30 years of experience in the finance industry, spending time at BNP Paribas, Liberty Financial, and Bear Stearns. At BNP he was the Chief Investment Officer for U.S. Equities and Global Sector Funds. That’s not a bad pedigree. That said, as you might expect, he came in, took a look at the portfolio, and made some changes. That’s what all new managers usually do. But, more important, it meant a 55% turnover for the fund in 2013. In the four prior years, the highest turnover was roughly half that at 27%. Turnover through the first nine months of 2014 was around 30% on an annualized basis. So he’s clearly gotten the portfolio pretty close to the way he’d like it. However, his approach at Adams Express hasn’t been tested by a major market downturn. That fact alone is enough reason to take a wait and see attitude, or to at least start slowly and build a position over time. Still, it’s worth delving into what Stoeckle does. For starters, he, wants to, “…invest in good businesses. These types of companies typically have a visible growth path and a defendable market position that they can use to their advantage.” He’s also fond of business operating in an, “…improving competitive environment…” That’s step one. He also wants to see a management team that has demonstrated its ability by, “…generating cash flow and using that cash to prudently grow the business and fortify its market position and balance sheet…” And before pulling the trigger he also wants to make sure he’s getting a good deal, making valuation a chief concern. After a stock is in the portfolio, meanwhile, Stoeckle and his team set milestones against which to grade each company’s performance. This all sounds great. But it’s roughly similar to things I’ve heard and read from hundreds, if not thousands, of pooled investment vehicles (mostly open-end mutual funds in my former life as a mutual fund analyst for a financial publishing company). Having a good story doesn’t mean you’ll have good performance. That’s not to say that posting a one-year gain of about 13% in 2014, roughly in-line with the broader market according to Morningstar, was a bad showing. Quite the contrary; job well done. But remember, 2014 wasn’t 2007 or 2008, when the broader market was, well, a little less hospitable. So, a new manager who’s only recently gotten Adams Express into fighting shape is a good reason to pause before you pull the trigger. And while the fund is trading at an around 14% discount to net asset value, that’s actually in line with the fund’s average over the last five and 10 years. So it’s probably fairly priced right now, but certainly not cheap. Not ready to pull the trigger I like Adams Express based on its long-term history and unique profile. But I’d wait until the market shakes things up a little before buying. I just want to see how the new CEO handles a bad market.