Perpetual CEFs vs. Limited Term?

hank

Having trouble getting my head around how the intrinsic “value” (now or in the future) to shareholders of perpetual CEFs works. In recent years there’s been a number of limited term CEFs opened (purely by way of example): Blackrock’s BCAT. The prospectus for this type of CEF sets a “liquidation date” in the future (perhaps 10 years) when the fund’s assets will be sold off and the shareholders paid based on NAV at that time. Usually there’s language to the effect that the board of directors / shareholders may at such time decide to extend the date of fund’s liquidation a number of years.

OK - That all makes sense to me. No matter how far above or below NAV the CEF is trading at any given time, shareholders know that if they hang on until the liquidation date they will receive the actual NAV of shares owned. But what about the other (perpetual) type? Is there any intrinsic value in the asset base / shares outstanding that is transferable to shareholders, or is it a game of charades? I’m sure someone smarter than me can answer that. Also, perhaps voice a preference for one type CEF or the other.

Thanks!

yogibearbull

These CEFs with special term-structures have evolved over 2-3 years. In about 12.0-13.5 years after inception, these CEFs will liquidate, but smaller residual CEFs may continue AFTER all shareholders who want to redeem have been redeemed. Prices will be whatever they are at the time of liquidation, but premiums/discounts should disappear. But in the recent bond selloff, these have been sold indiscriminately along with others. One problem is that many think of them as new CEFs, but they have much older perpetual CEF cousins, often run by the same managers.

Many firms have both - perpetual and special term CEFs. Several examples of CEFs with special term-structures:

Pimco PDO, PAXS

Nuveen NDMO, NMCO, NPFD

Thornburg TBLD

More info
https://ybbpersonalfinance.proboards.com/thread/22/funds-series?page=1&scrollTo=436

https://ybbpersonalfinance.proboards.com/thread/515/cefs-newer-term-structures-nuveen?page=1&scrollTo=1214

hank

CEFs But where do the perpetual type derive their value? (I’ve read the prospectuses on several and have owned both types.) If the assets will never be marketed (ie held into perpetuity) how can you or I know what our shares are really worth? It is, of course, common for CEFs to trade above or below their NAV. But in the case of “limited term” CEFs there is the assurance those assets will be put on the market some day. A perpetual CEF could in theory go on for 100 years just trading on some market determined value which might have little resemblance to the worth of its underlying assets. Nuts on the surface.

Maybe it’s the same as with common stocks. One does not “plan” for a company to be broken up and sold off in pieces. However, there is often a breakup value or book value to help support the share price. Is that the part I’m missing with perpetual CEFs?

yogibearbull

CEFs are tradable securities just like ETFs and stocks. They have the current market values but no liquidation dates. They are subject to M&A by activists. Just look at GIM that will turn soon into SABA.

BTW, CEF structure is one of the oldest fund structures going back to late-1800s (but none around from that era). The OEFs came in 1920s, the ETFs are just newbies from 1990s. Among the oldest CEFs now are GAM (1927), TY (1929), PEO (1929), ADX (1929).

Notion of maturity exists in the bond world.

These newer CEFs with special term-structure are unique in that they do have definite liquidation timeframes without wiggle rooms.

hank

“CEFs are tradable securities just like ETFs and stocks. They have the current market values but no liquidation dates. They are subject to M&A by activists. Just look at GIM that will turn soon into SABA “

Appreciate all this. But ETFs trade at the value of their underlying assets. No? So do mutual funds (in theory anyways). But CEF’s can trade at discounts of 10, 20% or more below book value and sometimes trade well above what their assets are really worth

Maybe a better way to phrase my question: If you buy, sell or own perpetual (non term limited) CEF’s) on what valuation metric do you base your decision if the “share price” is substantially different from the “NAV”?

ISTM - One part I’ve overlooked is earnings stream. I suspect that’s really important to the perpetual CEFs.

yogibearbull

Actually, the ETFs trade at premium/discounts too, but those are small due to their creation/redemption mechanisms. There have been several instances where that mechanism was disrupted for some ETFs and those started trading like CEFs.

There is a correlation between CEF premiums/discounts and whether the asset class is in/out of favor. For OEFs and ETFs, that manifests as inflows/outflows, but for CEFs, that is premium/discount (because shares are issued only at IPO, via secondaries, or known shelf-offerings).

CEF NAV is the liquidation value at any time, but CEF price is what people want to pay.