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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Massive Carnage In The CEF Space


° All high yield assets have been crushed in this market - in some cases worse than equities.

° The declines in price and NAV of most CEFs have been nothing short of massive. Investors are selling anything and everything.

° This is all liquidity driven declines. What we are seeing are the pitfalls of a daily liquidity "wrapper" holding illiquid securities.

° It is still far too early to think about jumping in en masse and reloading up portfolios with leveraged CEFs. That said, we have a shopping list ready to go.

° We are in a 1% interest rate environment. Anything yielding in excess of that level has some assumption of risk. You must accept that risk if you want to produce.

SA Article Continues


  • Thanks for your thoughts. Interesting comments. Much appreciated. Old_Skeet
  • Howdy folks

    Shale oil high yield debt has been used to juice the return in all of our cash type investments.

    With the oil price war going on it's actually worth more as toilet paper.

    Peace and Flatten the Curve,

  • edited March 2020
    I would advise people to stay away from the levered closed-end funds and buy the unleveraged ones instead. You can screen for those at:
  • Something tells me that a lot of leveraging is disappearing as we speak.
  • Some of that leverage is not easy to unwind in closed-end funds as it is issued preferred stock. If anything, the leverage ratios increase as the value of portfolios decline and that's where it gets really dangerous as CEFs have to have a certain coverage ratio of assets to debt, and can go into forced liquidation mode as a result. Then losses are amplified from the leverage.
  • Thanks Mark. Yes, I've seen the devastation there too. The Great Liquity Crisis of 2020. Something tells me things are going to change big time in the way CEFs, ETFs, and OEFs are priced. c
  • I am by no means an expert on CEFs and ETFs, but concerns regarding the effects of panic selling on their pricing which can have nothing to do with their NAV has always troubled me. Whereas, at the end of the day OEFs are priced based on actual NAV. So, I have never used CEFs or ETFs.

    How has the correlation between price and NAV been working out in the current market volatility?
  • RiverNorth, whose strategy centers on CEF arbitrage as the key to their competitive advantage, posts the following "Cliff Notes" version of their recent conference call.
    The following provides a brief recap of the RiverNorth conference call held on March 19th.

    Capital markets and economic volatility/uncertainty has led to unprecedented volatility in the CEF markets

    RiverNorth estimates that 90%+ of the CEF market is owned by retail – and they are in full retreat

    Co-portfolio manager Steve O’Neill described some of the CEF price action last week as a “9.5 out of 10 on the CEF panic scale”

    Discounts hit (and in some cases exceeded) levels last seen during the Global Financial Crisis of 2008

    To keep investors appraised of the opportunity set, RiverNorth started posting discount data here:

    The opportunity is broad based – nearly all CEF asset classes trading at historically wide discounts
  • @Roy The bigger risk is to NAV impairment than market price action in the long-term. Those discounts usually subside over time as the NAV either declines to meet the market price or the market price rises to meet the NAV. Yet NAV impairment, especially on a leveraged ETF, is no joke as it could cause a violation on the debt coverage ratio required of the fund. Something else worth noting, many closed-end funds invest in fairly illiquid assets that don't price as frequently as the shares of the fund iteself. This means the fund's market price trades down before the NAV does, yet that NAV gap may eventually close as the illquid assets--high yield bonds, bank loans, mortgage debt, munis--are eventually re-priced. When things get interesting is if one thinks the market price has overshot where the NAV really should be on the downside so that a true discount exists.
  • How has the correlation between price and NAV been working out in the current market volatility?
    In typical trading days when there are ample buyers and sellers, bond prices are traded with narrow spread in relation to their trading volume. The bond prices are summed up at end of the day and posted as the NAVs. According to Dan Fuss of Loomis Sayles Bond fund, a number of his high yield bonds cannot be sold due to the lack of buyers. This situation further exacerbated when some of these bonds are thinly traded with large spreads. At the end of the day the bond prices went through a free fall, and they were calculated into the NAV at the end of the day. He had two choices: (1) sell the bonds at an higher loss, or (2) hold them and calculated into the NAV at the end of the day. He described the latter choice as as mark-to-market condition. Some calls this the liquidity issue. A sizable portfolio at that time held sizable % of high yield bonds and he simply cannot sell. 2008 was brutal for Loomis Sayles bond fund.

  • Just so it's clear to those unfamiliar with CEF's - not all CEF's are bond related. There are equity CEF's also. It doesn't seem to matter in the current market environment but they are different.
  • edited March 2020
    The guy who writes these articles is a very good CEFs analyst and sells his services. I love his writings and their depth. Late last year he was posting his portfolio results several times and how they did much better per risk/reward than stocks.

    The following is what I posted about the article we are discussing
    after years of great results, we are now seeing the real volatility of CEFs where many retail investors didn't understand the risk. While SPY lost over 30% PCI,PDI,PTY lost 43-46% and I'm guessing that your 3 portfolios were down accordingly at the bottom on March 23rd.
    Another interesting observation: 3 year annual average performance as of 3/27/20202 is ...BND(index) 4.8.......price return...PCI 2.3%...PDI 3%.......NAV return is even worse...PCI 0.1%...PDI 1.1%. It's an eye-opener.
  • What's your point? Do you know what's in his portfolio's and in what proportion? Did you just pluck 3 PIMCO funds to make your point with a smiley face just to gloat? Do you think all portfolio managers should have sold everything to cash when you did? I mean just what is your point? Sure CEF's are risky and if you own them you should be aware of that and willing to accept that risk. Otherwise don't own them.

    p.s. Nobody has seen your portfolio either. All we have is your words saying what you did and frankly I think most of us could repeat them by now. But in the end they are just your words. It's getting old.
  • edited March 2020
    I think you missed my main point. If you use his services he has 3 portfolios for you to select from, the funds/ETF/CEFs/whatever in each and all the trades he does. So yes, you do know his portfolios in detail.

    Going to cash with these portfolios and/or what other managers do? I doubt many do it because most managers don't have this flexibility, after all, you pay them to invest your money. Over the years I looked at many mutual funds and from memory, I remember Romick with FPACX at 30-40% cash and Eric Cinnamond in 2008-9 (can't remember the fund) was over 50% in cash.
    I don't know any fund that invests at any given time so much in cash.
    But, I can do what I want and it's the first time I ever sold everything. It was a great move I will remember for many years to come and probably saved me about 25-30%.
    I did sell in the past 20-40% but never that much.
    My situation has changed too, I'm retired now so protecting my capital is very important.
    So, maybe you should say good for you. I love when other investors are making money and making great moves.

    Since I'm flexible I can own any fund at any given time and since last week I'm mostly in HY munis. Why do you need to see my portfolio at all times? if you know my style (2-3 funds) and I said in January this year and several times after that I owned HY Munis and the 3 funds I like are NHMAX,ORNAX,OPTAX and the rest are in Multi and I mentioned IOFIX as the best one, you don't need to be rocket scientist to know that I probably own 2-3 funds out of these 4 funds.

    In the last 1-2 days, I also said that since last week I'm in again mostly in HY munis, which funds do think I have? really?
  • And I'm still failing to see your point. His client's can see the portfolios you refer to and can judge for themselves whether to stay or go. He's under no responsibility to share them publicly with non-paying interested parties such as yourself much like you or I.

    Hopefully we all formulate our portfolios in accordance with our own tolerance for expectations in line with the risk we're comfortable with taking. If I, or he and/or his clients failed to see this event coming we're in good company:

    Mohamed El-Erian: 'We Did Not Prepare for Something As Severe As What We’re Facing’

    Surely a drawdown seemed to be coming but I doubt that very few figured it to be this massive. Similarly, I would venture to guess that very few expected the unusually large gains seen in their portfolios in 2019. It works both ways. My point is that there's no reason to rub peoples faces in the mess on either side of the fence and that's how I read your post.
  • @Mark. "... I doubt that very few figured it to be this massive." Or this sudden. Especially for fixed income, even junk.
  • At the end of January the advisor for my retirement funds asked me if I'd be comfortable with a 17% drawdown in return for a chance at equivalent higher returns. I said yes, but I too was really not thinking that my portfolio (then about 57% equities) would decline precipitously. Not sure how I would answer the question today, nor how financial advisors are going to have to alter their advice. Maybe in hindsight this period won't feel like a game changer, but it certainly does now. FWIIW, no advised me to get into Alpha Centric.
  • @BewWP. Yes, this month seems to be painting individual investors into a corner ... become day traders or risk the consequences of catastrophic loss.

    Forget that quaint notion of checking your portfolio monthly, quarterly, semi-annually.


    But that can't be the right answer, can it?

    I can see David shaking his head right now.

    I'm still reeling from all this and the postmortem and lessons-learned have yet to be written ... and we don't know yet if the worst is over.

    Surely, something about limiting exposure to funds that can suffer a redemption-driven collapse.

    Surely, something about the potential for hiding volatility in NAV.

    Surely, something about being lulled into complacency by long periods of consistently good returns.

    M* took a bow recently with its "told you so" memo regarding how much better their metal winners fared than the more niche and boutique funds.

    But I've seen astonishing outflow numbers in fixed income funds and given the magnitude of the dislocation, I do wonder, maybe a little bit, whether such funds are just tip of iceberg.

    Hopefully not.
  • So far the futures for tomorrow don't look so great either.
  • Must you Mr. Poopypants? I didn't need to know that.
  • I'm sorry. :(
  • UPDATE with a focus on PCI & PDI

    PIMCO CEF Update | It's 2008 Redux


    ° The PIMCO UNII report showed some modest progress on coverage and UNII levels.

    ° Obviously, the traditional looks at this report are less important given what is happening in the markets and with these funds specifically.

    ° We expect distributions to be maintained in most of the taxable bond CEFs from PIMCO and that the muni funds are investable for the first time in years.

    ° Most funds earned their distribution in the month according to NII production with small shortfalls in the others. Nothing concerning.
  • edited March 2020
    Back to CEFs. Given my Irish background, I have casually watched IRL, ever since I bought it in the 1990s and sold for a very small profit. Life was in upheaval, then. Share price started the year at $10.00. NAV was at $12.00. Ordinarily, a very attractive discount. Tonight--- Sunday, 29/03/20, shares cost $6.07 and NAV stands at $8.00. I'm using Morningstar's numbers. YTD, shares are down over 39% almost. NAV is at -34.47% YTD. Portfolio holds 28.68% US stocks now. 70.18% non-US. Presumably in Irish companies...
    BUT WAIT! 25% in UK. (Some or most of that could be in Northern Ireland. These days, for many purposes, the border between the Republic and Northern Ireland is fluid or non-existent--- but Northern Ireland still uses pound sterling, of course, rather than the euro.) Holdings in "Europe Developed" = over 43%.

    Mind you, it's a very concentrated fund. Only 31 holdings reported to Morningstar.
    Oh, and Smurfit Kappa is GERMAN. Saint-Gobain is FRENCH. So is Veolia Environmental. IPL Plastics is Canadian.

    So, then: This is hardly the IRISH fund it used to be. By the way, ZERO cash holdings, but that's no suprise, eh?
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