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I’ll never understand CEFs

edited June 13 in Fund Discussions
Several weeks ago I opened up a good sized position in Gabelli’s GDL fund. Had owned a much smaller amount for a couple months. Thinly traded with only a $95.7 Mil asset base. Took hours to acquire the desired number of shares. The CEF is an arbitrage fund that skims small profits from pending or nearly completed mergers & acquisitions. It’s the tamest CEF Gabelli offers with a record dating back 15+ years and which I’d expect to outpace cash by a percent or two over longer periods. (Gabelli himself is reported to own a big chunk.)

Averaging in at $8.32, the fund has gone nowhere in the short time I owned it. Held steady around $8.32. Today’s the ex-dividend date (12-cents per share). While the fund opened lower as expected ($8.26) it quickly bounced to $8.35, well above its average price in recent days. I would not have expected it to go x-dividend and then jump in price over what it closed the day before - especially with the present Mid-East turmoil.

I really don’t understand the logic here in a fund jumping higher on ex-dividend date after the dividend has been declared / pulled out. It would make more sense for investors to be pushing the price up in the days before the dividend is declared. Would be instructive to better understand investor behavior & psychology is these matters.

I

Comments

  • What trading securities do after ex-div is unpredictable - they may even go up enough to make up for distributions. CEFs are no exceptions.

    For GDL (high discount of 20%) that's involved in M&A arbitrage, there could be news related to one of its holdings. In looking at its portfolio holdings at M*, nothing jumped out, but I don't follow GDL in detail.

    BTW, GDL has managed-distribution policy, so some of the distribution can be ROC (18.75% in 2024).
  • edited June 13
    Thanks @yogibearbull. Yes, one common criticism of this one is the ROC portion of dividends. But that can be said of a lot of CEFs. If I ever hear that Gabelli has sold his big chunk I’ll head for the exit. Forsyth did a (mostly complementary) piece on the fund in Barron’s a few years ago. Mentioned Gabelli’s personal investment.

    PS - I spoke too early. The CEF pulled back to $8.29 late morning, which makes perfect sense. I can’t account for the brief spike in price that was reflected on several different pricing platforms. But CEFs do behave in erratic ways!
  • I've actually noticed a similar phenomenon with Pimco CEFs that I own. Like Yogi said, I never know if it is due to news about internal holdings, market gyrations in general, or if the drop in price triggered "value" buying.

    For instance, how do you separate today's drop from the overall equity fall on ME events?
  • edited June 13
    I guess the real lesson is not to watch daily price fluctuations. In hindsight the small AUM & thin trading may have led to price distortion. Seriously doubt I could have sold at the high reported price had I wanted to.

    The war (Iran) seems out for a long run. Knee jerk in equities today. Little consequence for long term investors.
  • Unlike OEFs or ETFs, CEFs price is purely determined by investor sentiment and not the underlying value of its holdings. As you may be aware, investors like to buy/sell around distribution dates, which drives the potential for price fluctuation.

    I tend to say away from thinly traded CEFs for the reasons described in this thread. I prefer CEFs with 6-9% distributions, at minimum $1B AUM, and 125,000 daily traded shares.
  • edited June 13
    Good points @PressmUP. It was just the unexpected price swings around X-dividend date that puzzled me. And I’ve noticed the same with other CEFs. You helped by noting these strange price swings are common.

    I’m aware CEFs are priced by sentiment and do not often trade at NAV. I owned 15-16 a month or so ago and commented proudly on my ”CEF basket” here a few times. Many of them were doing very well. But when I pulled up the 2008 performance (where it was available) I learned that several of my “hottest” ones had lost between 50% and 65%* in 2008 alone. So, I pulled back out of caution. At age 79 I’m not going to go chasing anything lower as I did in ‘08.

    Still own 11 CEFs. Most are somewhat sedate and income oriented - even though I realize they aren’t the “hottest rods” on the block! BTW - GDL held up well in 2008 losing just 8%.

    Yes - Best to avoid thinly traded holdings. Tough to get on the fire escape when needed! :)

    * UTF is the one that lost 65% in 2008. Yet, I’ve come across well meaning financial articles describing the fund as an excellent “conservative” choice ”for older investors”. Obviously those writers hadn’t bothered to pull up its past performance.
  • Agreed, good points.
  • 2008-09 was a tough year overall. UTF is a solid fund, if purchased at the proper point...which goes for many funds. I've owned it for the last 5 years and it's done well, though it's richly valued currently.
  • Hopefully, what happened to CEFs during the GFC won't be repeated.

    At the time time, many CEFs relied on auction-rate preferreds (ARPs) for debt. These preferreds had weekly, biweekly or monthly auctions to reset their floating rates. ARP sponsors were to make last bids if other investors didn't show up at any auction.

    Nice theory!

    GFC was a debt crisis. Even big banks needed federal rescues.

    First, investors didn't show up at ARP auctions to bid.

    Second, ARP sponsors refused to make last bids.

    Third, CEFs couldn't arrange any replacement of bridge financing and were in violation of their debt covenants.

    Fourth, under the SEC regulations, several CEFs were forced to deleverage - i.e. sell at bottom prices. Results were just disastrous.

    Now, the ARP financing has disappeared. CEFs rely on better and more stable financing now.

    But the next crisis may show other problems.
  • edited June 13
    Absolutely correct Yogi. I don’t expect another ‘08. But it’s a great “stress test” I think to apply to different kinds of investments if you are very risk averse. 2022 wasn’t a typical year either in that bonds and equities do not normally fall out of bed together. But I also check a fund’s ‘22 performance just to see how it held up against other products under really adverse conditions.

    I owned UTF for a while after the March / April selloff but sold it recently. No. I don’t think it will have another year like ‘08. I also like Cohen & Steers a lot. Still own 2 of their OEFs (RAPAX & LPXAX) plus FOF.
  • I just examined a pile of CEFs last night. On most of them, the E.R. is astronomical, outrageous.
  • @Crash, pay attention to only the portfolio management fee. Total CEF ER has costs of leverage.
  • @Crash, pay attention to only the portfolio management fee. Total CEF ER has costs of leverage.

    Thanks a lot, Yogi. :)
  • edited June 17
    Yogi’s right. The interest from borrowing for leverage adds to the cost and is reflected in the fees. But fees tend to be on the high side anyway. Completely different animals than what most of us are used to. I now have 10 in a basket at Fido (down from 16 at one time). As noted earlier, I off-loaded the best performers (equity heavy) out of age related risk considerations. BTW GDL (not part of the basket) has bounced nicely since my OP. Up 0.85% today. Crazy.
  • Many high quality CEFs have no, or only minor degrees of leverage, and CEF Connect is a good screening tool if that is an important trait. But in a declining rate environment, leverage can work to your benefit.
  • Hmmm .... CEF Connect. I signed up, and it now shows me signed-in, but the Screener refuses to load. Pus. Dooky. Crud and slime.
  • edited June 18
    I’ve never found it necessary to sign in to CEF Connect. / @Crash - Look to the upper right of the page that surfaces. See the “Quick Search” box. That’s how to pull up a fund. Also, if you type in one or two letters it may randomly pull up some CEFs. One way to broaden your knowledge of what’s available. (I’ve gone thu the entire alphabet). Candidates for research & consideration don’t come easily. They’re not as widely covered on the web as more common OEFs and ETFs. Going to a fund provider’s home page should allow you to find out what CEFs, if any, they manage.

    The NAV / Price is worth looking at among a dozen or so other things. M* provides some limited useful information as well. As with OEFs, most issuers have a website detailing the fund’s purpose / philosophy, holdings and past performance. Some CEFs have a termination date when they intend to dissolve, while others don’t. You might need to dig that up in the fund prospectus.

    CEF Connect allows access to 20-year history (NAV & Price) once you locate the blue tab. I don’t own any Nuveen products but am greatful to them for providing this service.
  • Thank you, @hank. Juneteenth on Thurs. Short week.
  • I checked out a few more, after the Nuveen-sponsored website DID load for me, and I could see what was there. But there are huge errors. For example: RSF is 80% equities, but it's listed among HY BONDS. Jaypers slime crud.
  • edited June 20
    RSF - Fund Facts from Rivernorth

    When in doubt go to the source. Click on Portfolio to pull up Rivernorth’s description of what the fund owns. Obviously Morningstar and Nuveen are characterizing as “stocks” what Rivernorth considers “debt instruments”. I’m not expert enough to tell you why one party considers them debt instruments and another calls them stocks. But I wouldn’t lose much sleep over it either. One way to think about it - A good company’s stock is probably safer to own than a poor company’s debt.

    It’s not always ”black and white”. Preferred stocks, for example, behave more like bonds. Fidelity’s analytics lists them under “other” when I run a portfolio check. It’s interesting that RSF owns some of TRP’s High Yield Bond Fund (per CEF Connect) which would seem to be neither a stock nor a bond.
  • edited June 21
    Thanks very much, @hank. Upon looking a bit deeper I don't like the interval aspect at RSF. Moving along. ...MCI looks attractive so far--- apart from the big premium in price vs. NAV. I'll put it on my watch-list... The simplicity of an OEF might be where I belong.

    EDIT to add: I've settled on SPHY. :)
  • edited June 21
    A quick look - MCI lost about 30% in ‘08, but only 6% in ‘22. Looks like they’re doing something right. Not only is it priced at a large premium to NAV, but that premium is significantly above its 52-week average according to CEF Connect. Some funds consistently trade at double-digit premiums or discounts, so don’t buy based just on that. But when the current pricing diverges significantly from the norm it might represent a buying or selling opportunity.

    FWIW - CEFs are best bought in smaller quantities because of highly volatile nature. I hold 11 but (with the exception of GDL) each is only 1-2% of portfolio. Fidelity’s basket option facilitates such grouping. One possible advantage of owning a basket of conservative CEFs is that in a severe market downturn one might be able to swap some of them out for more aggressive / attractively priced ones. Pure conjecture, however. I also appreciate that while the CEFs are inside a Roth, the $5.99 monthly basket fee is pulled from my taxable account.

    There are several CEFs or ETFs that hold a conglomeration of CEFs - not a bad choice. Some I’ve owned before: FOF, CEFS, CCEF, PCEF

    Glad you found what you were looking for @Crash
  • edited June 21
    @hank and @Crash for some excellent discussion(s) on CEF's check out this forum Early Retirement

    dickoncapecod (read his bio) is an excellent resource, knowledgeable and helpful. There are also a number of other well versed posters. Hope you find it worth your time.

    Note: the "CEF Holdings ---- June 2025" thread the link should take you to changes by the month should you decide to keep visiting.

    I usually hold 10-12 CEF's in a mixture of equity and bond versions. I think that most people hold them for the income that is thrown off but as @hank may have mentioned the trick is to know when to buy or bail. Buying at a discount works most of the time for me but not always. Sometimes it's a signal that the fund has lost its mojo but not always. Also be aware that at some brokerages (Fidelity) distributions are reinvested at a 3-5% discount but not every CEF provider provides that on the platform.

    I also follow (subscribe) to a service provided by Doug Albo (mostly equity CEF's) on SA. ADS Analytics is also a highly regarded resource there.
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