Equity CEFs: Where’s My CEF Sugar Daddy?
Dec. 11, 2018 11:03 AM • ddf
This article is exclusive for subscribers.
Yesterday was one of the worst comparative performance days between the major market ETFs and equity CEFs that I have seen this year.
We all know that the US indices don’t reflect the damage that’s going on beneath the surface as bear markets are everywhere in stocks around the world.
Yet despite this poor breadth, which also has caught up to most equity CEFs in the form of widening discounts, there’s one fund that keeps bucking the trend.
The Delaware Investments Dividend & Income fund (DDF) may have its NAV at a 52-week low, but someone keeps this fund magically aloft at market price while all other CEFs are being thrown out.
I just want to know where I can find my CEF sugar daddy because there are a lot of CEFs that are performing better than DDF that deserve one.
The end of the year is usually not a good time for equity CEFs as lower liquidity and a down year can conspire to see fund market prices subject to enhanced selling while buyers are few and far between. This can sometimes lead to days in which market prices can fluctuate far more than their NAVs.
Yesterday was a good example of this. While the major market index ETFs like (SPY), (DIA) and (QQQ) recovered and went green on the day, virtually every equity CEF I followed was red, and mostly in the -1.0% to -1.5% range though a few were down over -2%.
Now, I don’t mind when equity CEFs don’t keep up with their benchmarks on any given day since usually it all evens out eventually, but when you start seeing 2%-plus performance differences even when a fund’s NAV is green on the day, then that is hard to overcome. In other words, you can be making good buying decisions on CEFs at close to their lows while hedging with ETFs at close to their highs and you still can get your head handed to you.
Unless, of course, you have a sugar daddy supporting your CEF and there certainly seems to be one for the Delaware Investments Dividend & Income fund (DDF), $12.10 market price, $10.70 NAV, 13.1% premium, 9.6% current market yield. Because while every other equity CEF I follow was getting thrown out yesterday, DDF was actually up 1% and back at close to its all-time high market price premium of more than 13%.
The question is why? Here’s the year-to-date NAV performances of all of the equity CEFs I follow which represent the vast majority of equity-based CEFs available to investors. This table sorts all 100-plus funds by their total return NAV performances year-to-date though only the top 40 or so are shown.
Note: Funds whose NAVs are beating the S&P 500 (SPY) are shown in green while those that are underperforming are shown in red.
If you look way down the list toward the bottom, you’ll see the Delaware fund DDF, which is showing an unspectacular and underperforming NAV total return performance (all distributions added back) of -2.2% so far this year, but yet has a market price total return of 21.7% YTD, leading ALL equity CEFs!
The question is why? Well, one reason and one reason only. Ever since Macquarie Investment Management got Board approval to implement a 10% NAV distribution policy for DDF back in March of this year, effectively doubling the fund’s yield to a current 9.6%, DDF has gone parabolic.
Here is DDF’s YTD premium/discount chart.
Now, I don’t mind when a fund’s market price rises to a premium valuation when it’s showing strong NAV performance, but this is not it. DDF historically has had very good NAV performance over the years, but frankly, implementing a 10% annual NAV distribution policy at close to the market highs is not exactly good timing. In fact, DDF’s market price should actually be penalized for that since I fully expect further NAV erosion from the fund trying to cover that 10% NAV yield.
But this begs the question. Should more equity CEFs implement minimum NAV distribution policies? Look at what 21% NAV distribution policies have done for the Cornerstone funds (CLM) and (CRF). Both funds have been trading at high premiums for years even if they can’t come close to covering those NAV yields. But through Rights Offerings and reinvestment at NAV even while the funds trade at premium valuations, Cornerstone has created a niche and a very loyal following of believers. The funds have actually done very well over the last couple years (see table above for YTD statistics) despite the fund’s propensity to erode NAV over time.
Income Investors Want Their Sugar Daddy Enablers
One thing is clear. Income investors want higher yielding CEFs even if the funds can’t support it. So why not give them what they want? Any fund can implement an annual NAV distribution policy and I have been pushing some fund sponsors to do just that. Even an annual 6% to 8% NAV distribution policy would be enough to get a lot of equity CEFs out of their double-digit discount doldrums.
Macquarie Investment Management may not be the sugar daddy keeping DDF’s market price up (I think I know who it is actually), but maybe we need more enablers like Macquarie. Another firm actively taking over operations of equity CEFs is ALPS.
ALPS also has sought to implement NAV distribution policies for its managed funds. ALPS now manages the Clough funds (GLQ), (GLO) and (GLV), the Liberty All-Star funds (ASG) and (USA), the Boulder Growth & Income fund (BIF) as well as others. Here is a list of their managed funds:
I don’t want to go through more days like yesterday and if adding high annual distribution policies for equity CEFs is what it takes to get investors to hold onto their funds or step up to the table, I’m all for it.
Even if over time, a CEF’s NAV is gradually eroded, many income investors seem OK with that. After all, we’re not going to live forever so just give me want I need now and worry about the future later.
So all I got to say to Macquarie and ALPS is. you are welcome to be my sugar daddy enablers.