By Randall W. Forsyth
DO YOU NOTICE THAT SCHOOLS seem to let out earlier every year? I recall going to New York City public school right up to June 30, but my kids will be off well before the summer solstice. Some colleges, moreover, let out in early May while I remember dealing with finals right up to Memorial Day.
All of which is brought to mind by last month's disastrous market performance. The old saw should be reworded to "Sell on May Day and go away." In case you've been blissfully sailing the Pacific or otherwise mercifully out of touch, May was the worst month for the Dow Industrials since February 2009, and the earlier you got out, the better.
In the same vein that the Chinese character for "crisis" is the combination of "danger" and "opportunity," some savvy investors took advantage of the May mayhem to snap up bargains. As Barrons.com's Avi Salzman reported last week, Bond King Bill Gross snapped up some Pimco closed-end funds at depressed during last month's market maelstrom.
Gross plunked down $7 million of his own dough to buy the Pimco Corporate Opportunity Fund /zigman2/quotes/200556932/composite PTY +0.56% (ticker: PTY), the Pimco Income Strategy Fund /zigman2/quotes/209865577/composite PFL +0.18% (PFL) and Pimco Income Strategy II Fund /zigman2/quotes/203087597/composite PFN -0.10% (PFN.) The purchases came mostly on one of those terrible, awful, very bad days last month, May 20.
On that day, the premium over net-asset value on PTY dropped to 2.09%, while PFL and PFN traded at slight discounts. (Closed-end funds issue a set number of shares, which can sell in the aftermarket above or below NAV.) Gross, moreover, is the manager of these funds, which he oversees along with the world's biggest mutual fund, Pimco Total Return Fund /zigman2/quotes/210424051/realtime PTTAX -0.29% (PTTAX) with $224.5 billion in assets. So, he'd have some idea the closed-end funds were selling at bargain prices, as indeed they were. PTY's averaged premium over the past year was 3.76% and as high as 16.88%, according to CEFConnect.com. PFL has averaged an 8.41% premium while PFN's was 3.76%. Since Gross's purchases, the funds have reverted to closer to their averages.
The Bond King's buys of his own funds -- which contrast sharply with the exodus of other insiders, as Alan Abelson perceptively details in this week's Up and Down Wall Street -- suggested there might be other opportunities lurking among closed-end funds. CEFs comprise one of the most inefficient sectors of the markets. (Translation: there are bargains to be found, which efficient-market theorists define out of existence.)
Patrick W. Galley, chief investment officer of the RiverNorth Core Opportunity Fund /zigman2/quotes/205196142/realtime RNCOX +0.22% (RNCOX), an open-end mutual fund that specializes in closed-end funds, also saw bigger discounts emerge from May's downdraft among fixed-income CEFs.
Among them was First Trust/Four Corners Senior Floating Rate Income Fund II /zigman2/quotes/206266858/composite FCT -0.34% (FCT), which fell to a double-digit discount from NAV last month. As of May 31, FCT traded at a 9.38% discount, one of the widest for the group owing to its modest 3.7% yield. But Galley says that CEF investors are drawn to high payouts, even if the fund isn't earning them, and end up paying a premium. If you're worried about Federal Reserve interest-rate hikes, FCT's yield should adjust as market rates rise.
Equity closed-end funds already traded at wide discounts in many cases going into May but widened a few percentage points, he adds. Among Galley's picks here are NFJ Dividend Interest & Premium Strategy Fund /zigman2/quotes/206775206/composite NFJ +0.51% (NFJ), which invests in stocks and convertible securities fund and also uses options. That makes the fund tough to categorize, resulting in a 16% discount, which should be attractive for investors looking to put money to work in an uncertain market.
Other picks of RiverNorth's Galley: The Royce Value Trust /zigman2/quotes/205853816/composite RVT +1.26% (RVT), an offering from the small-cap specialist manager that sells at a similar discount but provides a unique, investor-friendly attribute of not taking any fee while the rolling 36-month return is negative. Another bargain that's emerged is the Cough Global Opportunities Fund /zigman2/quotes/205189243/composite GLO -0.26% (GLO), which gets the expertise of former Merrill Lynch strategist, Chuck Clough, at 86 cents on the dollar with a 9.4%. (That's the result of leverage, one of the advantages closed-end funds enjoy, especially in a low interest-rate environment.)
Mariana Bush, who follows closed-end funds for Wells Fargo Advisors, also observes that some bargains emerged in the not-so-merry May market. She also added NFJ to her recommendations and also saw increased value in a number of long-lived equity funds, including General American Investors /zigman2/quotes/206464465/composite GAM +0.42% (GAM) and Adams Express /zigman2/quotes/206379906/composite ADX +0.89% (ADX), which both date from the 1920s, and Liberty All Star Equity Fund /zigman2/quotes/201786389/composite USA +0.25% (USA), which goes back to the 1980s.
Other recent additions to Bush's list include Nuveen Core Equity Alpha Fund /zigman2/quotes/209037357/composite JCE +1.14% (JCE), which uses options but not leverage to produce a 9.36% yield. First Trust Enhanced Equity /zigman2/quotes/206949953/composite FFA -0.14% (FFA) produces an attractive yield on its NAV, which results in an even higher yield of 8.39% on its discounted share price. Meanwhile, Nuveen Multi-Strategy Income & Growth Fund 2 /zigman2/quotes/201424526/composite JQC 0.00% (JQC) combines equities, convertibles, preferreds and debt with options writing.
Bush points out closed-end funds tend to trade like micro-cap stocks so she advises using limit orders to buy them. The RiverNorth Core Opportunity open-end fund takes care of those problems as well as security selection while providing diversification for investments as little as $5,000 ($1,000.) The fund also has garnered a top, five-star rating from Morningstar and was No. 1 among 955 moderate-allocation funds in the three years to March 31. Those estimable attributes come at a very high cost, however -- an expense ratio of 2.84%, more than double the average mutual fund.
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