Friday, 20 July 2012

Deep-Discount Closed End Funds of 2008: How Did They Do?

Way back in December 2008, when we described how Closed End Funds work, we copied the Globe Investor list of CEFs with the biggest discounts at that moment of market price compared to the net asset value of holdings inside the fund. Our screen capture snapped 13 CEFs with huge discounts ranging from 48% to 92%. This admittedly was the time of utmost fear in markets at the peak of the credit crisis but was the market overdoing it in pricing the extra risk factors we listed in our post? We thought back then that there might be some bargains amongst the heavily discounted unloved CEFs. Let's see how those CEFs evolved since then and see whether the market reconsidered its estimates. We exclude one of our 2008 list, the Bayshore Floating Rate Senior Loan fund since it was already announced for shutdown when we wrote the 2008 post.

Equity Benchmarks Up 42-47%
Let's remember that equity markets recovered strongly after those frightful days of late 2008. The CEFs were invested in a large variety of markets so the number can only be a rough measure but the TSX Composite Index Total Return from late December 2008 to today is just under 42% and the USA's S&P 500 Total Return Index, translated into Canadian dollars, is up about 47%. To get these numbers we used GlobeFund's handy graphing tool which lets us pick any of a range of benchmarks in the "Compare vs benchmark" drop down box.

Outstandingly Better Than the Market
  • First Asset Power Generation (PGT.UN at the time, no longer quoted) - The $5.74 per unit market price of 2008 was worth $9.13 by the October 26, 2010 agreement to merge with Sprott Power, a nifty 59% increase, more than double the TSX index's total gain up to then. That would have been the time to sell since Sprott Power (SPZ), whose shares First Asset owners got in exchange in the merger, has dropped back from $1.71 to $0.95 today.
  • Global 45 Split Corp (formerly GFV) - This is another fund that has fallen by the wayside through redemption by the managers, in September 2011, but Global 45 holders would have been very happy with the 107% increase in market price from $2.15 in 2008 to $4.44 at the end (see the Yahoo chart).
  • International Financial Income and Growth Trust (formerly FIT.UN) - This CEF stopped trading in December 2009 at $4.60 a share, a rather impressive 184% gain in a mere year.
  • Acuity Small Cap Corporation (formerly ASF) - This is starting to be a familiar story ... ASF disappeared as a separate entity in May 2011 when it was merged by Acuity into its Acuity Canadian Small Cap fund. The $8 or so price at the time gave the 2008 buyer a 397% gain
  • Split REIT Opportunity Trust (formerly SOT.UN) - The storyline continues as SOT.UN was merged into the Criterion REIT in December 2011. SOT.UN's market price at merger was $18.65, up a princely 729% in the three years.
  • Sentry Select Primary Metals Corp (PME) - This fund still exists as it did in 2008 but the market price underwent a huge turnaround. PME is actually down since a peak of around $12 in late 2010 but its current price of $7.37 per TMX Money still represents a very healthy 238% gain since 2008. Interestingly, the latest Globe CEF report shows that instead of trading at a huge discount to NAV, the current price is a 9.5% premium! Is the market fickle, or what? 
  • Global Diversified Investment Grade Trust (DG.UN) - This is another fund still in existence. The market price has risen to converge with the NAV such that the discount gap is now only 8%. That has allowed 2008 shareholders to receive a 358% gain to date on top of a regular stream of attractive dividends (TMX informs us the yield is now 6.8%). Manager National Bank Financial must be doing something right running the "portfolios of mortgage-backed securities, asset-backed securities, synthetic corporate exposures and other fixed-income securities". The Google Finance price chart below shows the very bumpy ride of DG.UN's blue line to the huge increase - by contrast, the orange line of the TSX Composite, which on most chart scales looks like a bumpy ride itself, seems to be smooth as a T-bill.
About as Well as the Market
  • Global Banks Premium Income Trust (GBP.UN) - The 46% gain of this fund more or less matches the market performance. A combination of NAV decline and price rise has almost eliminated the discount. In 2008, the price vs NAV discount was over 50%, now it is only 6.3%.
  • Energy Split Corp Inc (formerly ES) -Before this fund was redeemed and shut down in September 2011, it's 2008 price of $10.32 had recovered to $15.19, a 47% gain.
Worse Than the Market
  • Copernican British Banks (CBB.UN) - The market price has only risen some 27% since 2008 and the discount has narrowed but there is still a hefty discount of about 25%. A February 2012 Globe and Mail article by Martin Mittelstaedt included CBB.UN as showing interesting promise.
  • Copernican International Financial Split Corp (CIR) - This is a true disaster amongst the 2008 crop. The NAV is exactly zero i.e. the portfolio holdings are worthless, and the market price is $0.03 a decline of 92% since 2008. Any remaining money is going to the preferred shareholders, though the prefs (CIR.PR.A) trade at a 15% discount themselves. Is manager Manulife going to put this fund out of its misery soon?
  • Copernican World Banks Split (CBW) - This is another disaster, also it happens, managed by Manulife. The fund's NAV is zero, though the market price is $0.045, a decline of 85%. Similarly to CIR, the prefs (CBW.PR.A) trade at a 15% discount. Manulife should bury this dead fund.
  • Deeply discounted CEFs seemed to offer huge gains or giant losses, with few in the middle. Buying such funds is a high risk, high reward endeavour. An investor in deep-discount CEFs is likely better to own several and not put all eggs in one basket. A limit on how much money in total goes into such volatile funds makes sense too.
  • The price ride is very bumpy along the way. We showed one chart, for DG.UN, but others we looked at were just as hair-raising.
  • The worst outcomes have been with funds tied into banks outside Canada as the banking crisis has endured. The future was worse than even the market price in 2008 had indicated.
  • The best outcomes have occurred when the market price vastly overdid the negative view of the fund itself. The fund may have been in trouble, as evidenced by subsequent close down or merger, but the contents, as expressed by the NAV, were still worth far more than the market price. Value assessment is a worthwhile discipline to apply to these funds.
Disclosure: we did not actually buy any of the above funds ourselves, so we cannot now boast about how smart we were.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

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