Digging Into Closed End Funds

Boaz Weinstein from Saba Capital sat for an interview at a conference with Barry Ritholtz posted at his site that is very well worth the time. Closed end funds have intrigued me going back to the 80's. The short version is that the shares trade throughout the day but unlike ETFs the share count is fixed which usually results in the market price deviating from the net asset value (NAV). For the last few years, probably longer, most CEFs have been trading at a discount to their respective NAVs. I can remember stretches a long time ago where it seemed most of them traded above their respective NAVs.

Gaming the discount or premium to NAV is a complicating factor to using CEFs. Another complicating factor is that many of the funds use leverage which increases the yield on them but can result in larger drawdowns too. As we've looked at before, many funds have the tendency to erode on a price only basis as the first chart shows. 

Both PPT and MIN have been around a very long time. Working the yield back in, both funds have compounded in the mid-two's. 

The CEF part of Saba's business focuses on playing an activist role in working with or sometimes against, the fund managers to take actions to close the discount. To this end, Weinstein and Ritholtz talked about activist engagement with closed end funds hopefully resulting in equity like returns with bond like volatility. For example, if a CEF is trading at a 15% discount to NAV and an activist can actually get the market price back in line with the NAV over the course of two years or less, that is where the equity like returns come from. And while waiting for that to happen, the fund trades with bond-like volatility. 

Ok, yes...but. There have been plenty of instances where markets caught a cold and CEFs caught flesh eating disease. There was carnage in 1994 and 1999, June/July 2003 left a mark, PPT fell 31% in 2008 and MIN fell 15% in 2022. 

CEFS is an ETF of CEFs that Saba manages. BRW used to be a Voya fund, there was some sort of litigation, the net of which is that Saba now manages the fund. In the interview, Weinstein talked about steps taken to get the market price of BRW up closer to NAV, it currently shows trading at a 5.83% discount on the fund's page. Both CEFS and BRW have done well. The equity like return is a defendable argument, the bond like volatility less so but that's ok. 

BRW may not be what you think it would be. At least it's not what I was expecting under the hood.

The asset allocation, sort of.

Closed End Funds (Globally)	22.66%
Corporate Bonds	18.56%
Private Fund	13.96%
Senior Loans	13.70%
Common Stock	12.52%
Investment Trusts	8.79%
Unit Trust	3.58%
Simple Agreement for Future Equity Contracts	2.09%
Preferred Stock	1.14%
Mortgage-Backed Securities	1.10%
Money Market Funds	0.94%
Options	0.90%
Futures Contracts	0.55%
Sovereign Debt Obligations	0.54%
Special Purpose Acquisition Companies	0.53%
Credit Default Swap	0.44%
Credit Default Swaptions	0.24%
Investment In Affiliated Fund	0.23%
Forward Foreign Curreny Contracts	0.14%
Warrants	0.08%
Rights	0.01%
Participation Agreement	0.00%
Preferred Stock	-0.05%
Total Return Swap	-0.22%
TBA MBS Forward Contracts	-1.07%
Corporate Bonds	-1.46%
Exchange Traded Funds	-3.06%
Common Stock	-13.11%
Sovereign Debt Obligations	-53.81%
Cash, Cash Equivalents, & Other Net Assets	70.08%

There are a lot of holdings that include individual issues, mutual funds, closed end funds, ETFs and currencies. It seems global macro-ish to me but I don't know if Weinstein would describe it that way. 

Yes, the holding and composition data is stale. That is common with mutual funds and CEFs. The fund charges 98 basis points per cefa.com but a Google search gives a lower number and I didn't see it on the BRW page. It yields about 13%, $0.085 per month which implies that at least some of it might be ROC which I don't think is a bad thing in terms of taxes. For what it's worth, BRW was down 4.64% in 2022.

When we look at trying to put together advanced asset allocation ideas, one strategy that I typically avoid is relative value. I'm not really sure how we could access it in a retail-accessible fund. Weinstein described closed end fund activism as a form of relative value which is part of the story with CEFS. He would know better than me but I'm not sure that would present itself as being a differentiated return stream as Portfoliovisualizer has CEFS having a 0.85 correlation to the S&P 500.

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