Barron's had an article about Bill Ackman's closed end fund that trades in Amsterdam but is on the US pink sheets with symbol PSHZF. This post is not about that fund. There was a quote in there from Eric Boughton, one of the managers of the Matisse Discounted Closed End Fund Strategy (MDCEX). Matisse has a couple of funds of closed end funds that we've looked at before.
Closed end funds (CEF) have a fixed* number of shares. They have a net asset value (NAV) per share but because the number of shares is fixed, the market price that closed end funds trade at can vary significantly from the NAV. For quite a few years now, many (most?) CEFs have traded below their NAV, so a discount to NAV. There was a stretch many years ago that I recall a lot of them were trading above their NAV which is referred to a a premium. Fixed* in that there is no daily creation/redemption process but funds can go through a process to issue new shares via secondary offerings.
CEFs tend to have very high yields because they usually use leverage. The basics are not so difficult to understand but there is a lot of nuance to the space in terms of certain investors or funds, Matisse, Herzfeld Advisors and Saba Capital as some examples, trying to game the discount/premium dynamic along with some other strategies.
The chart is of three very long standing CEFs and isolates one of the challenges of owning closed end funds. The charts are price only but captures the erosion that often goes with owning CEFs. On a total return basis, the compound positively but they can't keep up with the payout.
According to Morningstar, JPC is trading at only a 0.12% discount to NAV, PPT is trading at an 8.14% discount and MIN is trading at a 3.96% discount. For what it's worth, JPC had been at a 4% discount until very recently. The respective yields of the three funds are 9.9% with 38% leverage, 9.02% with no leverage information provided and 8.91% with 23% leverage.
That all tees us up to try to figure out MDCEX. And I do mean try to figure it out because I really don't know what to make of it. MDCEX is in Morningstar's Tactical Asset Allocation (TAA) category and the Fidelity info page for the fund offers the following comparison to other funds.
MDCEX has had the highest returns but it appears to have been more volatile. Here's a comparison I built. The returns are competitive but the volatility is much higher.
MDCEX' Calmar Ratio was the essentially same as PRPFX and a good bit higher than VBAIX, higher is better. And its Kurtosis was off the charts high compared to the other two which is not good. High volatility and higher probability of bad outlier return (Kurtosis) don't have to be negatives if the correlation is low or if you have some reason to believe it could offer some sort of first or second responder defensive attributes but MDCEX's correlation to the S&P 500 is 0.86 and it has a downside capture of 88%.
Looking at how it has actually traded though, yes more volatility and you can see in the chart it got pasted in the 2020 Pandemic Crash (poor first responder?) falling 36% but in 2022 it was only down 6.5% so maybe there's hope as a decent second responder? Regardless of whether 2022 was a matter of luck or skill, down 6.5% in 2022 is a solid result. The question though is whether there is any basis to believe it could do something like that again.
Since it's inception, according to Arch Indices portfolio tool, MDCEX has compounded at 8.62% versus 9.06% for VBAIX and 5.78% for PRPFX. VBAIX and PRPFX are both core holding types of funds and while Morgingstar puts MDCEX into TAA, I'm not sure that is a great fit. MDCEX as a core holding, the return is decent but the stats say it is very volatile and the Kurtosis number is truly awful.
Can it add value as a diversifier, more in line with the TAA category? I built out the following to backtest where the only difference is a 20% allocation to MDCEX or iShares Aggregate Bond ETF (AGG). BTAL is a client and personal holding.
Portfolio 3 is 50/50 S&P 500/managed futures and the benchmark is Vanguard Balanced Index.
The return is higher with MDCEX but so too is the volatility. The Calmar Ratio with Portfolio 1 is ok at 0.84, better than Portfolio 2 and VBAIX. Interestingly, 50/50 S&P 500/managed futures has a Calmar above 3 which is very good. Portfolio 1's Kurtosis is pretty bad at 2.47. That's not off the charts but it's high. I played around with some similar variations of Portfolio 1 and couldn't get the numbers to change much, good performance with a lot of volatility.
Maybe not rigorous study, but if you shorten the time frame of any of the above to start after MDCEX fell 36% in the 2020 Pandemic Crash, the Kurtosis comes way down. The outlier of 2020 has really pounded this metric for the fund but if it happened once, could it happen again?
Top holdings per Fidelity
Simple to understand return attribution.
The expense net to fund holders is very high. The management fee seems in the ballpark at 0.95 but there are things like fees of the CEFs it owns, including very high fees for the Ackman fund mentioned above, that need to be considered and adds up to 3.84%.
The idea of what Matisse is doing is very interesting me, I've been intrigued by CEFs since the 80's but it has been ages since I used any for clients or owned one personally. I don't think it is a bad fund, yes very expensive, but I think there is something to learn by following it even though I am very unlikely to ever buy it.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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