The below text is licensed to Covestor Ltd. (“Covestor”), by Dan Plettner. Such text may be disseminated only by Covestor. Dan Plettner invests and receives income for securities research, including “buy-side” research. Dan licenses his own real time trading data to Covestor Ltd. (“Covestor”). Covestor is a Registered Investment Advisor that uses Dan Plettner’s data to create the Core, Long Short Opportunistic, Tax Advantaged Income, and Taxable Income models for its clients. Dan’s words should not be misconstrued as investment advice.
Even good financial journalists can cover Closed-End Funds in an exceptionally naive manner. Randall Forsyth stood in for Alan Abelson and touted Claymore Dividend & Income Fund (DCS) in the high profile “Up & Down Wall Street” distributed August 21st for the Barron’s August 23rd print edition. I am reminded of Barron’s mention of Gabelli Global Health and Wellness (GRX) late last year which at the time drove GRX shares to a lower discount.
Here Barron’s devoted six paragraphs to Forsyth’s DCS idea, and only in the final sentence of the 5th paragraph was “one negative” highlighted: “the fund’s 2.35% expense ratio”. Although the piece observes that the NAV “has basically shadowed the DOW”, it ignores a huge hazard common to Naïve Closed End Fund investment theses. With insufficient demand for an expensive product that shadows the broad market, discounts can naturally widen in the absence of Activism.
A year ago there was an Activism rationale for owning DCS, which ran to completion. With closing price discounts as high as 31.42% in September and 32.27% in October, and twice within 10 basis points of 36% in November of 2008 (historical discount data accessible at CEFConnect), Activists had the opportunity to accumulated sizable positions in DCS. Fund Governance and Activists ultimately arrived at an In Kind Tender, which provided an 88.91% fulfillment rate. The in kind tender expired at 11:59 p.m. EST on Monday, January 4, 2010 and the primary benefit to small retail investors required selling on the open market in advance. Participation in an in kind tender is only practical for larger institutional investors with economies of scale.
Near the same time, DCS lost an advantage I think it once had, redeeming some cheap borrowing in the form of Auction Rate Preferreds (“ARPs”) it had issued.
In my view, the Barron’s piece was particularly naive in not only ignoring why DCS trades at a discount, but also that the Activism story, which is over, was the reason why DCS discount once narrowed. Having exited, Activist Investors appear highly unlikely to revisit DCS within the next 5 or 10 years. And, for that to ever happen, DCS would likely needs to first drop back to dramatic discounts.
I have patiently waited to sell DCS short while awaiting the buying force induced by Barrons to run its course. As recently as August 11th, DCS traded at a 17% discount, when Google Finance shows that DCS traded less than 30 thousand shares. DCS traded more than 235 thousand shares on Monday the 23rd on what I perceive as an ill advised buying force. Among DCS market price forces alien to the broad market, I expect a widening discount over the long term, and excessive expenses to adversely affect DCS.
None of my words are intended to disparage Barrons, which I read, or Randall Forsyth. I research Closed-End Funds because doing so is challenging even for smart people. I believe that the detail orientation and challenges inherent to Closed-End Fund research create inefficiencies, and thus opportunities. I love Closed End Funds and my long positions are far more substantial in size than my short positions. Although I often sell my long positions in Closed-Ends like GRX when Barrons mentions them, it is nothing personal. In disclosure, I have recently bought the same issuer’s exchange traded GRX-A for yield in the account which licenses trading data to Covestor’s Taxable Income Model.
