Disclaimers: Dan Plettner owns IIC in his Covestor Tax Advantaged Model
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.
August 3, 2010: I continue to believe the market for Closed-End Municipal Income Funds is extremely inefficient. I’m certainly happy with what I observe in the daily fluctuations, income, prospects for monthly dividend hikes, and attractive valuations in the funds I hold. I don’t anticipate near term turnover in my holdings.
But, I find it evident that market inefficiencies work in both directions. What really amazes me is the presence of so much market risk elsewhere in the space. I doubt Financial Advisors would take so much risk with their own money. When observing funds like NOM on Nuveen’s ETFConnect, I ask myself why anyone is ever willing to pay $16.40 for $13.66 in Net Asset Value (as of August 3, 2010). (CEFConnect).
I suspect that some financial advisors in various states are touting dual state and federal tax advantages, ignorant to absurd current market valuations and extensive related risk. I see lots of other single state issues that look like significant overpricings: NGK, CCA, NTX, and several Virginia funds (BHV, NGB, NNB, NPV). Even a fund focused on my home state of Ohio, EIO, trades what looks to me like an irrational premium.
Federal Tax Advantages are important in my view, especially going into a likely expiration of Bush’s Tax Cuts in 2011. I am much less concerned with adding state tax advantages on top of Federal Tax advantages than I am with seeing the big picture. I don’t think a state tax advantage affecting merely the yield means nearly as much as risk-adjusted total return. I want to buy well. Also, in today’s environment I desire geographic diversification when using Closed-End Municipal Bond Funds to build a Tax Advantaged Income Portfolio.
I highly doubt state focus is responsible for most of the excessive market valuations. National Funds like BPK, EIV, EVN, PMF, PMX, and NMZ appear significantly overpriced to me as well. And, some of what looks to me like “funny money” in single state Closed End Funds are focused on the same states where I alternatively see funds that offer great value. For example, Nuveen’s ETFConnect reported as of August 3, 2010, PCK recently traded at $9.72 per share for $8.18 in underlying Net Asset Value (CEFConnect). That fund recently was measured as having negative Undistributed Net Investment Income and has a distribution cut in its recent history. I’d much prefer to own IIC for any allocation I choose to that state. IIC is an Invesco fund trading at a discount, enjoying a low cost of capital, and having extensive Undistributed Net Investment Income.
I believe Closed-End Municipal Income Fund Market Inefficiencies arise out of any number of reasons. Likewise, they can “correct” for any number of reasons including distribution changes, rights offerings, tender offers, and activism. I obviously want to be on the advantaged side of inefficiencies, to the extent my research allows.
I look to buy low, but price is not the only factor. I care about the prospects for improved value and thus consider factors including Undistributed Net Investment Income, Expenses, Cost of Capital advantages, and a shareholder base I believe likely to unlock value should inefficiencies persist.
Learn more about Dan Plettner’s Tax Advantaged Income Model on Covestor
