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.
Dan Plettner owns UTF, RNP and DVM in his Covestor Core model.
September 16, 2010: On the evening of September 15th, Cohen & Steers announced adopting a level rate distribution policy, and declared third quarter distributions for its affected Closed-End Funds. I perceive this news most relevant to Cohen & Steers Infrastructure Fund (UTF, a pre-existing position in the Core model), Cohen & Steers REIT and Preferred Income Fund (RNP, a pre-existing position in the Core model), Cohen & Steers Dividend Majors Fund (DVM, since added to the Core model), and Cohen & Steers Quality Income Realty Fund (RQI, newly added to the Taxable Income model).
Accumulated undistributed net investment income data had been available in the UTF semi-annual filing in addition to other potentially counterbalancing data points. Although not supportive of my own equal conviction, the same data fields were in RNP’s semi-annual filing. The timing of distribution changes are always a complete mystery to everyone outside of any particular Closed-End Fund complex. But, the plausibility of distribution changes themselves in UTF and RNP certainly did not shock me.
Ideally, I would have preferred that Cohen and Steers distribution changes occur at a time when my conviction in the equity style had been higher. My lack of current conviction in equities has influenced me to have an unusually small exposure to equities since the trading week ending August 27th. Under-participation in September’s equity rally has been frustrating both in relation to market’s move, and the timing of moves in some of my favorite equity ideas. That happens. I still need to stay objective at all times, and concern myself not only with upside opportunities, but downside risks.
I wish I had previously owned Cohen & Steers Dividend Majors Fund, but its distribution increase was factually not anticipated by me. I am decidedly imperfect. I’ve long observed a double-digit discount but aside from the marketplace’s taste for dividends among the equity class, I saw no catalyst for changing that discount as probable in the near term. I will not blame my failure to anticipate the distribution change on Net Investment Income data from DVM’s semi-annual filing, as some Closed-End Fund analyst (which I do not define myself as) may.
The point is that I believe we are all imperfect in all of our investment decisions. Those who fail to accept their imperfections may be doomed not to improve their acumen, and further disable themselves from making sound, objective decisions in instances where they missed an earlier opportunity.
When I look at DVM objectively after my failure to anticipate its distribution change, I want to own it now, regardless as to the source of its distributions given that it is trading at a double-digit discount (CEF Connect), and certainly not at a premium. Some Closed-End Funds, potentially including DVM, could move to supplement their taxable dividend distributions with non-taxable return of capital going into the uncertain 2011 dividend tax environment. Such, if when and where it occurs may have its place, and also may draw merited criticism. Details matter. Sadly, not all Closed-End Fund investors choose to observe details, much less contemplate the relevance of those details. Again, I am buying DVM at a double digit discount, not a premium.
The distribution change in DVM is relevant to my security selection thesis given what I perceive as a marketplace taste for yield. If the marketplace demand for shares of Cohen & Steers Dividend Majors Fund grows, and supply does not grow, I believe DVM’s discount may shrink. In my experience, choosing a Closed-End Fund at a discount is primarily beneficial if that discount shrinks. I do not believe that the shrinking or the painful widening of Closed-End Fund discounts is random.
