EC Knowing When To Walk Away

Unlike a typical portfolio of ETFs or mutual funds traded at NAV, closed-end fund investors must decide from a fundamental perspective if a fund’s risk will ultimately be worth the reward. ETF or mutual fund assets are always redeemable at an underlying asset’s current price, so as an investor it becomes easy to make educated decisions when evaluating market trends alongside the funds you own. 

The problem with CEFs is that even the most communicative fund sponsors report statistics that are 60-90 days stale. So in turn, CEF investors are left to evaluate the daily relationship between NAV and market price trends to develop a cohesive portfolio.

This daily relationship allows us insight into yield curve positioning, duration, or targeted credit quality. You then have to back out leverage and compare NAV price fluctuations to popular ETFs such as the iShares 7-10yr Treasury Bond ETF (IEF)or the iShares High Yield Corporate Bond ETF (HYG) to identify with the underlying portfolio manager’s intentions.

The bottom line is that you have to come to terms with the fact that you’re never going to get the entire picture; you are merely peering into a room through a keyhole. Especially true with respect to swaps and other complex derivatives that can drastically change a portfolio’s dynamics.

The hard part is knowing when to walk away from an underperforming fund in what should be a nurturing market environment.

At our firm, we manage our Dynamic CEF Income Portfolio to capitalize on developing trends in the market, and some times that includes taking a countertrend viewpoint. This was precisely the investment thesis when we assumed exposure to the Legg Mason BW Global Income Opportunities Fund (BWG). The fund has an excellent long-term track record, distribution rate, dividend coverage, and even a rising dividend trend.  These characteristics meet or exceed all of our internal fundamental requirements.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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