Cornerstone Strategic Value Fund Is No Panacea

“In a rights offering, the subscription price at which each share may be purchased is generally discounted relative to the current market price. Rights are often transferable, allowing the holder to sell them in the open market.”

Such a discounted rights purchase can work out well for the investor. It can also turn into high yield being nothing more than taking money from you, then paying it back and calling it income. Rest assured that I’m aware of this risk with CLM and other closed-end funds engaged in the practice.

CEFs that engage in new rights offerings are not necessarily out of the question for income seekers, nor ineligible for an Income Sig plan, but buying and holding them is generally inadvisable because their price decays over time, as shown below for CLM:

CLM Trailing Price Change
– – – – – – – – – – – – – – –

1-Yr +14.0%
3-Yr -22.8%
5-Yr -29.9%

Now, observe its trailing total returns for the same time frames, which reveal the benefit of its high distributions:

CLM Trailing Total Returns
– – – – – – – – – – – – – – –

1-Yr +34.5%
3-Yr +12.2%
5-Yr +15.3%

Better, but not as good as the general market, represented below by SPY:

SPY Trailing Total Returns
– – – – – – – – – – – – – – –

1-Yr +39.6%
3-Yr +17.4%
5-Yr +17.0%

It’s possible that an investor would value income so highly that they would be willing to watch the value of their CLM position shrink over time while they collected its big monthly distributions. However, this is not suitable to an evergreen Income Sig system.

Another possibility for using CLM-like big payers is swapping them in and out based on a metric or suite of metrics, such as discount to net asset value, yield, and/or price change. Reacting to the latter is the Sig System’s specialty, but it could also react to something else. A CEF study by Matisse Capital found that discounts to NAV correlate with high subsequent total returns, which encourages work in that area.

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You can learn more about the way I use leveraged ETFs in The Kelly Letter at jasonkelly.com

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