Closed-End Funds And Stocks

The second US trading day this week saw further price deterioration. This is either a trend indicator or a momentary reversal. If you know which it is, you can make your fortune right now by either going long or short. But as a long-term stock market junkie, the one thing I am sure of is that history does not repeat.

The big global news is that the Labour Party will not accept a rushed British exit from the European Union without terms and conditions. That means either negotiations will continue beyond the current deadline, or that a second referendum over whether Britain should leave may take place. The result of this was a jump in the pound sterling to over $1.30, which had the perverse side effect of chopping the share price of large-company British multinational corporations, whose bottom line depends on exports. But if the Brexit nightmare is delayed or canceled, the ultimate impact on UK stocks will be positive.

Meanwhile, there is renewed pessimism about the government shutdown and Chinese trade talks. There are mounting hints that growth is sagging not just in China but all over.

My golden oldie US shares are again up nicely thanks to Wednesday's jump in IBM and smaller ones in GE and Blackberry (BBwhich are offsetting the drop in Microsoft.

Today we catch up on closed-end funds, which tend to be less volatile than single stocks—but not today. And then we turn to company news.


*Wells Fargo Bank is piling into closed-end funds, including the country funds we cover, with very heavy spending, particularly at funds trading at a significant discount from net asset value. One of the problems for my newsletter during this period of upheaval was that Lipper charts from Barron's I rely upon to get data on the discounts of closed-end funds were not providing the net asset values at all. This gave an edge to institutions that do not rely on the data published. I wrote up one of these moves early this week but there are more.

During the market sell-off last Christmas, Wells, itself a manager of closed-end funds, did a spending spree in the shares of rival managed CEFs, according to data provided to the SEC:

It owns nearly 20% of the Japan Equity Fund. JEQ is the fund where it has the 2nd most investment, topped only by 24.6% of Mass. Financial Services Government Market Income Trust (MGF).

It also has double-digit stakes in: Morgan Stanley Asia Pacific Fund (APF), Western Assets Inflation-Linked Opportunity & Income Fund (WIW), MFS Intermediate Income Trust Western Assets (MIN), WA Inflation-Linked Income Fund (WIA), China Fund (CF), Central and Eastern Europe Fund (CEE), Duff & Phelps Utilities & Corporate Bond Trust (DPG); Brandywine Global Income (BWG).

The Wells Fargo buying of other funds was also heavy but in single digits: Eaton Vance Senior Income Trust (EVFEuropean Equity Fund (EEA); First Trust Dynamic European Equity Income Fund (FDEU); Taiwan Fund (TWN); John Hancock Income Security Trust (JHS); Mexico Fund (MXF); Morgan Stanley Emerging Markets Debt Fund (MSD); MS Emerging Markets Fund (MSF), and VoyaAsia Pacific High Dividend Equity Income Fund (IAE), plus others.

Note that this kind of discount shopping is distinctly different from a company buying back its own shares because they are undervalued, as Royal Dutch Shell has done because the beneficiaries are not the shareholders but an outside outfit.

*The information gap is extremely unfair to retail investors who are stalwarts in owning closed-end funds. A lack of information on pricing and value has given an edge to institutions—probably not confined to Wells Fargo which I stumbled upon doing my Sunday tables because it also bought ~20% of Japan Smaller Capitalization Fund, JOF.

JOF closed out its FY in August 2018 with a 9.6% loss in net asset value and a 12.8% loss in market price. It paid us $21/sh in short term gains, $140.41 in long term gains, and $9.26 in non-qualified dividends.

*The manager informally revealed that Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG) in December continued its practice of paying most of the dividend, 93.2%, in the form of return of capital, which is not taxed until the shares are sold as they cut the basis for capital gains. The investment income was only 6.8%.

*We still own the combined funds of Advent Claymore Convertible Securities & Income Fund (AVKdespite the fund now being mostly domestic. While it can go international at will, it was only 22.1% international at the end of its FY last Oct, but up from 13% a year earlier. The funds were combined last March to cut expenses and overhead.

It is about 50% in convertible bonds, preferreds, and mandatory cv's, with the rest in corporate bonds, equities, senior floating notes, and cash. While the indexes did okay in the year to October 31, the fund was held back by its borrowing costs which were higher than the asset class returns. The asset manager is Tracy V. Maitland, one of the rare African Americans in this business, and the fund is part of Guggenheim Partners which has about $9 bn under management, not only CEFs. It paid out 10.1% with monthly dividends and it mostly makes money by writing calls on what it holds, plus leverage. It lost 5.22% in market price and 0.34% in NAV in its first period as a combined fund, and it closed FY 2017-18 in October at an 8.17% discount from NAV of $17.63.

*Fibra Uno is volatile as the outlook for Mexico is uncertain. Today it rose 2.55% to 24.26 in Mexico, still near the low for the REIT of 20.23. In fact, FBASF's tenants are majority dollar companies so it should do better if the Mexican outlook dims.

*Asia Pacific Income Fund, FAX in the same period to October 31 lost 7.3% in NAV and 14.3% in market price and was discounted 14.4%. It also uses leverage to lock in attractive borrowing costs for diversifying its holdings.


*As I keep warning you all, Banco Santander (SAN) will redeem its non-cumulative preferred shares soon. It is also closing 140 branches in Britain and moving them to digital banking.

*Grupo Financiero Scotiabank will pay back the entirety of its bond issued last Feb. at the end of this month. The Mexican sub of Bank of Nova Scotia could have waited till August to repay the US$51.61 mn issue quoted on the Mexican Bolsa, but didn't wait. Eduardo Garcia reported this in Sentido Comun.

*Greencore Group plc today reported to the Irish Central Bank that its shares are being bought by institutions: 3.93% by BlackRock Inc; 3.29% by Prudential plc, a UK insurance firm; 4.074% by Susquehanna International Group; and 6.5% by FMR LLC, (Fidelity Funds). They are able to collect the buyback on UK listed shares which holders of the normal ADR cannot get because the GNCGY shares are not accepted for the buyback, only the GNCGF pink sheet shares based on the London price. It will incur a 20% withholding tax which can be offset against taxes owing next year.

Tech & Tel

*Mercado Libre is still falling because Amazon plans to open its own distribution system in Brazil, the largest market for the Argentina internet shopping site. Amazon is also roiling the US UPS and FedEx delivery services because it also plans to exclude them from distribution what people buy on-line. Note that Brazil is a tough market for delivery because it is very large and poorer than the USA, and also has variable state sales taxes. Amazon is also ending its $5 print magazine subs. Its Whole Foods arm is being sued for discrimination against a Black Muslim who took time off to pray. I am pretty sure MELI will avoid these issues.

*Apart from Amazon, Vanguard Global's best performers include Naspers which we own thanks to our reporter Africa hand Harry Geisel. NPSNY owns 31% of Tencent which has run into trouble lately but also has dozens of other internet and media holdings in emerging markets.

*China today spelled out why TCEHY is in the doghouse. The Cyberspace Administration of Chine singled out Tencent's news product as “bulgar and low-brow content that is harmful and damaging to the internet ecosystem. It shut down 733 websites in its latest crackdown. Last year TCEHY suffered since Mach as no new games were approved.

 *Vodafone defeated Telecom Italia's plan to assuage pressures for a separation of its prized network assets by placing them into a wholly owned subsidiary, as the industry regulator said it was opposed to the proposal. It would be able to compete with rival telcos while also offering them access to its network which holds too much power directly. TIM has been under pressure for years from Italian politicians, regulators, and rivals to separate and upgrade its network, which analysts have valued at up to 15 bn euros ($17 bn). Now the Italian communications regulator has sought public consultation on what to do. VOD and the O2 sub of Telefonica of Spain are working on a possible joint venture to share ownership of 2500 5G towers in larger cities which could be sold to a 3rd party. US towers already are leased to wireless telcos. But their optical fiber deal specifies that the terms and conditions under which they will work together will be flexible and will depend on accord between them later this year.

VOD was raised to buy with a GBX 225 target price today by Crédit Suisse.


*Danish Novo Nordisk's (NVO) xultophy diabetes drug combo of liraglutide and degludec is now on sale in Canada. It needs to be dosed carefully as there are side-effects so don't buy it there to save money.

*Teva was upgraded to neutral from underweight by Piper Jaffrey with a $16 target price, below its current price. It was upgraded from neutral to buy by UBS's Navin Jacob with a $24 target price because its new management is able to cut costs by shut-ins, downsizing, and closer surveillance of R&D spending to save a peak of $3.6 bn. After a trough this year, Jacob expects compound annual growth rate of 6% in 2020-22. TEVA rose 3%.

*Eisai (ESALY) of Japan is one of the “hidden backers” of privately held Blaze Bioscience which is being touted by Louis Navellier and Investorplace, as reported by Travis Johnson on Stock Gumshoe, a site which reveals the secret companies being pitched to sign up subscribers. Such newsletter promotions predict high gains from companies whose names are hidden so to get the name you have to subscribe. Or read Travis. This firm doesn't do drugs yet; it just has an imaging agent to help surgeons based on scorpion venom.

*Zymeworks should not be sold over concern that it is raising capital, because a shelf registration is only a place-holder. The odds are the $250 mn it filed for is unlikely to be raised unless it does a takeover itself, which Martin Ferrera thinks is possible. The total cap of ZYME is about $500 mn.


*While lower oil prices and a stronger pound sterling have hurt BP and Royal Dutch Shell, Cosan Ltd of Brazil is up 2.6% today. CZZ makes ethylene from bagasse (cane waste) and runs Latin gas stations.

*Sure Dividend predicts that Schlumberger Ltd (SLBwill offer an average return of 14.4% over the next 5 years despite contraction they predict in its p/e ratio. 


*CRH of Ireland was upped today from neutral to outperform by BNP Paribas at $28.50/sh.

*Unlike China Southern Airline which was tipped by JP Morgan as a beneficiary of lower oil prices, China Eastern Airline is less sensitive to fuel costs because it is more domestically oriented.

*Pres Trump named Prem Parameswaran, CFO of Eros and President of North America for EROS International plc, to become a member of his advisory committee on Asian American and Pacific Islanders.

Disclosure: None. Subscribe to Global-Investing for more updates.

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.