inherited closed end funds - sell or hold ?

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inherited closed end funds - sell or hold ?

Postby daz » Mon Jul 01, 2013 8:28 am

I'm inheriting four closed end funds that are today worth a total of $27,000, which is a small portion of my investible assets.

My question is whether I should sell these four funds or hold them ?
Do they have a place in my portfolio for the long-term ? I am 51 years old.

The rest of my portfolio is invested in index and other mutual funds that are low cost. Today I'm not asking for feedback on my overall portfolio.

The four funds and current values are:
    BOE BlackRock Global Opportunities Equity Trust $3,713
    ETY Eaton Vance Tax-Managed Diversified Equity Income Fund $10,170
    EXG Eaton Vance Tax-Managed Global Diversified Equity Income Fund $4,635
    JGT Nuveen Diversified Currency Opportunities Fund $8,408
They pay high dividends. The weighted average yield is 9.8%. The average annual expense is 1.05%. The broker received commissions and any load fees from my deceased FIL when he bought these funds. The cost to now sell is only the usual selling commission and the bid/ask spread.

If I hold them, I'd categorize them as part of my asset allocation:
    BOE global stock
    ETY us stock
    EXG global stock
    JGT foreign short government bond
If I sell them, I'd realize an $856 loss. The basis is the date of death value.

Should I hold these funds or sell them?

Today they earn $2600 per year on $27,000 value, which is is attractive, but how will these funds do in the long run? Would I be better off selling them and investing the $$ in my portfolio next time I re-balance? Likey the $$ would end up in VTSAX and/or VTIAX.

Below is more info.

Thank you!


Price on 6/30/13

Ticker Shares Price Value Basis Gain/Loss Yield
BOE 275 $13.50 $3,713 $4,153 ($441) 9.2%
ETY 1000 $10.17 $10,170 $9,403 $768 9.9%
EXG 500 $9.27 $4,635 $4,361 $274 10.5%
JGT 750 $11.21 $8,408 $9,864 ($1,457) 9.4%

TOTAL $26,925 $27,781 ($856)
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Re: inherited closed end funds - sell or hold ?

Postby Valuethinker » Mon Jul 01, 2013 5:23 pm

daz wrote:I'm inheriting four closed end funds that are today worth a total of $27,000, which is a small portion of my investible assets.

My question is whether I should sell these four funds or hold them ?
Do they have a place in my portfolio for the long-term ? I am 51 years old.

The rest of my portfolio is invested in index and other mutual funds that are low cost. Today I'm not asking for feedback on my overall portfolio.

The four funds and current values are:
    BOE BlackRock Global Opportunities Equity Trust $3,713
    ETY Eaton Vance Tax-Managed Diversified Equity Income Fund $10,170
    EXG Eaton Vance Tax-Managed Global Diversified Equity Income Fund $4,635
    JGT Nuveen Diversified Currency Opportunities Fund $8,408
They pay high dividends. The weighted average yield is 9.8%. The average annual expense is 1.05%. The broker received commissions and any load fees from my deceased FIL when he bought these funds. The cost to now sell is only the usual selling commission and the bid/ask spread.

If I hold them, I'd categorize them as part of my asset allocation:
    BOE global stock
    ETY us stock
    EXG global stock
    JGT foreign short government bond
If I sell them, I'd realize an $856 loss. The basis is the date of death value.

Should I hold these funds or sell them?

Today they earn $2600 per year on $27,000 value, which is is attractive, but how will these funds do in the long run? Would I be better off selling them and investing the $$ in my portfolio next time I re-balance? Likey the $$ would end up in VTSAX and/or VTIAX.

Below is more info.

Thank you!


Price on 6/30/13

Ticker Shares Price Value Basis Gain/Loss Yield
BOE 275 $13.50 $3,713 $4,153 ($441) 9.2%
ETY 1000 $10.17 $10,170 $9,403 $768 9.9%
EXG 500 $9.27 $4,635 $4,361 $274 10.5%
JGT 750 $11.21 $8,408 $9,864 ($1,457) 9.4%

TOTAL $26,925 $27,781 ($856)


I am not USian so I cannot advise you re tax.

But assuming disposal is not taxable I would clear these out. The higher yields are paid for at a cost. Unless you think the discount is so attractive relative to the NAV of the underlying assets (Barron's used to have a table, I would say you need *at least* a 10% discount to interest me at all, and when I played the Closed End Fund game I typically looked for a 20%+ discount) then I would liquidate and reinvest according to your investment policy in low cost index funds.

I do use CEFs (the UK version called Investment Trusts) where I think the fund invests in an asset I could not otherwise get access to (private equity, deep value strategies).
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Re: inherited closed end funds - sell or hold ?

Postby livesoft » Mon Jul 01, 2013 5:25 pm

Always sell, so that you have no emotional attachment to money from an inheritence.

If you inherit something like Vanguard Total Stock Market Index, I will make an acception, but you can alway buy that back anyways.

The fact that you have net loss now is just a bonus.

Sell.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: inherited closed end funds - sell or hold ?

Postby Watty » Mon Jul 01, 2013 5:43 pm

If you would not buy them today if you had cash instead then sell them.

If there were big tax issue then sometimes it is better to keep a less than ideal investment but that is not an issue for you.
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Re: inherited closed end funds - sell or hold ?

Postby Electron » Mon Jul 01, 2013 5:56 pm

I'd suggest a little additional research before you make a decision. CEF Connect can provide useful information on Closed End funds. I don't believe you hold any leveraged funds which is a good start.

http://www.cefconnect.com/

Morningstar has a Forum specifically for Closed End funds. There are many knowledgeable investors there that might have some insight.

http://socialize.morningstar.com/NewSoc ... 00006.aspx

Several of your funds are currently selling at a significant discount to NAV. I'd check the recent range of premium or discount as that can be a useful parameter in terms of buying or selling Closed End funds. It appears that all four of your funds are returning capital (ROC) with every dividend. Check the Distributions tab on CEF Connect.

Lastly, Morningstar has excellent coverage on CEFs. I might compare performance with no load funds or index funds in the same asset class.

If you have an investment plan and asset allocation, you should be able to decide whether any of the four funds would fit into the plan.
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Re: inherited closed end funds - sell or hold ?

Postby Scooter57 » Mon Jul 01, 2013 6:04 pm

A tax loss always comes in handy. I'd sell them and invest the money as you would any other new funds.
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Re: inherited closed end funds - sell or hold ?

Postby Grt2bOutdoors » Mon Jul 01, 2013 8:30 pm

I make it a policy not to specifically use leverage to goose returns. I'll bet you donuts to dollars, the Eaton Vance funds are using leverage, and the Currency fund is likely using derivatives which may or may not be a good thing. If you have no emotional or rational connection (you wouldn't buy them if you hadn't inherited the money), then sell tomorrow when the market opens.
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Re: inherited closed end funds - sell or hold ?

Postby Kevin M » Mon Jul 01, 2013 8:32 pm

Nothing new here, but I would sell them, unless perhaps they are trading at a very large discount to market value. Then I might look at the historical discount to market value to determine how current discount compares. But even if the discount were large, I probably wouldn't hold them if they weren't sufficiently diversified or did not represent asset classes I wanted to own.

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Re: inherited closed end funds - sell or hold ?

Postby daz » Mon Jul 01, 2013 10:07 pm

Thank you, all, for the advice.

Below is the discount as of today, and the average discount for the past 12 months for each CEF.

    Ticker -- Discount -- Average Discount
    BOE ----- 11.65% ----- 10.56%
    ETY ------- 9.12% ----- 12.25%
    EXG ------- 8.49% ----- 12.21%
    JGT ------ 13.64% ----- 11.18%

How can I know if the above discount rates make these CEF better to hold or to sell ?
How can I tell if the return of capital is destructive or not ?

Thank you again,
Dan
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Re: inherited closed end funds - sell or hold ?

Postby Electron » Tue Jul 02, 2013 12:26 am

Notice the Investment Objectives on these four funds. I believe the three equity funds write covered calls to enhance income. Most or all of the funds indicate Managed Distribution which is why the "Distribution Rate" is so high. Return of Capital is used to make up any deficit.

http://www.cefconnect.com/Details/Summa ... ticker=BOE
http://www.cefconnect.com/Details/Summa ... ticker=ETY
http://www.cefconnect.com/Details/Summa ... ticker=EXG
http://www.cefconnect.com/Details/Summa ... ticker=JGT

Return of Capital is not necessarily a negative especially for a retiree. I think the trick is to determine how the fund has been performing after extracting the return of capital from past returns. ROC may complicate record keeping as I believe it alters cost basis.

There are several red flags associated with these funds that probably conflict with the general investment guidelines typically seen on this board. Those include moderately high expenses, the use of covered call options and other derivatives, and probably active management, managed distributions, and return of capital.
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Re: inherited closed end funds - sell or hold ?

Postby MN Finance » Tue Jul 02, 2013 10:02 am

daz wrote:Thank you, all, for the advice.

Below is the discount as of today, and the average discount for the past 12 months for each CEF.

    Ticker -- Discount -- Average Discount
    BOE ----- 11.65% ----- 10.56%
    ETY ------- 9.12% ----- 12.25%
    EXG ------- 8.49% ----- 12.21%
    JGT ------ 13.64% ----- 11.18%

How can I know if the above discount rates make these CEF better to hold or to sell ?
How can I tell if the return of capital is destructive or not ?

Thank you again,
Dan


The only way to come out ahead on CEFs is to buy at a larger discount than when you sell, and at that, an amount greater than the higher expense drag. That's it. So if you bought a stock CEF at a 5% discount to fair value, then sold at par, you would have done 5% better than the rest of the market (less the added expenses). The problem is that usually the best discounts are the most out of favor sectors, making them "hard" to buy (and the opposite on the sell side). Many funds can/do stay at large discounts forever and that discount could widen. Return of capital is not that big a deal just so you're not looking at the current yield and thinking that's your return. All in, I'd sell. There are people that swear buy CEFs but they can be risky and take energy to monitor.
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Re: inherited closed end funds - sell or hold ?

Postby G-Money » Tue Jul 02, 2013 10:24 am

Kevin M wrote:Nothing new here, but I would sell them, unless perhaps they are trading at a very large discount to market value. Then I might look at the historical discount to market value to determine how current discount compares. But even if the discount were large, I probably wouldn't hold them if they weren't sufficiently diversified or did not represent asset classes I wanted to own.

Kevin

Serious question: Do CEFs' premium/discount to NAV mean-revert?

I have very little experience with closed end funds. My inclination would be to sell them ASAP (assuming no dire tax consequences), simply because I don't understand them and don't know what they'll do in the future. But if the premium/discount to NAV can be expected to mean revert, maybe it is worth checking each fund's premium/discount and possibly waiting.
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Re: inherited closed end funds - sell or hold ?

Postby sometimesinvestor » Tue Jul 02, 2013 10:36 am

I would keep them for a while and use this link to monitor. As others have noted the discount is key . If you don't want to check once a week or once a month than sell


http://wsj.com/mdc/public/page/2_3040-CEFmain.html
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Re: inherited closed end funds - sell or hold ?

Postby bsteiner » Tue Jul 02, 2013 10:53 am

Some people think that from time to time there's opportunity in closed-end funds, if the discount outweighs the capitalized value of the expenses. A high level of distributions is a good thing (at least in an IRA), since distributions come out at par, though in general the discounts are lower on funds that have a higher level of distributions. The discounts can vary over time, so it helps if you can buy at a relatively high level of discount and sell at a relatively low level of discount (or sometimes at a premium).
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Re: inherited closed end funds - sell or hold ?

Postby Watty » Tue Jul 02, 2013 12:00 pm

G-Money wrote:Serious question: Do CEFs' premium/discount to NAV mean-revert?



It is just anecdotal but about ten years ago I got interested in closed in funds and I found one that was selling at a good discount and it paid a good dividend that more than made up for the expenses. I thought that it should do better than a comparable index since either it would keep paying a better dividend, or it would increase in price if the discount declined.

What happed was that this value did not go unnoticed by the company that was running the fund and they ended up merging that closed end fund with another closed end fund that was not selling at a big discount. I don't recall the details but I did not get paid for the discount when they merged so while I did not lose money it was no longer attractive so I sold it and figured that it was a game that I could not win and I have not looked at closed end funds since.

There is an old saying; "If you look around the poker table and you don't see the patsy, then you are the patsy." I think this applies to the closed end funds too.
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Re: inherited closed end funds - sell or hold ?

Postby G-Money » Tue Jul 02, 2013 12:34 pm

Thanks for sharing, Watty. I inherited a handful of closed-end funds, and what seemed like a persistent premium/discount (mostly discounts) on a few of them befuddled me. I sold them in relatively short order. My experiences with CEFs tainted my view of ETFs, even though I understand they are different animals. Just mutual funds for me. :)
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Re: inherited closed end funds - sell or hold ?

Postby MN Finance » Tue Jul 02, 2013 12:41 pm

They typically mean revert to their "perpetual" premium or discount but not to par value (unless they redeem the shares by moving from closed to open end, which is rare, but happens).
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Re: inherited closed end funds - sell or hold ?

Postby Electron » Tue Jul 02, 2013 1:43 pm

Here is a very interesting chart from Morningstar showing the four closed end funds along with Vanguard Index 500. I assume Morningstar has accurate total return data with all closed end fund distributions reinvested. That would include return of capital.

Notice how the four funds outperformed the S&P 500 in the 2008-09 period. That would be expected with covered call equity funds and the income fund. These charts do not account for taxes paid in taxable accounts.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D

If you change the chart to show the last 3 years or 5 years the S&P 500 Index fund outperforms.
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