A few weeks ago, on one of these threads, several commented that virtually all CEFs on their watch lists were down YTD.  As I reviewed my lists, I had to agree; everything was down without any relief in sight.

Things are generally looking much better now, but I was surprised as I looked at IGR, RPF, AWP, RNP, RIT, etc -- virtually all Real Estate CEFs are not only up YTD, but they're up substatially.  ICF is also up YTD, but EGLRX is still down.

We've all been looking for a bottom.  Housing and Construction are still way down, but maybe the time has finally come to start re-thinking Real Estate!

What do you think!

Zwilnik 

 

 

You're right--in the media frenzy over the sub-prime and Bear-Stearns debacles, real estate has been quietly creeping up while remaining under most people's radar.

On the advice of a friend who posts on the Vanguard Diehards forum, I checked out the Vanguard REIT index fund VGSIX and ended up buying it. It's up +8.48% YTD, including yesterday's jump of +3.87%.  Plus, it's yielding 4.92%.

I still have my position in EGLRX but can't figure out why it is doing so badly--down -11.56% YTD, although yesterday it was up +2.42 %.  So that's a good sign. I guess Sam Lieber has made some bad choices.

At the moment I don't have any pure-REIT funds in my closed-end portfolio since I've been stocking up on non-dollar denominated emerging-market bond CEF's for income and as a hedge against the depreciating dollar.

Any particular recommendations for closed-end REIT funds?

Jagor 

Most REITs earn their Funds From Operations in local currencies, so are good surrogates for foreign bonds from a forex (falling dollar) standpoint.  In addition to IGR, RWF has a very similar global portfolio.  RAF and RAP are devoted to Asia and Australasia respectively. I also hold WPS, which is an international property ETF.  Not buy receommendations but subjects for DD.

US only REIT CEF, such as RLF, also did well yesterday

Guys...I too am watching these closely for an opportunity to re-enter...but just a word of caution.  The nice YTD returns are largely a rebound from the extraordinary tax-selling lows set at year end.  That tax selling was a consequence of horrible performance during 07.  Finally, none of the CEFs mentioned above successfully broken above the downtrend lines in all of these from October 07.  I'll happily join you in buying some of these, but only after they prove they can break the downtrend.

Dick

That's a very good point, Dick, but depending on which moving average you use for a trend line, waiting can cost you much of the new advance.  For example, IGR is up 15% from its 2007-2008 low and if you wait for the 200dma, it'll cost you another 15%.  IGR is already above a 50dma, and this price improvement doesn't fully account for the monthly distribution stream (9% annualized).  I think it's important to consider the fundamentals at work in these REITs as well, such as inflation and demographics, particularly in emerging markets. Financial services, including REITs, are an early stage sector in the event of a new market cycle.  Best wishes, Bill

Good points....however, please note I'm talking about chart downtrend lines connecting the recent successively lower highs since October ..not moving averages.  For RNP, for example, up 20-30 cents, and then holding it for a day or two would bring me in on the long side.

Regards, Dick

"Charts become dangerous only when they seem meaningful."  -Euler

I grant you Euler may have a point.  However, Euler may also have purchased Citi at 45 or Wachovia at 40 because they were "down enough" and is now waiting for those great dividends to bail him out!

Dick

True! Buying Citi at $45 on the way down would have been an error in judgment.  Not buying it more recently at $20 may have been another.  (at least for us FA guys) Best wishes,  Bill

Chamois...thanks for bringing these CEFs to my attention....they've convinced me with price action yesterday and today, so I'm aboard with you now on a couple.

Regards, Dick

PS. Re Citi - have you considered C convert pref instead of C itself?  Any thoughts? 

I bought C-V last Fall.  Pays a nice dividend and is up about $0.10 from purchase price.  Big deal but better than being down 32% like my Citi stock.  Meantime I'm enjoying a nice dividend...around 9% I think.

O is the only REIT I carried through the tough times.  I've owned IGR, CGMRX, & ICF in the past, but have been watching several CEFs for a while.

IGR always seems like a no-brainer.  Good company, well run.  RNP & RPF are interesting, if C & S get straightened out. 

I don't normally look at funds until they've had time to establish themselves, but I'm intrigued by AWP.  I've liked Alpine in the past.  It seems to be quietly "running under the radar".  What are your feelings about AWP?

Zwilnik

Last time I looked at AWP, which was some time ago, it was heavy in RE finance companies, maybe explaining its underperformance at the time.  I notice Lieber's mutual reit fund EGRLX is also not doing well

Dick, I haven't looked at converts at all; trying to subordinate current income to LTCG for tax reasons 

Hi Chamois - does "subordinate current income" to LTGC mean STCG to LTCG? 

Last year I was able to change quite a bit of STCG to LTCG buy buying funds that payed large distributions of LTCG then selling before year end, capturing the LTCG and off setting previous STCG with STCG loss.  Of course some of the funds were distributing 10%+ LTCG (KF,CHN,GCH,TWN,MXF,LAQ,IFN,IIF,MSF,APB etc)because of the huge increases in NAV, which may not happen this year - anyway it worked out luckily for me as I sold off before the end of the year and have been buying back much cheaper after sitting out January because of the Wash Rule.

What I meant and didn't say very well is a need to reduce current taxable income of all kinds (ie distribution yield) in favor of  unrealized capital gains that I can harvest at a time of my choice rather than having it done by the fund at theirs.. This pushes me to ETF and away from CEF.  It's a triple whammy from IRC Sec 68, MAGI and AMT, exacerbated by the IRA MRD,  Best wishes

Hi, I'm a newbie here, with many more questions than answers. But before I found this forum, I was just looking into some RE.

You mention EGLRX, which was one of my first picks when I started investing, just a month ago. It's gone up 14% in that time, so I'm happy.

Now I have an eye for JRS, but I must admit I'm a little intimidated by the relative complexity of figuring returns and values in a CEF compared to an OEF.

For example, I've read that it's best to look for deep discounts on the NAV, for better leverage--which seems obvious at first.  But then I also read that a declining NAV could indicate that the fixed-rate returns are eating away at the principal. That's a lot of variables to track--and then income vs. total distribution returns?

I'm not unintelligent, but with so many variables and such high returns, I'm just guessing that there are risks I'm just not able to fathom at this point. Can anyone help me out? And how about JRS?

thanks

Alan 

 

Alan, if you're not familiar with the complexities of cCEF, a first step woud be to read some basic materials. The CEF Assn has some reading materials; I provide the link below.  scroll down on the right side you will find five introductory booklets of interest.

CEFA 

Each CEF has an equilibrium discount worth knowing.  Buying it at that discount or  greatercan be important.  One also nees to know the makeup of the distribution. Many closed-end funds, including the reit CEF,  often return shareholder paid in capital.  Good luck!

[quote user="chamois"]

Alan, if you're not familiar with the complexities of cCEF, a first step woud be to read some basic materials. The CEF Assn has some reading materials; I provide the link below.  scroll down on the right side you will find five introductory booklets of interest.

CEFA 

Each CEF has an equilibrium discount worth knowing.  Buying it at that discount or  greatercan be important.  One also nees to know the makeup of the distribution. Many closed-end funds, including the reit CEF,  often return shareholder paid in capital.  Good luck!

[/quote]

Greetings, Chamois, and thanks for engaging with me here.

I've read the CEFA pamphlets, and they are helpful, but I imagine the key is in being able to grasp how the variables are interacting in each situation; I'm not quite there yet.

The "equilibrim discount" concept is intriguing, and it would be very helpful if I knew how to find it. I don't see this term discussed anywhere else. Can you describe it further?

Digging deeper into the Nuveen website, I found the answer to my question about JRS. Thanks for the encouragement!

 alan 

 

Depending on how interested you are in academic theory, I've posted another link below. The theory is that the discount from NAV has three main components.  The management fee, the illiquidity of the portfolio and the expertise of management in providing bells and whistles, such as leverage, dividend capture, options activity, hedging etc.  The higher the fee, the greater the discount, the harder the portfolio would be for a retail investor to buy directly, the less the discount. For an equity CEF with normal fee of 1.25%, the discount should be around 10-12%.  For a floating rate note, the discount is maybe 0-5%.

CEF prices fluctuate significantly around the "norms."

Pricing study 

 

[quote user="chamois"]

Depending on how interested you are in academic theory, I've posted another link below. The theory is that the discount from NAV has three main components.  The management fee, the illiquidity of the portfolio and the expertise of management in providing bells and whistles, such as leverage, dividend capture, options activity, hedging etc.  The higher the fee, the greater the discount, the harder the portfolio would be for a retail investor to buy directly, the less the discount. For an equity CEF with normal fee of 1.25%, the discount should be around 10-12%.  For a floating rate note, the discount is maybe 0-5%.

CEF prices fluctuate significantly around the "norms."

Pricing study [/quote]

Thanks, Chamois. My browser wasn't able to download the entire study--graphics were missing, as well as the entire conclusion--so I only skimmed it. From what I could see, it doesn't explain the observed price flux very well--and whatever its virtues in mathematical modeling, they are lost in the density of the presentation. Your summary explanation is better! 

The theory is unsatisfying because: 

1. I don't see how a 1% fee becomes a 10% discount. Did the study examine actual fee structures and discount rates, or is this just conjecture? If the management doesn't add value, then the fees are a drag on the demand; but that would show in the NAV, not the discount rate.

2. If liquidity is the added value, then a discount could occur when liquidity decreases, i.e. when trading volume diminishes. Was this studied? Even if this does occur, it only explains lack of premium, not deep discount.

While researching another CEF, I happened across the transcript of the fund manager's conference call with professional/institutional investors. The professional investors had pretty much the same questions I do, so I feel much less foolish! If there is anyone who really understands this market, I guess they are pretty well hidden. :-)

Aalan 

I think the basic reasons for the amount of CEF discount are simpler than the academic discussions suggest.  With mutual  funds, an investor is forced to pay the daily NAV as measured at market close.  For Index ETF, the situation is much the same, because arbitrageurs keep the market price at NAV, even though traded in the secondary market.

Only with CEF, do investors get to inflict revenge for management fees by setting a market price significantly below the fund's asset value.  The ratio is roughly 1:9 in the US, more in some other markets, eg UK CEF.

When the  retail investor has little alternative but funds to buy relatively illiquid securities  or securities which must be bought in prohibitively  large quantities, h/she is forced to pay more, reducing this discount.  Favored sponsors and managers may attract investors believing they can do better than they, also reducing the discount.

Thus, the pricing paradigm is NAV minus the management fee ratio plus the illiquidity factor plus sponsor expertise, resulting in a net typical discount for each CEF asset class. 

These typical discounts can be found in the addenda to the academic studies or at etfconnect.com simply by measuring the visual or tabular displays.  It is important to make this measurement over a multi-year period eliminating the first few months after fund inception. 

The usual CEF practice then is to buy only when the discount is at or bigger than normal and sell only when it is less.  The reason for the excess variability about these norms is the variance of CEF (retail investor) sentiment vis a vis that of the  direct owners of portfolio holdings, who are largely insitutional.  That variance is sometimes referred to in studies as CEF "investor irrationality"  Best wishes!

[quote user="chamois"]

I think the basic reasons for the amount of CEF discount are simpler than the academic discussions suggest.  With mutual  funds, an investor is forced to pay the daily NAV as measured at market close.  For Index ETF, the situation is much the same, because arbitrageurs keep the market price at NAV, even though traded in the secondary market.

Only with CEF, do investors get to inflict revenge for management fees by setting a market price significantly below the fund's asset value.  The ratio is roughly 1:9 in the US, more in some other markets, eg UK CEF.

[/quote]

Thanks, Chamois,[i] that[/i] is easy enough to understand.

The other zinger I've run into is the practice of distributing dividends and deducting the distribution from the NAV, so there's no advantage to buying before or after the distribution date. Fair enough, but if the market follows the NAV+distribution return (which would be rational), it complicates the discount chart, doesn't it?

Whew... it makes me dizzy. No wonder most people stick to open-ended funds!

aalan 

Hi again.  Theoretically on the ex-dividend date, both the NAV and the market price should drop by the amount of the distribution.  That may not happen in actuality upon the market opening, depending on the first sale.  The amount of the distribution represents an asset transferred from the fund's balance sheet to the shareholder, so a recent buyer is just getting h/her money back, usually in taxable form.

The discount can often increase temporarily  when shareholders wait until xd to sell in order to capture the dividend. 

Unfortunately, RIT and RNP appear to be rolling over on the dailies.  Perhaps we anticipated an end to the RE chi-chi a bit too soon.  Perhaps, like the famed groundhog, RE has reared its head, but decided the long winter hasn't ended quite yet?

Dick