CEF Income Focus

The best time to invest in closed end funds (CEF’s) is when market sentiment for these funds has been very negative, and the funds are trading at deep discounts to NAV. Since this only happens occasionally, it is difficult for money managers to develop a sustainable, stand-alone CEF strategy. We believe the best use of CEF’s is to augment existing fixed income portfolios when opportunities present themselves. This TFS strategy seeks to build up the income component of the portfolio with CEF’s that also have potential for capital appreciation.

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  • CEF’s are launched through an initial public offering

  • The proceeds are invested by the fund manager according to the fund’s strategy

  • The CEF is then configured into an equity security which trades on an exchange in the secondary market

  • Investor activity that takes place in the secondary market has no impact on the underlying assets or NAV of the fund

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  • ETF: has a market maker who can either create more shares or redeem shares to keep the value of the ETF close to its NAV

  • CEF Difference: A CEF does not have this mechanism, leading to periods when the market price of the CEF may differ substantially from the NAV. Such deviations tend to occur during periods of extreme volatility and investor sentiment in the marketplace

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  • CEF’s are frequently leveraged and become “little income producing factories”

  • Leverage is typically 25%-35% of the assets of the fund

  • Opportunities may arise during periods of extreme negative market sentiment when the CEF trades at a significant market discount to NAV

  • Possible hedge for fixed income portfolio