CEFS: A Unique Closed-End Fund Play

Closed-end funds ("CEFs") are just like the vinyl records of the fund business. They don’t get a lot consideration from the mainstream media, however they’ve an viewers that simply completely loves them. Closed-end funds are distinctive – they’ve a hard and fast variety of shares, which may make their share costs commerce at both a premium or a reduction to the true underlying web asset worth of holdings. It is from these reductions and premiums the place one can doubtlessly generate extra returns. That what the Saba Closed-End Funds ETF (BATS:CEFS) goals to do…in an ETF format.

CEFS is designed to speculate a minimum of 80 % of its belongings in closed-end funds that the adviser believes are buying and selling discounted to their web asset worth, or NAV. The fund makes use of a quantitative screening course of to dynamically rank the universe of closed-end funds, primarily based on components corresponding to yield, low cost to NAV, and the standard of underlying securities. The portfolio is actively traded in an try to use the variability in relative reductions to NAV and beat the returns of passive, index closed-end fund merchandise.

CEFS is managed by Saba Capital Management, L P a registered funding adviser based in 2009 by Boaz Weinstein, a well-known face in monetary markets. Weinstein co-headed the Global Credit Trading enterprise at Deutsche Bank and reported to the funding financial institution’s Chief Executive Officer. His crew managed roughly 650 professionals and was on the forefront of the event of credit score relative worth and capital construction buying and selling methods. I’ve had the distinction of interviewing him on my podcast a couple of months in the past, and I can let you know he’s the true deal.

ETF Holdings

CEFS owns somewhat over 100 closed-end funds. The particular person funds I’m not overly aware of, and sure you aren’t as nicely. The wager right here is that the administration and screening facet of Saba has accurately recognized the place the reductions are largest to permit for potential outperformance as these reductions to NAV shut (hopefully).

Note that this can be a fund of funds. What which means is that although the highest place has a close to 18% weighting, the fund is extraordinarily diversified as every of the underlying funds has quite a few holdings.

Asset Class Exposure and Sector Composition

CEFS’s portfolio is diversified by asset class, with prime publicity to equities (47%), adopted by mounted revenue (27%), various (16%) and combined allocation (10%). This is value noting because it makes for an much more distinctive return stream profile.

The good factor concerning the holdings and publicity to mounted revenue? The 30-Day SEC Yield is 7.97%. So not solely are you (hopefully) gaining the expertise Saba brings to the desk figuring out mispriced closed-end funds, but additionally getting a pleasant yield due to that composition.

Peer Comparison

There aren’t any good direct comps as a result of what CEFS does on the energetic facet, given Saba’s method, isn’t simply replicated. There are different closed-end funds just like the Invesco CEF Income Composite ETF (PCEF), however in equity it’s not likely an apples to apples comparability. PCEF is predicated on an index and isn’t actively attempting to outperform through reductions. CEFS has outperformed on a worth ratio foundation, however this may increasingly have extra to do with the asset allocation of CEFS favoring equities general

Evaluating the Pros and Cons

The greatest professional is that CEFS is exclusive – it permits traders to make the most of the potential for closed-end funds to commerce discounted to NAV. Moreover, CEFS’s variety throughout a number of closed-end funds, asset lessons and funding managers permits traders some portfolio diversification to mitigate danger. CEFS’s energetic administration implies that because of Saba Capital’s skilled crew, the fund may outperform passive, index-based closed-end fund merchandise.

Of course, there may be danger in investing in CEFS. The administration charges and bought fund charges and bills ("expense ratio") are excessive (5.81% all-in), and over the long term add to or subtract from returns. There’s additionally by no means a assure that any of those closed-end funds shut their reductions to NAV. If something, these reductions may enhance over time and end in bigger dislocations.

The Verdict: A Compelling Diversifier

I very very similar to Saba Closed-End Funds ETF as a diversifier. It permits traders to get publicity to the closed-end fund market conveniently, because it’s an actively managed, broadly diversified portfolio. Its technique of shopping for closed-end funds at reductions offers a robust worth proposition. I wouldn’t contemplate this a core holding, however undoubtedly nonetheless one thing to allocate to doubtlessly on the periphery.

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