These three funds have received top marks.
By my completely unscientific polling, Thanksgiving is one of our nation's most anticipated holidays. No matter how divided we may seem, Thanksgiving is a day for relatives of all stripes to put aside their differences, break bread together, and reflect on our good fortunes. With the election a few weeks behind us, we are now free to focus our attention on giving thanks with family and friends and reflecting on the year that has passed. It has been one year since we launched our Morningstar Analyst Rating for funds, and in that time we have rated more than 125 closed-end funds, or CEFs, and nearly 925 mutual funds. The reports are available to Premium Members on Morningstar.com and to subscribers of many Morningstar products, including Morningstar Direct.
The CEF team is thankful for all the feedback and support that our readers have given us over the year, especially regarding the ratings. To show our gratitude, in this CEF Weekly we share portions of our Analyst Reports from three highly rated CEFs under full analyst coverage. If you are new to the Morningstar Analyst Rating, this article provides a detailed discussion of the methodology.
CBRE Clarion Global Real Estate Income IGR
Steve Pikelny awarded CBRE Clarion Global Real Estate Income a Morningstar Analyst Rating of Gold for its strong management, low fees, and a parent company that is firmly established in the real estate market.
(10/8/2012) CBRE Clarion Global Real Estate Income has strong management, low fees, and a parent company that is firmly established in the real estate market. The erratic behavior of the real estate market has led to equally erratic performance, but since shedding its leverage over the past four years, the fund has been a top performer in the global real estate category across fund vehicles. For these reasons, we believe the fund is one of the best options for investors to gain access to this market, especially if the fund trades at a discount. Overall, the fund has earned a Morningstar Analyst Rating of Gold.
Launched in 2004, in the middle of a real estate bubble, the fund logged three years of good performance before plummeting in 2007 and 2008. As with most real estate CEFs, the fund's high leverage ratio amplified the losses on its REIT holdings (which typically use leverage as well). In all, the fund's net asset value, or NAV, fell 86% from peak to trough. Unlike many real estate CEFs, however, managers decided to significantly scale back the use of leverage. While the fund still has a $300 million line of credit open, it does not currently use any leverage. Since this strategy change, the fund has both outperformed peers across fund vehicles while providing less volatile returns. Over the trailing three-year period, the fund was the top performer in the category on an absolute and volatility-adjusted basis. Although 2012 year-to-date performance has been lackluster (the fund has a total return of 19.5%, compared with the category average of 22.6%), it has also been less volatile. While the peer group lost an average 10.7% in 2011, IGR returned a modest, but positive, 1.0%.
The only obvious blemish of this fund is its distribution policy. Of the previous 21 distributions, each has included return of capital. However, this likely corresponds to unrealized capital gains: The fund's NAV has increased 11.8% over this period. While a distribution cut in the near future is not likely, in our opinion, the fund's lack of a UNII balance leaves it without a cushion against any downturn in the global real estate market.
We like that the fund has experienced managers who are also shareholders. Lead portfolio manager T. Ritson Ferguson has 18 years of management experience and owns between $500,000 and $1 million in shares. The management team has regional offices in North America, Europe, and Asia-Pacific, allowing it to view properties firsthand. Managers also have the advantage of drawing on the resources and proprietary research of CBRE, the largest real estate services firm in the world.
We also like that the fund is one of the cheapest options for actively managed global real estate funds. The fund charged an annualized 0.98% total expense ratio for the first half of 2012, while the peer group charges an average 1.25%.
DNP Select Income DNP
I've awarded DNP Select Income a Morningstar Analyst Rating of Silver for its strong risk-adjusted returns against various peer groups as well as its experienced and capable management team. Its higher-than-average fees kept the fund from earning top marks.
(9/19/2012) This top-performing fund has strong risk-adjusted returns against various peer groups and great absolute returns. The management team has a long history of running portfolios together, and many own shares. What's more, every board member owns shares, a rarity among CEFs. Finally, the steady distribution should appeal to income-oriented investors. However, the fund's expense ratio is high compared with open-end and exchange-traded fund peers. For these reasons, the fund has been rated Silver.
Long-term outperformance and the steady distribution have attracted premium pricing levels to the share price. The fund currently and historically sells at a large premium. Purchasing funds selling at large premiums can be risky; there is no guarantee that the fund's premium will remain high. In fact, this fund had a premium of more than 30% just six months ago and it sits below 17% today. The share price fell 8% since the last report, while the NAV increased 3.5%. This illustrates the riskiness of investing in funds selling at high premiums.
Investments are focused on public utility companies. Common shares, preferred shares, and debt are all fair game, making it more of a hybrid strategy focused on utilities and energy firms. Managers have a conservative mind-set and the strategy tends to be defensive. In down markets, its investments in the utilities sector provide insulation, but the sector can lag the broader market in up markets. Managers have been able to pick winning securities in both market environments and have done so with minimal risk. Over the past five years, the fund had an active return of more than 3% annualized over the DJ Utilities Index.
The fund's Morningstar Risk-Adjusted Returns, or MRARs, are strong. Over monthly rolling five-year periods, the fund beat the CEF utilities category average in 48 of 60 periods, the open-end average in 28, and the ETF average in 37. From an absolute perspective, the fund gained 7.8% over the five-year annualized period, compared with a gain of just 3% for CEF peers, 1.3% for open-end peers, and 0.19% for ETF peers.
The three-person management team has worked together for nearly 10 years. Head manager Nathan Partain has been with the fund since 1996, Brooks Beittel since 1992, and Daniel Petrisko since 2004. Partain and Beittel own shares of the fund as do the fund's board members.
This fund has paid a distribution of $0.065 every month since 1996, the majority of which is from income. This stability is remarkable, given the overall market's ups and downs over the years. At the current net asset value, this is a relatively high 9% distribution rate that does not include destructive return of capital.
The fund's largest detractor is its expense ratio (1.95%), which is on par with its CEF peers but much higher than the open-end category average.
Gabelli Equity GAB
Mike Taggart likes Gabelli Equity for its strong performance, a time-tested investment process, and reasonable fees.
(5/10/2012) Mario Gabelli can be a polarizing figure. He has been derided as a marketer, and his funds have been said to be too expensive. He has been hailed as an investment guru, and his funds have been held up as a testimony to the superiority of value investing. Gabelli Equity Trust stands as a testament to the second view. As the first closed-end fund launched by GAMCO in 1986, performance relative to peers and the benchmark has been superior--even adjusted for volatility, which is somewhat magnified by leverage. A proven investment approach, a large team of analysts, a strong board of directors, and average fees lead us to assign a Morningstar Analyst Rating of Gold to this fund.
Gabelli himself has managed this fund since its 1986 inception. He is also the founder, chairman, and CEO of GAMCO Investors GBL, this fund's sponsor. Listed as the manager on many of GAMCO's funds, he oversees about $36 billion in investments for clients of all sizes. He owns, directly and indirectly, over 1.6 million shares of this fund. Zahid Siddique has been the fund's associate portfolio manager since August 2010. He owns no shares in the fund.
Perhaps Gabelli's greatest contribution to investing was further developing the value-oriented philosophy that he inherited from his predecessors who had similarly passed through the halls of Columbia University. Gabelli decided it was insightful and lucrative to determine a company's intrinsic value by estimating its private market value, which could include spinning off a business. Essentially, he and his analysts attempt to model the price that a strategic buyer would willingly pay for the entire business. To ensure that he didn't chase after class value traps, he added the catalyst component: Something has to be on the horizon to unlock that private market value within a reasonable period of time.
That this approach has worked over time can be seen in the fund's performance. It outperformed other large-blend closed-end funds in six of the past 10 calendar years, and it outperformed the S&P 500 Index in eight of those years. Perhaps more tellingly, given the broader field of competition, its Morningstar Risk-Adjusted Return has outperformed the large-blend open-end mutual fund category average 78 times in the past 120 months (10 years). On the same basis, it has outperformed the ETF category average in 74 of those months.
This fund has a decent board of directors, though the directors are seemingly entrenched. There are eight directors, seven of whom are independent. All but one own shares, and three own over $100,000 worth. All serve on the boards of other Gabelli funds. We prefer to see a mix of newer and longer-serving members. The latest director added to this board began serving in 2001. Most directors have served since the fund's inception in 1986.