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Year in Review: Allocation and Commodity CEFs

Bonds and foreign holdings boosted allocation CEFs, while commodity CEF averages were skewed by one fund's premium dissipation.

Mike Taggart, CFA, 01/15/2013

Our 2012 year in review for closed-end funds, or CEFs, has so far included an article on the equity-focused funds and, on Friday, Cara published an article on the taxable fixed-income funds. Today, we take what many may see as a pause before delving into the municipal CEFs on Friday: We look at allocation and commodity CEFs.

Allocation CEFs
Allocations funds, for a quick refresher, are those funds that hold both equity and fixed-income securities and have a substantial amount of each. For this segment of the CEF universe, we rely on the Morningstar category assignment process, which looks at how a fund's portfolio holdings have averaged over the past three years. Our classification names are a bit vague ("70% stock/30% bond") and are meant to serve as a horseshoe post: They're not exact, but funds in that segment should fall nearby. Global-allocation funds can have any combination of equities and bonds, but they are heavily invested outside of the US.

- source: Morningstar Analysts

Overall, the allocation group performed well in 2012, despite the tougher fourth quarter. As a whole, the group saw a calendar-year average total return on net asset value of 14.31% and on share price of 14.88%. Both of these metrics are right between U.S. general equity performance (12.25% NAV total return and 14.79% share price total return) and U.S. taxable-bond performance (18.20% NAV total return and 17.11% share price total return), which is as we would expect. It is interesting to note that it was yet another year when the fixed-income component of the portfolios boosted the average.

The best-performing segment within the allocation group on a NAV basis was the global-allocation segment, which rose 15.36% on average. First Trust/Aberdeen Emerging Common FEO led the way with a NAV total return of 24.01%. The fund is still trading at a 2% discount to NAV as of Jan. 11.

The best-performing segment on a share price basis was the 70% stock/30% bond segment, where the average share price total return came in at nearly 18%. Calamos Strategic Total Return Common CSQ, which carries a Morningstar Analyst Rating of Neutral, led the way here with a share price total return of 28.04%. This fund is currently trading at a 5% discount.

- source: Morningstar Analysts

Perhaps because investors prefer funds that focus on either stocks or bonds, rather than allocation funds, or because several allocation CEFs are very small, the average discount for this group is typically quite large. At year end, the average discount was 9.9%, ranging from the 6.2% premium of Guggenheim Strategic Opportunities GOF to the 41.3% discount of RENN Global Entrepreneurs RCG, a fund so tiny ($11 million in net assets) that it pains me to mention it.

Commodity CEFs

- source: Morningstar Analysts

There are only five CEFs that invest in commodities and, at year-end, had been around for at least three months. Nuveen Long/Short Commodity Total Return CTF was launched only in late October and Sprott Physical Platinum & Palladium SPPP launched in mid-December.

This table is a great set piece for the dangers of investing in high-premium funds. Notice that Sprott Physical Silver PSLV posted the highest NAV total return (9.7%) and the worst share price total return (negative 10.3%) of the segment. Over the course of 2012, the fund saw its premium dissipate to 1.5% from 24.2%, even as the underlying commodity performed decently--as reflected by the NAV total return. We had written extensively about this fund's premium, most recently in an article back in July when we documented the premium's demise. A similar compression of the premium happened to PSLV's predecessor: Sprott Physical Gold PHYS in 2011. However, investors seemed to have wised up to Sprott's marketing campaign, as SPPP is trading at only a 3.9% premium after nearly a month's worth of trading.

It should be noted that the Nuveen funds (CTF and its older cousin Nuveen Diversified Commodity CFD) are commodity funds but their portfolios differ from the others in at least one important way: They are broad basket commodity funds, whereas the others are precious-metals funds. Essentially, the other five funds in this group invest in gold or silver bullion and, in the cases of Central Fund of Canada CEF and Central GoldTrust GTU, a very small percentage of assets are in gold or silver certificates. The Nuveen funds, by contrast, invest via futures contracts in a broad array of commodities, giving investors exposure to far more than precious-metals prices.

Overall, then, it was a very good year for investors in most allocation-oriented CEFs and a decent year for commodity-focused CEFs. 

Mike Taggart, CFA, is the director of closed-end fund research at Morningstar.

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