Closed End Funds  A Unique Opportunity  a ValueX Presentation

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Essential Investment Partners

Closed End Funds – A Unique Opportunity
EIP is an independent investment counsel and wealth management firm

– More than $120 million in AUM as of 5/31/14
– Wealth management: 25 clients and 85% of AUM
– Separate accounts for third party advisers: 15% of AUM

Two main disciplines are available as separate accounts
– Essential Growth Portfolio? (launched 12/31/2003)
– Essential Absolute Return Portfolio?(launched 3/31/2009)

Will be talking about investing in closed end funds today, as used in the Absolute Return Portfolio strategy

Closed End Fund (CEF) Market Overview

Sold to individual investors at launch based on yield or a current investment fad
– Closed end structure allows leverage which amplifies yield and NAV volatility

– Fixed pool of assets for the manager — attractive from business perspective and investment perspective (no need to reserve liquidity for redemptions)

– Attractive to brokers as commission is builtering into price;o regular
calendar oferingso provides supply of new income ideas
Highly inefcient market

– Most funds are relatively small (less than $1 billion) so trading volume is thin and spreads are relatively wide

– Little or no professional research coverage
– Very few professional investors in the space. RiverNorth is one of the biggest non-activist investors. Bulldog and Karpus are the biggest activists
Overall market is small (approximately $225 Bil)
– Not attractive to large institutions as investments can’t be scaled
The ultimate indicator of retail sentiment

– Requires contrarian instincts to be successful

Lessons from Sumo

The match is quick
– And may well be over sooner than you think

The tide can change quickly
– Be prepared for unanticipated events

If you want to watch from close up, don’t relax
– It is dangerous to be a passive spectator

Opportunity Set Constantly Shifting

Corporate Actions — generally lower risk, lower return
Fund mergers — most often consolidations of similarfered byfundssameo sponsors
Open ending — relatively rare, usually forced

Tenderfoers — usually at a small discount to NAV for a minority of shares. Losing favor lately, replaced by buybacks

Reversion Trades — higher risk, higher potential return
Out of favor asset class — munis in late 2013, for example
Interest rate scare — double whammy for levered FI CEFs
Dividend cut — overreaction

Anomalies — one fund of a group trades away from the others

Full presentation below  Closed-End-Funds-A-Unique-Opportunity

Closed End Funds a Unique Opportunity