We don’t practice market timing at the CEF/ETF Income Laboratory (and our portfolios did fall with the rest of the market in March) but there is a surefire way of increasing your margin of safety with your closed-end funds investments if/when a bear market does hit.

The simpler answer is: avoid overpriced funds! Especially if there is a less overvalued alternative available from the same sector. CEF premium/discounts can often vary wildly based on no discernible reason other than imbalanced supply and demand, and the nimble investor can rotate out of these to save money or increase their share count in our patented “Here’s three examples of how our CEF rotation strategy could have increased returns vs. buy-and-hold, based on our report “Weekly Closed-End Fund Roundup: Three Swap Opportunities” released to Income Lab members in mid-January. (Note that these actionable recommendations were redacted from the public repost).

These three swap recommendations were all picked out of our weekly premium/discount gainers list, a staple feature to help our members quickly scan for overvalued or undervalued CEFs for swing trading opportunities. We’ll see how we scored 3 out of 3 on these trades, a restatement to the power of premium/discount mean reversion, as well as the fact that bear markets are great equalizers of overvalued closed-end funds!

1. Cohen & Steers Select Preferred and Income Fund (PSF)

Here’s what we wrote to our members in January:

Cohen & Steers Select Preferred and Income Fund (PSF) gained +5.10% in premium last week and sits at premium of +15.20% with a 1-year z-score of +2.3, indicating significant relative overvaluation. The valuation is the highest since inception in 2010!

Therefore, PSF is an excellent sell candidate. It could be replaced by something like Flaherty & Crumrine Dynamic Preferred and Income Fund (DFP), which is available at a +0.55% premium (cheapest of the Flaherty & Crumrine funds). Even though DFP is nearly fully in preferreds while PSF has a mix of bonds, preferreds and convertibles, their NAV profiles have tracked each over very closely over the last several years.

How did our recommendation play out 5 months later? It hit it out of the park! Since our recommendation, DFP outperformed PSF by 1590 bps. A member who swapped from PSF to DFP at the time of the recommendation, then swapped back today, would have gained nearly 20% of “free shares” of PSF, equivalent to DRIPing two and a half years worth of distributions from the fund! Moreover, check out how closely the NAVs of the two funds tracked each other over the same time frame. An investor did not lose exposure to preferred stocks, nor did they have to practice market timing and predict sector movements. They simply increased their share count (and future income) by 20% by swapping between these two funds.

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2. MFS Special Value Trust (MFV)

Here’s what we wrote to our members in January:

Another overvalued fund is MFS Special Value Trust (MFV), which gained +3.20% in premium last week and sits at a premium of +17.39% with a 1-year z-score of +2.1, indicating significant overvaluation. The premium is at a 5-year high.

MFV is a balanced/hybrid fund that owns an approximately 40:60 stock-to-bond portfolio, which admittedly does make it hard to benchmark against peer CEFs. However, we can see that its NAV performance has not been particularly special versus the BlackRock 40/60 Target Allocation Fund (BIMPX). Hence, I do not think that the fund’s +17% premium is deserved.

This was another highly successful trade recommendation. While BIMPX did outperform MFV by around 3% at the NAV level, the outperform on price was 1730 bps. Swapping from MFV to BIMPX, and then back to MFV, again would have gained 21% free shares of MFV in only 5 months.

3. Liberty All-Star Growth Fund (ASG)

Here’s what we wrote to our members in January:

The final fund to consider replacing is Liberty All-Star Growth Fund (ASG), which +5.35% in premium last week and currently has a premium of +6.28% and a 1-year z-score of +2.1. While this premium isn’t as excessive as the previous two examples, have investors forgotten that a rights offering for ASG is currently on file? When the timing of the offering is announced, I expect the price to drop quite significantly (as discussed in an early Weekly Roundup). One can always “hide out” in an ETF with similar exposure such as iShares S&P 500 Growth ETF (IVW) in the meantime, which as you can see has a very similar NAV profile to ASG.

This was our least successful trade suggestion, but is still in the black. ASG’s portfolio did outperform IVV’s over this time frame by around +7%, so we can see that the active management of ASG has delivered during this bear market. Yet, IVV still outperformed ASG by +4% on market price over this time frame. How did this happen? The answer is that ASG’s premium/discount valuation dropped by 11 points during this time frame. Hence, investors in ASG were unable to benefit from the managers’ alpha over this time frame as the premium of the fund disappeared during the market collapse.


Bear markets are great CEF premium/discount equalizers. While we don’t advocate market timing, there is a surefire way of increasing your margin of safety when investing in CEFs: don’t buy overvalued funds!

Our recommendations from January had a 100% success rate, with alphas of +20% generated in two out of the three cases. Who wouldn’t want to increase their share count of their CEF position by 20%, if it was offered to you for free? I know I would. This could represent the equivalent of DRIping years of distributions of the funds!

We also practice our patented CEF rotation strategy in our model portfolios. It is a great way of increasing your working capital and future income without market timing. The nice thing about this strategy is that it works no matter whether the markets are up, down or sideways. We call this a form of “double compounding” because you gain shares from both the reinvestment of distributions, as well as from the swap trades.

For example, we recently increased our share count in Oxford Lane Capital Corp (OXLC) by +90% in our Income Generator portfolio by swapping between it another CLO equity fund, Eagle Point Credit Company (ECC). Members who followed that swap trade would have turned a -30% YTD loss in their OXLC position into a +20% return, handily beating the S&P 500. This is just one illustration of how powerful our CEF rotation strategy can be.

Members also receive a list of weekly premium/discount gainers or losers as part of our Weekly Closed-End Fund Roundup in order to help them quickly scan for overvalued or undervalued swing trading opportunities. In our Weekly Roundup from last week, we recommended our members to sell the overvalued First Trust Specialty Finance and Financial Opportunities Fund (FGB) and Flaherty & Crumrine Preferred and Income Fund (PFD). Don’t let premium/discount reversion catch you out!

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Disclosure: I am/we are long ECC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.