Molalla River in Infrared.
Thanks to Lee Cash, more information is available when it comes to identifying which CEFs to include in a portfolio. Below are the two primary screens I will be using in the future to aid in the selection of CEFs.
The first Internet source [CEF Connect] is one we have been using to identify the Discount Rate and Discount Premium. What is not apparent is the Expense Ratio and these are sometimes very high for CEFs.
We begin by identifying two sources of CEF data and both are linked to a specific CEF. Just use the Search or Quick Search to find additional CEFs of interest.
- CEF Connect – Use this screen to determine the Distribution Rate and Discount Premium.
- Schwab CEF Screener – Use this screen to locate the Morningstar Rating. Unfortunately, I think one needs a Schwab account to access this screen.
Currently I am working on an Excel™ spreadsheet that will rank the input data, thus making it easier to identify which CEFs make sense to include in a portfolio. Already, I’ve located several CEFs I no longer want to hold as the Morningstar rating is much too low.
The spreadsheet currently includes only three variables. 1. Distribution Rate. 2. Discount Premium. 3. Morningstar Rating.
I may eventually include the expense ratio. However, I am assuming the Morningstar rating will work such variables into their rating system so I may just keep the spreadsheet simple to include only three critical variables.
CEF Excel™ Spreadsheet:
Below is a screenshot of CEFs I am currently using with the Kepler portfolio. Using the following rating system I plan to make changes in the Kepler. Decision #1 is to only hold CEFs that have a Morningstar ranking of 4 or 5.
For any given portfolio, the goal is to hold the 20 CEFs with the highest ranking.
Readers: Your input is valuable so if you have ideas as to how to best select CEFs for portfolio inclusion, please place your comments in the Comment space provided below. If there are metrics, other than the three mentioned above, you consider important, let me know what they are so I can include them in future spreadsheet revisions.
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Hi Lowell,
It’s great you’re doing this. I’m interested in constructing a CEF Portfolio. As for selection criteria, how about leverage ratio since I think it increases the risk. Also what about liquidity which I think is related to trading volume.
Thanks,
Bill
Bill,
Thanks for the suggestions. What I think I will do is try to find more four and five star ratings from Morningstar and once identified, then go in and look for metrics such as expense ratio, leverage ratio, liquidity, etc. If there is a high correlation then I can keep the spreadsheet simple, knowing Morningstar is taking many of the very important metric into their evaluation system. Does this make sense?
Lowell
I tend not to consider expense ratios in these CEFs since this is built into prices/returns so, if returns are good, the costs are justified, with the fund managers earning their rewards.
Leverage, of course is a 2-edged sword – benefitting in bullish markets and suffering in downturns – all resulting in higher volatility. Again, if returns are consistently acceptable/favorable and fund managers are doing a good job, I don’t let this deter me from investing (especially since, holding ~20+ CEFs means that exposure is limited). This is obviously a matter of preferrence for each investor – with different levels of tolerance for risk/volatility.
Since these are usually longer term “buy-and-hold” portfolios I don’t worry too much about liquidity because my exposure will be limited and I don’t expect to be desperate to sell. I do, however, tend to be patient on the entry and not enter on the ask if the bid/ask spread is wide. I will start at the bid and “work” the order slowly higher to a level at which I am happy/satisfied.
I have no idea what variables Morningstar factors into their ratings so I cannot comment on that other than to say that Morningstar’s analyses are usually very thorough and that they are a very reliable source of information.
David
From various articles, it appears there is a cycle in the amount of spread between CEF Share Prices and their underlying NAV. An interesting article about the cycle was published in 1973 and referenced statistics from 1950 to about 1970.
The very thorough August 2024 Investopedia article, “Why Do Closed-End Funds Trade Above or Below Their Net Asset Values?” points to that cycle and analyzes the possible drivers. I would guess this article might point to a useful factor or two to include in a CEF selection spreadsheet.
https://www.investopedia.com/ask/answers/145.asp#:~:text=CEF%20Trading%20at%20Premium,indicate%20strong%20performance%20or%20optimism
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