GGT - Equity CEFs: You're Still Going To Be Far Better Off In CLM Than GGT

2023-10-17 12:25:33 ET

Summary

• It's been a rough year for CEFs. Between skyrocketing interest rates and liquidity tapering by the Fed, many CEF valuations have plunged to near bear market lows.
• But have CEF investors completely lost their minds in what they should sell and what they should hold?
• It seems as though the larger and more liquid the equity CEF fund is, the more it has been sold down since large shareholders have been raising cash anywhere they can.
• I believe this is what we're seeing as larger-cap funds keep losing valuation even though many are outperforming where it counts, at NAV. And, eventually, strong NAV performance will win out. You just have to wait.
• Over a year ago, I wrote an article suggesting that shareholders swap out-of-one fund and into another based on yield and NAV performance. Though I didn't take into account fund size back then, you still would have better off in the fund I recommended.

More than a year ago, on Aug. 22, 2022, I wrote this article: Equity CEFs: Got High Yield? Swap GGT For CLM And Get A Lot More .

That article was partly based on the fact that if high-yield income was all you were looking for, the Cornerstone Strategic Value Fund ( CLM ) , $7.32 closing market price , offered a far higher market yield at 21.0% than the Gabelli Multimedia fund ( GGT ) , $5.77 closing market price , at an 11.4% market yield.

Not only that, the Cornerstone funds, CLM and its sister fund, the Cornerstone Total Return Fund ( CRF ) , $7.11 closing market price , had additional features that made them even more attractive than a leveraged fund like GGT. Chief among them was the ability for shareholders to reinvest those massive distributions at NAV no matter what the market price premium of the fund was.

Note: Due to the similarity of CLM and CRF, I will only use CLM for comparison.

And since both funds historically have traded at some of the highest market price premiums of all equity CEFs, that ability to re-invest at NAV no matter what the market price premium was a game changer in my mind since that one feature could add 20%-plus more shares to your total outstanding shares annually at a significant discount to the market price.

At the time in August 2022, CLM was trading at +26.4% market price premium while GGT was trading at an even higher +42.9% market price premium, despite CLM offering a FAR higher market yield and showing far better NAV total return performance.

But what I didn't take into account back then was the size of the funds and how much of a difference that would make in selling pressure over the next year. CLM has a market cap well over a $1 billion (CRF is more like $650 million ) and often trades over a million shares a day while GGT's market cap is less than $100 million and typically trades about 50,000 shares a day.

So with that kind of liquidity, an institutional shareholder in CLM could get in, or in this case, get out relatively easily whereas with GGT, it would be a lot more difficult.

And this is what I believe has been hurting the larger cap equity CEFs over the last year as institutions, like banks and financials, have been under duress and have been big sellers as they try to raise cash and reduce leverage wherever they can.

Because it's not just Cornerstone that is suffering from this. We're also seeing this plunge in valuations in the Eaton Vance, Nuveen, BlackRock and many other fund sponsors that manage larger equity CEFs, i.e. over $500 million in market capitalization let's say. And this is happening EVEN when their NAVs are solidly outperforming!

How Did My Swap Idea Work Out?

So what we've seen since I wrote that article in August of last year is that CLM's valuation has actually gone down -39.0% from a +26.4% market price premium on 8/22/22 to only a +14.2% premium as of yesterday's close whereas GGT's market price premium has actually jumped + 38.3% from + 42.9% to + 64.9% today:

What this basically means is that CLM's NAV has performed a lot better than its market price over the last year while GGT's NAV has performed a lot worse than its market price.

Now you might think that any CEF that has seen its valuation go up by that much would probably be far outperforming a CEF whose valuation has plunged. But there was one over-riding statistic that most shareholders paid little attention to, and that's the fact that CLM's NAV performance had trounced GGT's NAV performance since I wrote that article.

So even taking that massive valuation divergence over the last year-plus into account, which pushed GGT to an absurd 64.9% premium, you still would have been better off in CLM at total return market price than GGT since Aug. 22, 2022:

And that's not even taking into account the reinvestment of distributions at NAV for CLM shareholders, which would have dramatically improved CLM's market price performance to probably about break even.

Now you're probably also saying, " But that's still not great market price performance compared to the S&P 500 or the NASDAQ-100 over the past year."

Well, that's true. But I have no control over a CEF's market price, and if shareholders want to sell, and clearly, large institutions have been selling where they can, then there is nothing I can do about that.

But what I'm more concerned about is NAV total return performance, since eventually, even institutions will run out of shares to sell and as long as a fund's NAV is performing well, its market price will eventually catch up.

And here you can see that over the past year, CLM's total return NAV has kept pace with the S&P 500 ( SPY ) , $436.04 closing market price , and is in fact, ahead of SPY:

And this is the reason why I believe you will still be better off in an equity CEF like CLM (and/or CRF), with pretty much the same 20%-plus market yield they offered a year ago. Because compared to when I wrote that article last year, the facts say CLM and CRF are even more attractive today based on valuation and strong NAV performance.

Yes, there's a good chance that both CLM and CRF will slightly reduce their distributions for 2024 when the new monthly distributions are declared in early November based on the closing NAV prices of CLM and CRF as of this Oct. 31.

And based on CLM's current NAV of $6.41 , the new distribution starting in January of 2024 would be $0.1122/share , down a bit from the current $0.1228/share that a current shareholder will still receive through December.

Note: Calculations are $6.41 X 0.21 divided by 12 months.

Though nobody likes to see a distribution cut, this would be a relatively small - 8.6% cut for CLM along with a similar percentage cut for CRF. To me though, this is inconsequential and anybody who has been selling CLM or CRF because of that, I believe is making a big mistake.

Besides you would be selling CLM or CRF at about a three-year low market price (not including all those large distributions):

Even as both of the fund's NAVs have largely kept up with the S&P 500 on a total return basis:

But you know who is in need of up to a -50% distribution cut? Try GGT with a mind-blowing +25.1% NAV yield. Tell me, how is GGT going to possibly cover that NAV yield without seeing more NAV erosion?

GGT's NAV is only up + 6.9% year-to-date so it has a long ways to go to cover that +25.1% NAV yield. And compared to the S&P 500 over the last three years, GGT's NAV total return performance has not even come close:

Whether GAMCO finally cuts GGT's distribution in mid-November remains to be seen, but the fact of the matter is that they will need to eventually, so if you're a GGT shareholder, I'm going to say this one last time:

You're still going to be far better off in one of the Cornerstone funds than GGT.

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