2023-12-06 04:45:13 ET
Summary
- Cornerstone Strategic Value Fund is a closed-end fund with a 19% yield, but its NAV has declined significantly since its inception.
- The fund's strategy cannibalizes capital and relies on the return of capital to maintain its distribution plan.
- CLM's high distribution rate is not in line with the returns of the S&P 500.
Summary
Cornerstone Strategic Value Fund ( CLM ) is a closed-end fund that lures you in with massive too good to be true "Yields." Its NAV has declined to US$7 from US$134 since 1985 and the fund has a distribution-adjusted CAGR of .6%.
Where is the magic, how does the manager at the Cornerstone Strategic Value Fund generate a 19% yield and pay this out like clockwork every month? The closed-end fund has a broad investment mandate and holds stock and other funds that approximate the SP500. They do not use leverage. Thus, to pay out nearly 20% the managers must be great traders/investors or is something afoot. From the data, it seems a chunk of this distribution is a return of capital propagated by regular capital increases that distort actual returns. NAV has declined to US$7 from US$170 since inception.
Performance and Total Return
I compared the fund's Price, NAV, and Price+Distribution performance since inception and for the last 10 years and found severe weaknesses. At the core of the problem is that the fund's strategy does not consistently generate capital gains and dividends to meet its managed distribution plan ((MDP)) and cannibalizes capital i.e., a return of capital. In addition, the fund managers sell more shares and raise new funds at discounts to NAV which further dilutes earnings potential.
Cost Average Down Forever
I ran a simple exercise to illustrate better the lack of return this MDP delivers. An initial investment in 1995 (at year-end prices) of 100 shares or US$13,400 would be worth US$740 today. Add in the distribution of US$28,365 and one would have earned US$16,705 or a CAGR of .6%.
If an investor reinvested the distribution the results are even worse, resulting in a net loss of US$8,784. This is due to the sharp and consistent decline of CLMs price that does not recover. One is cost averaging down forever.
Capital Increase and ROC
Since the fund does not normally earn enough to meet its aggressive distribution plan it needs to pay from capital and raise new funds when assets have declined. Does this "strategy" of offering very high "yields" and then giving back investor capital and raising funds at a healthy discount to NAV sound suspicious?
The following table highlights the size of capital increased, share dilution and NAV discounts offered. Since 2004 CLM has raised US$1.6bn in new capital at an average discount of 20% to NAV.
In the chart below I calculated the accumulated EPS and DPS of the fund which shows a consistent gap since 2001 that is closed with ROC. Many investors have called ROC an accounting function , a way for funds to reduce shareholder taxes. This is true as long as the fund has unrealized gains that it can eventually sell to distribute. However, if said gains do not exist then NAV will be eroded.
Unfunded Distribution
The CLM advisers state that their investment strategy has failed to fund the MDP and yet they continue to believe that it's in the best interest of the shareholders. The two charts below illustrate the return gap. The first included all years since inception and showed an average MDP rate of 20% vs a return on NAV of 4%. The second chart excludes several very negative years, which still produces a sizable gap between what is distributed from what is earned.
I have added several older articles on CLM that warn of this situation.
- Cornerstone Strategic Value Fund: Overpayments Depleting The NAV
- Heck, Just Put Cornerstone In Charge Of All CEFs
- Cornerstone Strategic Value Fund (2019)
Conclusion
I rate CLM a Strong Sell. The fund's MDP (managed distribution plan) is inconsistent with NAV preservation and often relies on the return of capital and discounted capital increases to maintain and recuperate lost assets. A 20% distribution rate is not coherent with SP500 returns of 8%.
For further details see:
CLM: MDP Inconsistent With NAV Preservation, Avoid