2023-10-28 01:54:11 ET
Summary
- Cornerstone funds have been smashed to near their NAVs.
- Z-scores look appealing, and you are always a stone's throw away from someone who has allegedly made a lot of money in this fund.
- We tell you why this is a party for time travelers.
We will get to the time traveling part a little later...
Cornerstone Total Return Fund Inc. ( CRF )
On our last coverage of this fund we did not want to bother you with any kind of fence sitting. We told you right in the title what we thought of this one.
Our conclusion in that piece could be summed up with "you ain't seen nothing yet", but we are rarely that terse. So we went with,
That has got the crowd complacent. This is very similar to the multiple arguments you saw in the financial sphere suggesting 2.5% 10-year yield was a "great deal". It only was a great deal in relation to the bubble. It was not cheap in relation to any objective measure of what bonds should provide in an era of high inflation. So when CRF finally does go to a discount and stays there, remember the perpetual well of NAV-accretive-fund-raising comes to a standstill. We see that ahead for this fund, and if we are right it will once and for all end the debate about the returns from this point.
Source: Seeking Alpha
We are about 8 months through and avoiding this fund has certainly been a pleasurable experience .
We go over where things stand and why you may have some whipsaw action ahead.
That Is An Odd Number
We run the daily screenings of Z-score on CEF Connect to look for dangers and opportunities in closed end funds. As anyone who has investigated this area knows, Z-score shows just how far pricing is from where it has been. This morning we were greeted to some extreme outliers. Cornerstone Strategic Value Fund ( CLM ), the sister fund that is riding on the same fumes, was taken to the cleaners alongside CRF and a few others.
What is fascinating here is that we are seeing a negative 4.71 Z-score while these funds are still at a premium! Everything else around it at deep discounts. Tekla World Healthcare Fund ( THW ), which we wrote about before it tanked , had a 23% percent swing in the premium factor.
But CRF and CLM are of course special. You can see the mass insanity in the premium profile that has raged as high as 80%.
So in relation to the chronic FOMO we see in these funds, this is not the worst spot to get involved. But we are still suggesting you stay away.
The Macro
Technology and growth bubbles dominate the S&P 500 ETF ( SPY ). 27.5% of the top 10 holdings would fit that with only Berkshire Hathaway ( BRK.B ) and UnitedHealth Group Inc. ( UNH ) being outliers.
CRF takes this one step further and throws in actual iShares Technology Select Sector SPDR ETF ( XLK ) to augment its dedication to this area.
The rest of the fund works like a proxy SPY. So whatever happens here on out, the movement of the broader indices and growth sector in particular, will play a huge role in how this fund performs. Our take is that this is an area of a super bubble that will collapse eventually. So far this year the median stock has done far, far worse than these super giants.
Every true bull market is characterized by broad participation. That remains absent today. Getting specifically to these bubbles, they have really diverged from the correlation with yields and catch-up is likely in the next 12-15 months.
Sure yields could come down. In fact, it would fairly unusual for bond yields to keep rising so relentlessly. But with risk-free rates so high, the puncturing of bubbles is likely to be an almost certainty. If you go back and look at the Nikkei bubble in the late 80s or the NASDAQ bubble in the late 90s, or even the housing bubble in the 2006-2007, all were shattered by the risk-free rate going high enough. We are there now and the payback is in innings one.
One final note on the macro here is just how much the market has favored the holdings which CRF tends to favor.
Non-dividend payers are being favored at an even more impressive rate than what we saw at the bubble peak in 2000. There is going to be hell to pay when this reverses.
We Are Going To Need A Bigger Pool
Apparently there is no dearth of people who have made phenomenal returns on CRF. That is the retort we always here from the ones that favor this fund. All you have to do is take that massive distribution from the fund, reinvest it at NAV and sell equivalent shares. The fund always trades at a premium, so this is a no-brainer strategy. Lost in this logic is that you need an infinitely expanding "pool of fools" who will buy it at a premium. We hate to break it to you but that pool is not infinite. It was one thing to do this if the fund had $30 million in assets. It is another to do this when there are $633 million in assets.
As the fund distributes $150 million (Yep that the amount at the 23% "yield") on an annualized basis, you need $150 million invested by patsies who are happy to hold on to this S&P proxy at a premium. Oh we forgot, CLM does the same silly distribution schedule. So you will need about $400 million to be purchased by patsies.
We will add that the entire period of 2014-2023 was marked by a relentless bull market, briefly punctuated with 3-4 nasty corrections.
Verdict
Stephen Hawking was quite the scientist and quite the prankster. He threw a party once and sent out invitations after the party. The reason? He wanted to invite "time travelers". He figured that this order of events would ensure that the only people who would show up would be time travelers. The people using their personal past returns on this fund to lure others in are doing the same thing. The only way to make money in this fund beyond the returns of the S&P 500, is if you can time travel back and be an early adopter of this strategy. Since we don't have that ability, we have to rate the fund a "Sell". The fund itself is a mediocre fund and for everyone that sold at a 20% premium (to reinvest at NAV) there is someone that bought at a 20% premium and lost more money than they care to admit. As much as the first group has something to gloat about, the second group is sobbing uncontrollably. The Z-score looks like a low point to buy and we would not rule out some premium expansion in the short term. Longer term we think this gets thrashed to a discount like most proxy S&P funds.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
For further details see:
CRF: Negative 4.7 Z-Score And The Party For Time Travelers