Our Favorite CEF’s NAV Just Dropped: Buy, Hold, or Sell?

Our Favorite CEF’s NAV Just Dropped: Buy, Hold, or Sell?

“There it is – Freddo’s Ice Cream. It should be right next door,” I half-heartedly explained to my wife.

And with feigned confidence, I added, “I’ll be right back.”

I crossed the street once, then again… and walked up toward this monolith:

I didn’t see a teller window, so I walked around into the ice cream shop. Maybe that was the entrance.

Nope, just a wall. So I circled back, and the door on the left “buzzed” at me. I tried to pull it open—to no avail.

It buzzed again. I tried pushing this time, and it opened. Inside there were two teller windows, both guarded by bulletproof glass.

Yes, this is what I was looking for. Oh boy.

I walked up to the available window on the right, nervously reached into my pocket, took out three very crisp one hundred dollar bills, and slid them across the countertop.

The teller barked something in Spanish at me. I had no idea what he said. I just nodded and kept my mouth shut.

He punched some numbers furiously into a 1987-vintage giant calculator. Then, he rotated it to face me:


That was less than I thought it would be.

But, I didn’t have the guts to say anything. So, I just nodded, and muttered, “Si.”

He began to count out pesos in increments of 100. These were BIG bills here, too. Most local convenience stores refuse to make change for 100 pesos, in fact!

“Un ciento, dos cientos, tres cientos…”

He counted out the first thousand and began on the next. Then, quickly realizing that my stack of 100s was becoming unruly, he put a rubber band around the first pile.

I stuffed the wads of pesos into my pocket and walked outside into the Buenos Aires afternoon.

My experience in Argentina is five years old, but the currency lessons are coming around today. At the time I learned how to get money from my friend, who was fresh off his third trip to the “Paris of South America.”

The country’s ever-inflationary economy means cash is preferred. But you can’t get a fair rate at legitimate establishments. My buddy explained:

“So, what you need to do is take crisp U.S. $100 bills with you. Then I’ll tell you where to go when you get down there.

“Basically, you don’t want to exchange your dollars in a real bank, because the bank won’t give you the real rate. You need to go to the black market to get the best rate.

“I know it sounds like a real pain… but it’s the only way to do it. Everyone does it down there. Seriously, it will make your trip 40-50% cheaper if you exchange your dollars for pesos where I tell you to.”

“BUT!” he warned. “Don’t exchange your cash on the street. They’ll rip you off, guaranteed. And even if you get real money, someone will follow you and rob you. So… never exchange money out in the open.”

Did the Bond God Just Get Robbed in Argentina?

DoubleLine’s founder Jeffrey Gundlach (nicknamed the bond god for his fixed income brilliance) runs two very successful closed-end funds (CEFs). His team of 65 credit analysts cherry pick their favorite bonds in the US and around the globe. Over the past five years, the two funds have delivered total returns (including distributions) of 39% and 47%:

It’s Tough to Beat These Bond Funds

These are of course excellent results for bonds. Of the two vehicles, I prefer to drive the DoubleLine Income Solutions (DSL) fund because its team has a wider mandate to search the globe for high yield.

At the end of July, DSL’s top 25 holdings yielded an average 7.6%. How great is that in a world where Uncle Sam’s bonds pay just 1.5%?

Plus, Gundlach gets to borrow money for cheap (about 2%) to buy more high paying bonds. DSL levers its portfolio up an additional 30% or so to bring the net yield on its fund to 9.2%. And remember, that’s after Gundlach’s fees!

Since I formally recommended DSL to my Contrarian Income Report subscribers, it has delivered 59% total returns in less than three-and-a-half years. We beat the chart above because we “bought the dip” in early 2016. And we have another dip right now thanks to a good ol’ fashioned currency crisis in Argentina. Should we buy now?

When to Double Down on CEFs

CEFs are unique vehicles because, unlike ETFs and mutual funds, their prices can drift from their net asset values (or NAVs, the actual values of their portfolio). NAVs are updated daily, and they are a truer measure of intrinsic value than price is.

As contrarians we want to buy funds when their prices are below their NAVs. In fact, the further below, the better. This is the “free money” we picked up courtesy of the bond god’s fund in April 2016:

When DSL Was Discounted, We Profited

At a glance the difference between the two lines on the far left above may not look like much. But the discount we bought, plus the distributions we collected along with the modest NAV gains we enjoyed added up to our 59% total returns:

Income + Discount Closing + NAV Gains = +59%

DSL’s price has dipped over the past month, but so has its NAV. In fact, the value of its bonds decreased even more than its shares and its price now trades above NAV. In other words, the fund is now fetching a modest 2.5% premium.

The DoubleLine team had doubled down too often on Argentina. A charming place to visit, but an economic basket case, it represented 10% of the fund. That’s not a position you want to have when the peso crashes.

It was a rare miss for this talented team, but a miss nonetheless. It doesn’t make sense to buy more shares at a premium. So should we sell and cash our profits? No. I think Gundlach & Co. deserve the benefit of the doubt while they sort out this mini-mess.

But until the situation in South America looks better, DSL is a hold. Looking for safe 9%+ yields to buy? I’m glad you asked.

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