Enterprising Investor
5 years ago
These Ancient Funds Are Still Beating the Market (11/29/19)
By Leslie P. Norton
You’re never too old to outperform.
Even as the largest actively managed stock mutual funds in the U.S. lag behind the S&P 500, the oldest funds are doing nicely. We’re talking about some funds that survived the 1929 stock market crash, including Central Securities (ticker: CET), Adams Diversified Equity (ADX), and General American Investors (GAM). These closed-end funds might not be bargains, but they’re all up 30%-plus this year, handily beating the S&P 500. Meanwhile, Tri-Continental (TY), another oldie, has risen 24%, trailing the index by just a couple of points.
We last wrote about these funds last year, on the theory that the administration would change the way unrealized capital gains are calculated, potentially reducing taxes for these funds and narrowing their discounts to net asset value. That didn’t happen, but still, the funds have sprung higher and their discounts have slimmed, helped in part by high yields, cheap valuations, strong share-buyback programs, and good investing.
Through Wednesday, $1.9 billion Adams Diversified had returned 34% this year. Mark Stoeckle, its manager, credits the fund’s practice of matching sector weight to the S&P 500 and focusing on stock selection within those sectors. Many large-cap core managers “pretty much ignore basic materials because it’s only 3% of the index,” Stoeckle says. But three of the fund’s top performers are in that sector: Ball Corp. (BLL), Sherwin-Williams (SHW), and Air Products & Chemicals (APD). “It was good stock selection, as well as having the conviction of being in the sector,” says Stoeckle. “To have the kind of performance really goes a long way to outperforming your peers.”
Adams Diversified also had a bunch of standouts in consumer staples and technology, including Costco Wholesale (COST), Coca-Cola (KO), Accenture (ACN), Fidelity National Information Services (FIS), Mastercard (MA), and Visa (V). Unlike open-end mutual funds, closed-ends don’t have to worry about inflows and outflows, and “our entire focus is on compounding returns for our shareholders,” says Stoeckle.
He predicts that stocks will keep rising because the Trump administration “will act the same as every other [one seeking re-election]: They will do whatever they can to keep the economy good before the presidential election.”
Adams became a closed-end fund in October 1929, although it was actually founded in 1854 as Adams Express, part of an older company created by Alvin Adams to carry mail in Massachusetts that eventually began shipping to the South and then to Missouri. In 1910, it was the second-largest owner of Pennsylvania Railroad stock. The closed-end came to life to invest the money gleaned when U.S. railroads bought railroad shares owned by Alvin Adams.
One younger fund, also mentioned in our previous story,was a laggard: Boulder Growth & Income (BIF) has a third of its assets in Berkshire Hathaway, which has trailed the market for years. Boulder also owns big slugs of stocks held by Berkshire, including JPMorgan Chase (JPM, 9.4% of the fund) and Wells Fargo (WFC, 5.4%).
“Every time you see stories that Warren Buffett has lost his touch, that historically has been the wrong guess,” says Jim Branscome, a longtime closed-end fan and retired director of investment analysis at S&P. If you think Berkshire will make a comeback, an easy way to bet on it is to own Boulder, which yields 3.6%.
Much of the fund, Branscome notes, is owned by an early investor in Berkshire, Stewart Horejsi, who reportedly began buying Berkshire after reading about it in John Train’s book The Money Masters.
Branscome is less bullish on the other funds in our 2018 article, given their narrowed discounts. For example, Central Securities’ discount was 17.3% back then, but now is 13.8%. General American’s has slid from 16.5% to 13%, while Adams’ went from 14% to 11%.
“The alpha pond is being overfished,” says Branscome. (Alpha is return above the overall market’s.) Today, Branscome is finding bargains in quality municipal closed-ends. True, they’re leveraged, which heightens risk, but they also boast nice yields.
His favorites include Eaton Vance Muni Bond (EIM), with a discount of 7.8% and taxable-equivalent yield of 6.8%; Eaton Vance Municipal Income Trust (EVN), with a discount of 6.5% and a taxable-equivalent yield of 7.5%; Nuveen Quality Municipal Income (NAD, 9.3% and 7.5%), and Nuveen AMT-Free Quality Municipal Income (NEA, 9.5% and 7.7%). He also likes VanEck Vectors CEF Municipal Income (XMPT), which buys shares of other closed-end muni funds with big discounts.
“I don’t know any other prognosticators who think the market will earn [7%],” Branscome says. “If you want to be in bonds for ballast, the Fed will be on hold, and we’ll be in a noninflationary environment. These are good funds.”
https://www.barrons.com/articles/making-sense-of-retail-stocks-ahead-of-black-friday-51574770501
Enterprising Investor
5 years ago
Trump’s New Tax Idea Could Be a Big Boon for These Ancient Funds (8/10/18)
By Leslie P. Norton
he recent discussion about a change in capital gains taxation is making hearts beat faster, especially among a small group of die-hard fans of closed-end funds.
The Trump administration is studying using its regulatory power (without going through Congress) to change the way unrealized gains are calculated. Specifically, it’s considering allowing investors to adjust the original purchase price of all assets—stocks, funds, homes—for inflation, which would reduce the gain.
That could be a boon for some of the ancient funds we wrote about early last year—funds that survived the 1929 stock market crash, then marched along, offering solid performance, high yields, cheap valuations, and strong share-buyback programs. The funds included Central Securities (ticker: CET), Adams Diversified Equity (ADX), General American Investors (GAM), and Tri-Continental (TY).
Closed-end funds trade on an exchange, unlike open-end funds, and have a fixed number of shares, unlike exchange-traded funds. The price of the shares bears a loose relation to the actual value of the securities owned in the fund’s portfolio. Typically they trade at discounts to net asset value. Ben Graham, Warren Buffett’s mentor and the father of value investing, was a fan. So is Edward Thorp, the mathematician and top-performing hedge fund manager.
One theory for the discount is that funds are sitting on hefty unrealized gains. The smaller the gain, the lower the eventual tax bill. Consider General American Investors, where unrealized gains account for more than 50% of NAV. When Graham wrote about General American in 1970 in his seminal book, The Intelligent Investor, the discount was 7.6%. Today, the discount is 16.5%. Says Jeff Priest, the fund’s manager: “Some of the discount is possibly due to a perceived tax bill.…It probably weighs on investors’ minds.”
Then there is Central Securities, where unrealized gains account for 54% of net assets, partly because closely held insurer Plymouth Rock, a longstanding investment, accounts for 19% of assets. The fund trades at a 17.3% discount to NAV. It has been run by Wilmot Kidd since 1973, and has put up a stellar track record: Over the past 25 years, it has returned 11.1% a year, versus 9.8% for the S&P 500.
To be sure, a change in capital gains would benefit a range of investments, including the house that you’ve owned for decades. “It’s an advantage to any person who’s owned an asset for a very long time,” says Mark Stoeckle, who has managed Adams Diversified since 2013. Unrealized gains at Adams Diversified are 32% of assets. Partly to close the discount, Adams some time ago began paying at least 6% dividends. Today, the fund trades at a 14% discount.
Discounts persist, and “the long-term stock holder shouldn’t be bothered” by them, Kidd says.
Another potential beneficiary, says Jim Branscome, a longtime fan of closed-ends and retired director of investment analysis at S&P, is Boulder Growth & Income (BIF). The fund has a third of its assets in Berkshire Hathaway, 11% in cash, and the rest in such blue chips as JPMorgan Chase, Caterpillar, and Walmart. Net unrealized gains account for 52% of assets. Much of the fund, Branscome notes, is owned by a an early investor in Berkshire, Stewart Horejsi, who reportedly began buying Berkshire after reading about it in John Train’s The Money Masters.
If nothing else, the prospects serve to highlight the charms of quirky, well-run funds trading at discounts whose managers continue to find opportunities in the market despite having vastly different views. Priest of General American follows a growth-at-a-reasonable price philosophy, looking to invest for three to seven years with corporate managers who are good capital allocators. He is a major shareholder of his fund.
General American recently added to existing positions in Anadarko (APC) and United Technologies (UTX), and eliminated Johnson Controls International (JCI) and Oracle (ORCL). Unless something goes “horribly awry” with the trade talks, says Priest, “there are still two more quarters at least of fairly significant earnings growth, and analysts estimates keep going up. As long as that’s the case, it will be tough to take the market apart.”
Meanwhile, Central Securities’ Kidd shares that he recently bought Capital One (COF) and Alphabet (GOOG), quipping, “Isn’t the argument that these are 21st century companies imprisoned in a 19th century accounting system?” Kidd himself believes that the market is risky today, but notes that “investments managers add most, if not all, of their value in bear markets.”
Ever since he took over Adams Diversified, Mark Stoeckle has read everything he can get his hands on about why discounts persist. He’s not holding his breath that a change in the tax structure will solve the problem. “As a rational person, that’s the most frustrating part. I’ve read everything there is to read. I won’t give this another thought until it gets closer.”
https://www.barrons.com/articles/trumps-new-tax-idea-could-be-a-big-boon-for-these-ancient-funds-1533935951
Enterprising Investor
5 years ago
Central Securities Corporation Releases Report to Stockholders (8/02/19)
NEW YORK--(BUSINESS WIRE)--Central Securities Corporation (NYSE American: CET), a closed-end investment company, today released its Report to Stockholders for the six months ended June 30, 2019.
Figures as of June 30, 2019 compared with those of one year ago, are as follows:
June 30, 2019
NAV: $36.72
$935,765,992
25,482,666
June 30, 2018
NAV: $33.61
$845,131,777
25,146,616
Additional details are available at www.centralsecurities.com.
https://www.businesswire.com/news/home/20190802005002/en/
eastunder
9 years ago
Central Securities Corporation was organized on October 1, 1929, and has operated as a closed-end management investment company since its incorporation. It is the policy of Central Securities to operate as a non-diversified investment company.
Our Common Stock is traded on the NYSE MKT under the symbol CET.
We invest primarily in common stocks, but we may invest in bonds, convertible bonds, preferred stocks, convertible preferred stocks, warrants, options real estate, or short-term obligations of governments, banks and corporations. From time to time we invest in securities the resale of which is restricted. Our primary investment objective is growth of capital. Income received from securities is a secondary consideration. It is our policy not to restrict ourselves as to the types of securities in which we invest or as to the proportion of the value of the Corporation's assets invested in any class of securities. Central Securities has been managed by Wilmot H. Kidd since 1973.
The net asset value ("NAV") is calculated every Friday and is reported every Monday in the Wall Street Journal under the heading "Closed End Funds". The NAV and closing market price, updated weekly, may also be found on this website.
Central Securities' dividend and distribution policy is to pay out substantially all net investment income and realized capital gains. The amount of our dividends and distributions may vary significantly from year to year.
It has been the Corporation's policy to make two payments to holders of Common Stock each year. A smaller cash payment is generally made at mid-year, and a distribution consisting primarily of realized capital gains is made at year-end when available. Stockholders have been given the opportunity of receiving the year-end distribution either in additional shares of stock or in cash, at their election.
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