Closed-end Fund Adams Natural Resources to be Added to the SMA Portfolio
There are occasions when a Closed-End Fund (CEF) is preferable to holding a comparable ETF due to the positive effect a high discount has on expected return. For example, Adams Natural Resources (PEO), a CEF with a reasonable annual expense ratio (0.63%) and outsized discount to NAV (15+%), can result in higher returns than competitive oil ETFs. The extra return you are likely to get due to the discount, even without a shrinking of that discount, is greater than the expense fee being charged.
Historically, PEO has returned 9% per year over the past 5 years and 5% annually over the past 10 years. Splitting the difference, using a reasonably based long-term return calcuation of 7% a year, the discount on PEO means you get an extra 7% multiplied by 15% (the discount) resulting in an extra 1.05% of return annually. However, it costs 0.63% in expense ratio (or fees) annually to hold the fund. 1.05% – 0.63% = 0.42% in free net gain. In other words, this can be considered a negative expense ratio and a substantial advantage to the investor. This is a reasonable expectation unless management makes poor timing moves. Portfolio turnover in PEO is only 20%, so this shouldn’t be a deleterious factor.
Currently major oil stocks, which are large portion of PEOs holdings, are extremely out of favor. This has created an opportunity for decent forward returns. I will be using the cash balance of the SMA Portfolio in an attempt to purchase PEO at $22.24.
Disclaimer: It is very difficult to outperform a buy and hold strategy. Many investors have found themselves well served over long time horizons by investing regularly in a diversified portfolio of stocks or low cost, broadly diversified indexed stock funds. Information presented is based on analysis of past data and assessments by the Tactical Timing System model. Future performance may not reflect past performance. Profitable trades are not guaranteed. No system or methodology ensures stock market profits. Although accuracy is strived for, no guarantee is made regarding the accuracy of data presented.