CLM Is No Panacea

I wrote in last Sunday’s Kelly Letter about a closed-end fund called Cornerstone Strategic Value (CLM $11.50 -2% YTD). It’s one of many securities I’m auditioning to play a part in an Income Sig strategy for retirement.

Please remember that this is a research phase.

None of the funds I’ve referenced is a recommendation. I don’t know yet whether I will reach a level of confidence high enough to release an Income Sig plan at all, much less what specific funds would power it, nor what rules would guide it. The result of this research could be nothing more than a regularly updated table of income assets to accompany a slimmed-down Sig System portfolio for retirement. Please don’t jump the gun and load up on funds I mention during this research phase.

About CLM, I wrote last Sunday:

“If a retiree had put that $1M into CLM at its closing price of $8.02 on 3/30/20, the date our Q1 2020 orders filled, they would have purchased 124,688 shares.

“Those shares would have kicked off a $23,105 monthly income last year and a $19,975 one this year, as the untouched holding grew in value to $1,417,703 today.”

You may wonder, “What in the world could CLM own to kick off that kind of monthly income while also growing capital 40% in a year?”

It does, indeed, look like a free lunch—and you know what they say about those.

The answer: nothing. There is no portfolio good enough to deliver CLM’s results of the past year. The secret to its high yield is that it pays from proceeds of new rights offerings. From Investopedia:

“A rights offering (rights issue) is a group of rights offered to existing shareholders to purchase additional stock shares, known as subscription warrants, in proportion to their existing holdings. These are considered to be a type of option since it gives a company’s stockholders the right, but not the obligation, to purchase additional shares in the company.

“In a rights offering, the subscription price at which each share may be purchased is generally discounted relative to the current market price. Rights are often transferable, allowing the holder to sell them in the open market.”

Such a discounted rights purchase can work out well for the investor. It can also turn into high yield being nothing more than taking money from you, then paying it back and calling it income. Rest assured that I’m aware of this risk with CLM and other closed-end funds engaged in the practice.

CEFs that engage in new rights offerings are not necessarily out of the question for income seekers, nor ineligible for an Income Sig plan, but buying and holding them is generally inadvisable because their price decays over time, as shown below for CLM:

CLM Trailing Price Change
– – – – – – – – – – – – – – –

1-Yr +14.0%
3-Yr -22.8%
5-Yr -29.9%

Now, observe its trailing total returns for the same time frames, which reveal the benefit of its high distributions:

CLM Trailing Total Returns
– – – – – – – – – – – – – – –

1-Yr +34.5%
3-Yr +12.2%
5-Yr +15.3%

Better, but not as good as the general market, represented below by SPY:

SPY Trailing Total Returns
– – – – – – – – – – – – – – –

1-Yr +39.6%
3-Yr +17.4%
5-Yr +17.0%

It’s possible that an investor would value income so highly that they would be willing to watch the value of their CLM position shrink over time while they collected its big monthly distributions. However, this is not suitable to an evergreen Income Sig system.

Another possibility for using CLM-like big payers is swapping them in and out based on a metric or suite of metrics, such as discount to net asset value, yield, and/or price change. Reacting to the latter is the Sig System’s specialty, but it could also react to something else. A CEF study by Matisse Capital found that discounts to NAV correlate with high subsequent total returns, which encourages work in that area.

However, what I have come up with so far is overly complicated for negligible benefit. The investing world is filled with unnecessary complexity. I refuse to compound it.

This drawing board is a long one.

Conclusion: CLM is no panacea.

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