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Equity CEFs: Will 2015 Be The Year Of The Rotation? Part II

Summary Recently, I wrote an article offering what equity based CEFs might benefit from a sector rotation from the leaders over the last few years to some of the laggards. Though there have been fits and starts so far in January, and certainly 1-month does not make a trend, indications are that a rotation could very well be afoot. The bigger risk is that the end of Quantitative Easing will see a contraction in all asset prices across all sectors. Over the last few years, your best bet in fund investing would have been just to buy the biggest and most popular US based broad market index ETFs, such as the SPDR S&P 500 Trust (NYSEARCA: SPY ) , the PowerShares NASDAQ-100 (NASDAQ: QQQ ), the SPDR Mid-Cap 400 (NYSEARCA: MDY ) or the iShares Russell 2000 (NYSEARCA: RWM ) and forgot about them. Certainly there have been even better performing funds and ETFs that focused in sectors such as healthcare or biotechnology, but for mindless “invest and forget” funds, you could not go wrong with the most popular broad market US indices and any of the many ETFs that correlate with them. Because the vast majority of actively managed mutual funds and professional money managers have had a very difficult time competing with these US indices. The traditional fundamental stock analysis that many active portfolio managers relied on for alpha performance simply was overwhelmed by the massive amounts of liquidity and/or computer algorithm trading that benefited the largest and most liquid ETFs. The ramp up in these indices really began in 2012 and so here are the total returns of these four popular major market ETFs since then through January 30th, 2015. Index ETF Ticker Total Return SPDR S&P 500 SPY 67.1% PowerShares NASDAQ-100 QQQ 86.8% SPDR Russell Mid-Cap MDY 68.6% iShares Russell Small-Cap IWM 63.1% NOTE: The actual indices do not include dividends whereas these ETFs and others like them do. So total return means all dividends are added back to the ETFs but not on a reinvested basis. In addition, the NASDAQ-100 represents the largest 100 non-financial stocks listed on the NASDAQ and thus, holds far fewer stocks than the actual NASDAQ . And finally, there is also a lot of overlap in the technology dominated NASDAQ-100 and the S&P 500, as there would be with say, the Dow Jones Industrial Average (NYSEARCA: DIA ), whose 30 blue chip stock constituents would all be included in the S&P 500. Of course, this does not mean that all of the stock constituents in these indices have done this well and if you separated them out by sector, you would find that stocks in certain sectors, such as technology and healthcare, have far outperformed almost all of the other sectors, many of which may have shown one or two underperforming years or even negative years since 2012. Nonetheless, it’s unusual to see three straight years in which all market capitalizations have done this well even though the Russell Small Cap Index did not have nearly as good a 2014 as in the previous two years. But is there a reason for this mostly consistent performance over the last few years across all market capitalizations? Well, of course there is. The reason was the Federal Reserve’s Quantitative Easing which injected massive amounts of liquidity to financial institutions by buying bonds and other fixed-income assets. Though Quantitative Easing started well before 2012, much of the early liquidity brought more stability and traction to the markets rather than inflating them. But at some point, this sustained liquidity started to inflate the markets across all segments because if you were a financial institution that had excess liquidity you needed to put to work, the easiest way to invest it would be to throw it into the largest and most liquid ETFs. So Will 2015 Be The Year Of The Rotation? I’m not trying to imply that everything changes in a new year but there are certainly reasons why 2015 could easily be much different than the past three years. The biggest reason is Quantitative Easing ending in October, 2014 so the simplistic throw your money at the largest and most liquid broad based index ETFs is over. What this means is that financial institutions and other asset managers are going to have to start working harder to find places to invest and that bodes well for more individual stock and sector investing rather than index investing. In other words, the air in the balloon is not hooked up to the pump anymore and investors now have to put their fingers to the wind to find which way it is blowing. And that’s why I believe 2015 is setting up better for a rotation out of some of the high flying sectors over the last few years and into some of the more underperforming sectors, though certainly economic and geopolitical factors will play a huge role in which sectors perform better or worse. This was the basis of my article I wrote in late December, titled Will 2015 Be The Year Of The Rotation? Now I have no idea how the markets will perform in 2015 and it could be a down year for all sectors, but I felt pretty confident coming into the new year that we would see a sector rotation at least in the beginning of the year, and that one of the best ways to play that would be in equity CEFs because of their built-in valuations. If you go to the link above, I identified two equity CEFs in particular, the Gabelli (GAMCO) Global Gold, Natural Resource and Income Trust (NYSEMKT: GGN ) , $7.46 market price, $7.49 NAV, -3.0% discount, 11.3% current market yield , and the Gabelli Natural Resources, Gold and Income Trust (NYSE: GNT ) , $8.49 market price, $9.07 NAV, -6.4% discount, 10.0% current market yield , that I felt would be excellent rotational CEFs not just because of the sectors they invest in but also because of their valuations that tended to spike one direction at the end of one year only to spike the other direction at the beginning of the next. As it turned out, global geopolitical forces have also helped GGN and GNT since these funds invest mostly in gold sector stocks which have performed better, though energy and natural resource stocks remain weak. But as you’ll see in the table below, some sectors, such as healthcare, utilities and REITs continue to do well even after a very strong 2014. On the other hand, the technology and financial sectors have come under pressure so far this year. In other words, rotations can have fits and starts and nothing is a guarantee to move on your timetable. Here are the top performing equity CEFs I follow sorted by total return NAV performance YTD through January 30th, 2015. (click to enlarge) As you can see, GGN and GNT are among the top NAV and market price performers so far in 2015 and if you had actually invested in these gold and energy focused CEFs on the date I released my article, you would be up an even more impressive 11.4% in GGN and 6.5% in GNT . By comparison, the S&P 500 is down -3.0% YTD. so there are quite a number of equity CEFs that are already ahead of S&P 500 shown in the table above (only 30 can be shown in a screen shot. So why do I think this trend will continue? Because when you see a bellwether stock like Microsoft (NASDAQ: MSFT ) drop -14.4% in 1-week on heavy volume, that is more than just a road bump on the way to new highs, in my opinion. That is institutional investors lowering their weightings and expectations going forward not just for MSFT but for technology in general I would expect. Now the other alternative is that we’re in for something far worse and that no sector will be safe. The weakness in the financial sector is probably the most unsettling since this is where the seeds of something more ominous usually begin. But for now, I believe that the most popular sectors over years past are not going to be the leaders in 2015 and that investors will be looking more towards out-of-favor sectors and even overseas markets to provide better opportunities. Undervalued Equity CEFs Don’t Need Positive News To Turn It Around But It Sure Can Help In 2013, I strayed from my usual focus on equity CEFs and wrote several articles on Municipal Bond CEFs. If you didn’t follow what was going on with municipal bonds that year, let’s just say the news out of Detroit, Puerto Rico, Illinois and other municipalities was creating one of the worst years for muni bond funds and a downright bear market for muni bond CEFs, many of which dropped from premium valuations to double digit discounts in one year. However, at the end of 2013 I wrote this article, The Sad State Of Muni Bond CEFs , and said the worst was mostly reflected in their valuations and to start buying these funds even ahead of any tangible positive news flow. In hindsight, I wish I had bought even more muni bond CEFs as they have been one of the best fund investments I have owned since then. The point is, you don’t have to wait for positive news when buying CEFs, you just have to know when their valuations make their risk/reward too good to pass up. Geopolitical events are already beginning to help some of the down and out sectors so far in 2015 and as I’ve said, valuations of funds can often provide the best support for their market prices even if the sectors they invest in have yet to recover. We’re already seeing this in many of the energy related CEFs and energy MLP CEFs even while oil and energy prices remain weak. One extreme example of this is the BlackRock Energy and Resources fund (NYSE: BGR ) , which has magically risen from a -10% discount not long ago to an 8.1% premium. (click to enlarge) Not sure what’s behind the interest in BGR but it provides a good example of what can happen to more thinly traded securities like CEFs when a little confidence returns to a sector or when investors try and get ahead of the curve. Even many of the energy MLPs are seeing better valuations so far this year despite most energy prices remaining in a downtrend. So imagine what can happen when a few geopolitical or economic events start to turn in favor of your rotational sectors. One of the biggest news so far in 2015 was the announcement by the European Central Bank to begin their own Quantitative Easing program which has helped gold prices and brought renewed interest in European stocks. This was the basis of my last article, Global CEFs For A QE Europe . Conclusion Are we seeing the seeds of rotation in the markets? I believe we are and in my Part III article, I will go over the equity CEFs that I think will be primary beneficiaries. Disclosure: The author is long GGN, GNT. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Niska Gas Storage Partners LLC (NKA) Q3 2015 Results – Earnings Call Webcast

The following audio is from a conference call that will begin on February 02, 2015 at 09:00 AM ET. The audio will stream live while the call is active, and can be replayed upon its completion. How did this change your view of ? More Bullish More Bearish It Didn’t This impact ( ) More Bullish More Bearish Unchanged Thanks for sharing your thoughts. Submit & View Results Skip to results » Share this article with a colleague

Top Investment Ideas For 2015

The U.S. stock market will continue to build upon its secular bull market rally in 2015. Maintain overweight to the U.S. Consider asset classes and sectors that should benefit from rising interest rates. REITs should continue to perform. Bonds can still be effective for income and growth-oriented portfolios. I believe that the U.S. stock market will continue to build upon its secular bull market rally in 2015, and post a positive return, potentially even in the high single digit range, for the year, though there will likely be several more periods of short-term volatility over the course of 2015, similar to what we have seen thus far in January. As a result, I suggest the following portfolio management ideas for careful and thoughtful consideration for the New Year remembering that any investment portfolio should be custom tailored to an investor’s specific financial goals, income needs, investment timeframe and tolerance for risk. · Maintain overweight to the U.S. The U.S. appears to be positioned for the most upside potential in 2015, especially during the first half of the year, in comparison to other developed and emerging market countries for the following reasons: o Our contention that we are in the midst of a secular bull market and any intermittent market pullbacks may help to fuel the next leg(s) of this bull market cycle. o The U.S. economy currently resides as the “shiny city on top of the global economic hill” and should continue to generate a majority of capital inflows. o Europe appears to be struggling with how best to navigate out of their own economic recession and it may take longer for Europe to show consistent signs of economic growth than many originally forecasted though I still believe that international stocks (particularly within Europe and also including certain emerging markets) are an attractive asset class for the intermediate term, however, I expect better risk adjusted, relative performance potential over the near term in certain U.S. equity asset classes and sectors. · Consider Asset Classes and Sectors that have Historically Benefited from Improving Economic Conditions accompanied by Rising Interest Rate Environments I believe it is an appropriate time to consider making adjustments to investment portfolios to brace for the reality that interest rates will inevitably start rising, though yields may rise before any such interest rate increases if investors continue to increase allocations to bonds and thereby push up their prices. Recognizing that past performance is not a guarantee of future results, according to research report from Capital Innovations entitled, ” Most Bonds and Some Stocks Could Suffer from an Increase in Long-Term Rates “, areas such as senior loans/floating rate notes, convertible securities, high yield fixed income and certain sectors of common stocks; such as Materials, Information Technology, Energy, Consumer Discretionary and Industrials, have generally benefited historically from rising interest rate market environments ( measured for these purposes as the price impact of a 1% increase in 10-Year US Treasury rates ) during the timeframe of 1994 – 2013. We also conducted our own research at Hennion & Walsh observe which sectors performed best when the Federal Reserve embarked upon their last measured rate increase program during the years of 2004 – 2006, which I contend is the likely blueprint they will follow this time around. As you may recall, during this timeframe, the Fed raise the Federal Funds Target Rate by 25 Basis Points (i.e. 0.25%) on seventeen different occasions. Our research interestingly showed that the top performing sectors of the stock market during this time period were Energy, Utilities, Telecommunication Services, Financials ( led by REITs ), Materials and Industrials. · REITs Should Continue to Perform Many have been leery to increase allocations to Real Estate Investment Trusts (REITs) due to fears over the impact of rising interest rates on the housing market and mortgage REITs in particular. To this end, it is important to recognize that REITs are not just related to the housing market and all REITs are not Mortgage REITs. In fact, the largest component of the REITs market is not associated with Mortgage REITs, but rather is associated with Retail REITs. Other sectors of the REIT market include diversified REITs, industrial REITs, hotel and resort REITs, office REITs, residential REITs, health care REITs and specialized REITs ( including self-storage facilities ). Certain REIT sub-industries appear to be positioned well to perform in a rising rate environment for the next few years under the presumption that the Fed would not consider raising interest rates unless they believed that the U.S. economy was on a firm footing and expanding moderately well, even if the housing market is not growing as rapidly. Additionally, REITs have demonstrated that they have performed well during previous periods where the Fed has gradually raised interest rates. For example, during the previously discussed timeframe of 2004-2006, the Fed raised the Federal Funds Target Rate on 17 different occasions in 25 basis point (0.25%) increments, U.S. publicly traded REITs, as measured by the Wilshire REIT Index, experienced an average annual total return of 27.7%. Year # of Fed Fund Rate Increases Wilshire REIT Index Total Return % 2004 5 33.2% 2005 8 13.8% 2006 4 36.0% Data Source : Wells Fargo Advisors. Past performance is not an indication of future results. You cannot invest directly in an index. The Wilshire REIT Index measures U.S. publicly traded Real Estate Investment Trusts. The Wilshire US REIT Index (WILREIT) is a subset of the Wilshire US Real Estate Securities Index (WILRESI). · Remember that Bonds can be Effective for Income and Growth-oriented Portfolios It has long been our contention at Hennion & Walsh that, for income-oriented investors, bonds can provide for a dependable and consistent stream of income, and principal protection when held to maturity. Bonds, whether they are Municipal, Government or Corporate bonds, can also provide for compounded growth opportunities when the income received from the bonds is reinvested. Additionally, for growth-oriented investors, fixed income securities can provide investors with downside protection and diversification within a growth portfolio, especially in a highly volatile market where additional, measured, short-term flights to quality are likely. In our view, investors should be careful not to miss out on the income and diversification opportunities offered by bonds by trying to time future, potential changes in interest rates. History has shown us that trying to time the market, or time interest rate increases or decreases, is often an exercise in futility. With this said, it is important to understand that when interest rates do increase, bond prices may fall and yields may rise. However, rising interest rates should not impact the interest that bond holders receive on their bond holdings nor should they change the ability of these investors to receive par value on their bond holdings at maturity. Bond fund investors, on the other hand, may see the interest they receive on their fund holdings change in a rising rate environment and will not receive par value at maturity as there generally is no set maturity on bond funds. While allocations to bonds may vary based upon market conditions and investor objectives and risk appetites, certain types of bonds, from certain types of issuers, can still find a home in most investment portfolios throughout most market cycles. Please note : Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above. This posting is provided for informational purposes and is not a solicitation to buy or sell any of the investment strategies or companies discussed. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.