Tag Archives: income

Central Securities Corp. is one of the oldest closed-end funds around. It sticks to a value focus, which has kept it out of sync with the broader market of late. But with an around 20% discount, it might be worth a look for patient investors. Central Securities Corp. (NYSEMKT: CET ) is one of those closed-end funds, or CEFs, that kind of gets lost in the crowd. It hasn’t been a standout performer lately and what it does is, well, kind of boring. But for a long-term investor seeking a value fund it might be just the kind of boring you’ll like since it’s trading at an around 20% discount. Value versus growth There are two broad camps in the investing world, value and growth. There’s a lot of wiggle room in there, but it can be interesting to compare the two broad-based approaches. For example, since the bottom of the market was reached during the deep 2007 to 2009 recession, the Vanguard Growth ETF (NYSEARCA: VUG ) had handily outdistanced the Vanguard Value ETF (NYSEARCA: VTV ). VUG data by YCharts That’s not so surprising in hindsight, but it provides an important backdrop for research. If you are looking at a growth-focused CEF and comparing it to the market, it will probably look good. If you are looking at a value-focused CEF, well, not so much. Which is where Central Securities comes in. CET is a value fund and, perhaps, worse, it likes to own securities for a long time-which means it isn’t likely to switch into today’s hot stocks to follow the lemmings or to window dress its portfolio. In other words, when Central Securities is out of step with the market, it can look like a lousy investment option. But long-term performance suggests it isn’t. For example, the CEF’s trailing annualized 25-year return through December 2014 was around 12% compared to 9.5% for the S&P 500 Index, according to the fund. It held a similar, though not quite as large, edge over the trailing 20-year period, too. Over shorter periods, however, it has generally lagged. For example, over the trailing 1-, 3-, 5-, 10-, and 15-year periods through October Central Securities lags the broader market. The shortfall narrows materially the further back you go. For example, over the trailing 15 years, Central Securities’ annualized net asset value total return, which includes reinvestment of distributions, was roughly 4%. Over that same span the S&P’s total return was 4.5% or so. Over the trailing year through October, however, Central Securities was down roughly 1% while the S&P was up about 5%. Percentage wise, that’s a huge rift. But the backdrop is critical. VUG and VTV offer up a similar disparity. So, in some ways, Central Securities is doing what you’d expect. Moreover, leading into 2000, roughly 15 years ago, the market has been dominated by cycles of boom and bust. We are currently in an up cycle, in my opinion, highlighted once again by tech darlings sporting extreme valuations. In other words, not much has changed since the turn of the century. And that’s left a closed-end fund like Central Securities out of step. The long, long term But the thing to keep in mind about Central Securities is that it’s been in business since 1929. So it doesn’t think in days, months, or years. It thinks in decades… or longer. For example, three of its top-10 positions were purchased in the 1980s and one was bought in the 1990s. Yet another was added in 2000. That doesn’t mean it won’t buy and sell stocks when it sees opportunities, but when it buys a company it often holds for a long time (the other half of the top 10 were purchased in 2007 or later). Such long holding periods are not the norm in the fund world. So, almost by design, Central Securities is out of step. According to the fund : Our approach is to own companies that we know and understand, which we believe reduces risk. We also consider the integrity of management to be of paramount importance. We try to find new investments available at a reasonable price in relation to probable and potential intrinsic value over a period of years into the future and then hold them through the inevitable market ups and downs. If you think that sounds like something you’d expect out of Warren Buffett’s mouth, you’d be right. So why now? The interesting thing about Central Securities right now is its nearly 20% discount to net asset value. That’s fairly wide for this fund, which has a 10-year average discount closer to 16%, according to the Closed-End Fund Association-a level at which it traded when I last looked at the fund earlier this year. If you look back over the fund’s history on a quarterly basis 20% is a relatively infrequent number to see. Which helps explain why the fund repurchased roughly 775,000 shares through the first nine months of the year. The average price on those purchases was around $21. Central Securities’ shares have recently been trading hands below $20. If you are looking for a value-focused fund with a long-term history of success, this might be a good option for you. Just be prepared to hold for a long time and to handle being out of step with the market for sometimes lengthy periods. But when value comes back into favor, which history suggests it will, this fund’s willingness to stick to its knitting should shine through. The caveats But that doesn’t mean it’s right for everyone. For starters, if you are an income investor, the fund only pays semi-annually. And the distribution has varied greatly over time. So you can’t really count on Central Securities for income. It does have a lot of unrealized capital gains in the portfolio, which isn’t surprising given its penchant for owning stocks for long periods of time. However, that doesn’t mean it will sell them just to fund a distribution, only that it could do so if it wanted. Another wrinkle here is that the CEF’s largest holding is The Plymouth Rock Company, a non-traded insurance company. That one position makes up nearly 20% of the portfolio. That means management is pricing a huge chunk of the portfolio by itself. It has a system in place for that, but Central Securities does not own a diversified portfolio. It’s worth noting that The Plymouth Rock Company has been actively buying back its shares. Central Securities, for example, sold 6,000 shares in the third quarter, leaving it with over 28,400 shares worth a total of $109 million at the end of the quarter. CET has a massive unrealized gain in this one investment, since the initial cost was only about $700,000. Which helps explain why Central Securities has pretty much told The Plymouth Rock Company that it is willing to sell, but only a little at a time and only if the price is right. So this issue is likely to get smaller as time goes on. (A shout out to Papaone for digging that nugget out of a Plymouth Rock report.) Whether or not a concentrated portfolio and difficult to gauge dividends are reasons to bypass Central Securities is really going to be based on your investment preferences. But I would say conservative income-focused investors would probably be best off looking elsewhere if you are trying to replace a paycheck. However, Central Securities is well worth a deep dive if you are looking for a value-focused fund that has proven it won’t change its stripes and see the income it throws off as a side benefit and not the main show.