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8% Current Income And Stable Principal From A Portfolio Of Closed-End Funds

Summary This High-Income, Stable-Capital CEF portfolio is designed to generate current income with reasonable tax efficiency. The portfolio’s second, and equally weighted, objective is long-term sustainability of capital. The objectives are addressed by entering positions in quality funds when their discount status is attractive. This article summarizes the final quarter of 2015. High Current Income and Capital Stability from CEFs At the end of 2015’s gut-wrenching third quarter (chart at right) I took note of the sharp declines in closed-end funds and considered that an opportunity was at hand. I proposed a portfolio of CEFs ( A CEF Portfolio For High Current Income With Capital Preservation ) designed to generate high current income with capital sustainability: The Stable-Capital, High Current-Income Portfolio. With the fourth quarter in the books, it’s time to review the results. I’ll not spend time here rehashing the details of the portfolio; interested readers should refer to the article cited above. But I will say that one incentive for building this model grew from my frustration with the performances of ETFs, ETNs and CEFs that offer portfolios of CEFs. As the name implies, the model has three objectives: First is high yields for current income. I’ve targeted 8% for taxable funds and 5% for tax-free municipal bond funds. Any excess is to be reinvested. Second is sustainable principal value. Capital growth is not an explicit objective, but maintaining a sustainable principal while withdrawing income at approximately 7.6% will obviously require periods of capital growth to offset inevitable periods of capital erosion. Third is tax efficiency. I wanted a manageable portfolio, so I limited the selections to 15 funds and equally weighted them. The portfolio is diversified across income asset classes. The funds selected are: Equity (40%) Dow 30 Premium & Dividend Income Fund Inc. (NYSE: DIAX ) Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (NYSE: ETW ) Eaton Vance Tax-Managed Diversified Equity Income Fund (NYSE: ETY ) Tekla Healthcare Investors (NYSE: HQH ) NASDAQ Premium Income & Growth Fund Inc. (NASDAQ: QQQX ) Columbia Seligman Premium Technology Growth Fund, Inc. (NYSE: STK ) Real Estate (6.7%) Cohen & Steers Total Return Realty Fund Inc. (NYSE: RFI ) Preferreds (13.3%) Flaherty & Crumrine Preferred Securities Income Fund Inc. (NYSE: FFC ) First Trust Intermediate Duration Preferred & Income Fund (NYSE: FPF ) Fixed Income – Taxable (26.7%) Western Asset Mortgage Defined Opportunity Fund Inc. (NYSE: DMO ) PIMCO Strategic Income Fund, Inc. (NYSE: RCS ) AllianzGI Convertible & Income Fund (NYSE: NCV ) PIMCO Dynamic Income Fund (NYSE: PDI ) Fixed Income – Tax-Free Municipal Bond (13.3%) Eaton Vance Municipal Bond Fund (NYSEMKT: EIM ) MFS Municipal Income Trust (NYSE: MFM ) Comparables The comparables I’m using for this portfolio are: Cohen & Steers Closed-End Opp (NYSE: FOF ), an unleveraged closed-end fund of funds with 85 CEFs in its portfolio. PowerShares CEF Income Composite (NYSEARCA: PCEF ), an unleveraged ETF holding 147 closed-end funds. UBS E-TRACS Mthly Pay 2x Closed End ETN (NYSEARCA: CEFL ), an ETN (Exchange Traded Note) indexed to a 2x leveraged portfolio of 30 closed-end funds. YieldShares High Income ETF (NYSEARCA: YYY ), an unleveraged ETF that holds a portfolio of 30 closed-end funds using the same index as CEFL. Fourth Quarter Results Income The first objective is current income, so let’s start with a look at distributions for the funds. Recall that any distributions for the quarter over 2% (8% annualized) for 13 taxable funds and over 1.25% (5% annualized) for two tax-free, muni-bond funds are retained for reinvestment. (click to enlarge) Total distribution was $3430.00, a return of 3.26% for the quarter. The return is enhanced by three funds posting special distributions. PDI added $2.61/share for $608.13; DMO added $1.20/share for $322.80; and RCS added $0.04/share for $32.28. Thus, special distributions put an extra $963.21 or 28.08% to the quarter’s yield. When only the regular distributions are considered, the portfolio paid $2466.79, which exceeds the anticipated $2,372.43 by 4% (see previous article for a discussion of anticipated yields). Distributions for all but three funds met the 8%/5% target. The shortfalls were minimal and were anticipated at the onset: DIAX -$10.60, FPF -$31.10, and QQQX -$14.62. Overall, the 8%/5% target objective was exceeded by $1,428.03, which is available to reinvest. At the quarter’s close, yields for the funds are as shown in this next chart. (click to enlarge) As we see, a few have increased but most now have decreased yield percentages, reflecting changes in market prices. This leads to discussion of the next objective: stability of principal. Price Performance and Capital Stability It was a good quarter for the portfolio. Somewhat surprisingly so, in fact, considering the generally poor performance of equity and fixed-income markets. Here is the market price performance for the portfolio’s funds. (click to enlarge) Only four funds had price declines. For two of these, PDI and DMO, the declines were partially a consequence of their high special distributions. One, FPF, is essentially flat. And one, NCV, is the portfolio’s big loser having given up 4.5%. I added NCV to the portfolio because I felt that it was due for a move up. It had just come off a large dividend cut and moved from a perennial premium to a discount of -15%. The fund was paying a 13.44% yield. I anticipated the discount would be reduced and the fund would stabilize at a somewhat higher valuation to NAV. This has happened; the discount is now -11.2%, but NAV has been falling along with the rest of the high-yield bond market. The fund does, however, continue to pay an exceptional distribution (14.1%). Two funds that have been long-time favorites of mine, STK and HQH, had stunningly good quarters; they’re up 13.8% and 12.1%. I’ve written on both of these several times over the past couple of years, and regular readers are aware of my high regard for both of them. HQH had been unduly beaten down. As the biotech sector dropped mid-year, HQH dropped even further. This is yet another example of the exaggerated panic selling so often seen in closed-end funds. STK was also oversold in response to the summer’s market upheavals in technology. It fell to a -6.2% discount at one point, but was back up to a 2.4% premium when I began this portfolio. Anyone who was quick enough to grab that -6% discount gets my admiration and compliments. Premiums and Discounts Let’s look at the changes in discount/premium status for the funds which provides a bit of an object lesson in CEF investing. (click to enlarge) In large measure I felt that these funds were undervalued and oversold at the end of September. As such they offered especially attractive entry points. As we see here, only one fund (NYSE: DMO ) has not gained value from a favorable move in the discount/premium. Two, FFC and RCS, have grown from moderate-to-modest discounts to substantial premiums. I held both of these at the time I started this exercise. I’ve since sold FFC (and anticipate replacing it with FLC or, perhaps, another preferred share fund) to take advantage of that profit and have been considering doing the same for RCS. RCS is a fund that has run a perennial premium. It dropped to a discount after PIMCO cut distributions on several of its high flyers (not, however, RCS). I felt that RCS’s drop was unwarranted at the time and it quickly turned around. I will likely echo my real-money swap of FFC for another preferred shares fund in this model portfolio once I’ve reviewed the space. It could be FLC here as well, but there are other strong contenders which may be a better fit. Preferred shares are presently a bit of a hot asset class, so everything out there (except FPF which is already in the portfolio) is above its mean discount status. I’ll add here a view of the Z-Scores for the funds from the beginning and end of the quarter because I think it helps to reinforce the emphasis I’ve been putting on moves in discount/premium status relative to mean discount/premiums. (click to enlarge) On the whole, the 29 September Z-scores were indicating reasonable entries for most of the funds. As I noted at the time DMO, EIM, PDI and STK were exceptions, but I wanted those high-quality funds in here despite those apparently unattractive valuations. Notice too, how frequently the Z-scores predict reversion to mean values. By these indicators, HQH remains an especially attractive opportunity (especially so if, like me, you’re inclined to think biotech is due for a recovery), but little else in the mix is. Indeed, I would not be surprised to see some corrections in the other direction in the coming months. As I noted above, RCS and FFC look ripe for profit taking. The equity option-income funds, DIAX and QQQX, which I also suggested were good buys because of their unjustified under-valuations have moved to highly positive Z-scores as well. The problem with trading out of these funds is that one needs to find a replacement. I’ll be working on that as time allows and as I go through a similar exercise for my own portfolio which shares many of these positions. Performance Summary Fourth quarter performance is summarized in this table. (click to enlarge) As shown, the portfolio is up $5,550.27 (5.5%) on market price. Results for the quarter for some asset-class benchmarks are seen in this chart. (click to enlarge) The portfolio performed well relative to these benchmarks. On price returns it lagged the S&P 500, Russell 3000 index and the Dow Jones REIT index, but it beat corporate and high-yield bonds and preferred stocks. Consider that the 5.5% price return does not include the 3.3% distribution yield, a yield unmatched by any of these benchmarks, and it’s clear that it was a good quarter for the HI-SC portfolio. The next chart summarizes the total returns for combined market price and distribution yields for each fund. (click to enlarge) Only NCV is negative for the combined values. Comparables As noted earlier, there are products that offer exposure to CEFs. I’ve not been a big fan of these, but I know many readers are. Here’s how they stack up for the quarter. Each is based on a $100K investment at the quarter’s start. The table that follows shows percentage return for combined market value and distributions. The chart says it all, in my mind. CEFL, true to its charge and 2x leverage, generated remarkable income. But, true to its ongoing track record, that income has come at a substantial capital cost. It does beat FOF and YYY, as it should with its 2x leverage, but it lags PCEF. The lag is trivial but PCEF is an unleveraged product, so in an up-trending quarter, one would have certainly expected a better showing from CEFL than an essentially even run with the ETF. None of these comes close to the HI-SC returns. I’ll be the first to admit here that the model had an unfair advantage in that it was selected at the beginning of the quarter with valuation as a high priority. But I’d also argue that the model portfolio has a much higher quality of funds than any of the comps here and that is also a consideration. We’ll continue following these funds as I do quarterly updates to see if the outperformance trend continues. Updating the Portfolio As it stands there is $1,428 in excess distribution returns to reinvest. One possibility is to add them to the funds that are the greatest distance from the equal-weighted goal. My typical target for rebalancing a portfolio is more than 10% out of balance. This table shows none at that level, but three over 9% out of balance. If I add a third of the reinvestable capital to each of DMO, PDI and NCV it would bring them closer to equal weighting. A good case can be made for this. DMO and PDI are top-of-their-class funds, but their valuations look pricey at the moment. NCV has, as I noted, been hit hard by the flight from high-yield. Is that due to turn around? I think it might to some extent, but I’m not anticipating a good year for that asset class. And when an asset class falters, the CEFs for that asset class almost invariably exaggerate the declines. The fact that NCV has such a high yield argues in favor of bringing it up to near balance. I also am considering taking some profits and swapping out of some funds. I should have some clarity on that in the coming weeks, so I’ll be holding off on the re-investment until I make those decisions. I’ll update on changes when I make them. If you have suggestions, I’d love to hear your opinions in the comments.

Spark Energy’s (SPKE) CEO Nathan Kroeker on Q3 2015 Results – Earnings Call Transcript

Spark Energy (NASDAQ: SPKE ) Q3 2015 Earnings Conference Call November 12, 2015 11:00 AM ET Executives Andy Davis – Head of Investor Relations Nathan Kroeker – President and Chief Executive Officer Georganne Hodges – Chief Financial Officer Analysts Michael Gyure – Janney Montgomery Scott LLC Operator Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc. Third Quarter 2015 Earnings Conference Call. My name is Shannon, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes and this call will be posted on Spark Energy, Inc’s website. I would now like to turn the conference over to Mr. Andy Davis, Head of Investor Relations for Spark Energy, Inc. Please go ahead. Andy Davis Good morning, and welcome to Spark Energy, Inc’s third quarter 2015 earnings call. This morning’s call is being broadcast live over the phone and via webcast, which can be located under Events and Presentations in the Investor Relations section of our website at www.sparkenergy.com. With us today from management is our President and CEO, Nathan Kroeker; and our CFO, Georganne Hodges. Please note that today’s discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Management may make forward-looking statements concerning future expectations, projections of our operations, economic performance and financial condition. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we give no assurance that such expectations will be realized. We urge everyone to review the Safe Harbor statement provided in yesterday’s earnings release, as well as the risk factors contained in our SEC filings. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. During this morning’s call, we will refer to both GAAP and non-GAAP financial measures of the company’s operating and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to yesterday’s earnings release. With that, I’ll turn the call over to Nathan Kroeker, our President and Chief Executive Officer. Nathan Kroeker Thank you, Andy. I’d like to welcome our shareholders and analysts to Spark’s third quarter 2015 conference call. I will make a few opening remarks about our operating results and then our Chief Financial Officer, Georganne Hodges, will provide some detail on the financial results. We will then conclude with questions from our analysts. Georganne will give you the financial details of our third quarter results shortly, but I will tell you that we are very pleased with our results. We saw enhanced margins in both our Retail Natural Gas and Retail Electricity segments during the quarter, as wholesale prices continue to decline. We also saw increased volumes in our Retail Electricity segment, primarily as a result of our CenStar Energy and Oasis Energy acquisitions. I will talk a little more about those acquisitions, which we closed in July in a moment. With the help of our two acquisitions, we saw our customer count increased 17% in the third quarter, ending the quarter with 357,000 customers or 401,000 RCEs. Our two acquisitions added 53,000 customers, or 105,000 RCEs. The performance of both our CenStar and Oasis acquisitions have exceeded our initial profitability expectations on a combined basis. We have already taken advantage of the access we now have to 20 new markets in additional brands in several ways. We’ve expanded our existing broker relationships, adding commercial customers in new markets and in our new brands. We’re seeing success with our alternative brand wingback strategies, and we’re leveraging our channel management expertise and vendor relationships thus far to launch campaigns in several of the CenStar and Oasis markets. From an integration perspective, everything is on track. Our accounting, treasury, risk management, load forecasting, and supply functions are fully integrated at this time. While it’s still early, we are very encouraged by what we are seeing from these two transactions. We continue to see improvements in customer attrition in the third quarter, as we focused on sales, quality, and call center improvements, achieving a 23% decrease in customer attrition quarter-over-quarter. During the third quarter, we renegotiated our mass-market vendor commission structure to more accurately correlate commission payments with lifetime customer value and improve overall sales quality. What we expect to see higher lifetime value customers as a result of this change, this realignment has resulted in a slowing of organic customer additions, at least, in the short-term. We expect this trend to continue into the fourth quarter. On September 14, we paid a quarterly cash dividend for the second quarter of $0.3625 per share. More recently on October 22, we announced that our third quarter dividend of $0.3625 per share will be paid on December 14. We expect to pay this quarterly dividend on a go-forward basis, and we expect 2015 adjusted EBITDA to exceed our planned 2015 dividends and all required distributions and tax payments. And I want to reiterate that we do not anticipate any changes to the dividend policy. Thanks for your attention. And with that, I will now turn the call over to Georganne Hodges, our Chief Financial Officer for her financial review Georganne? Georganne Hodges Thanks, Nathan. Strong unit margins particularly in our electricity business, contributions from our acquisitions and lower organic customer acquisition spending resulted in adjusted EBITDA of $5.6 million for the third quarter. This represents a $10 million increase over our loss of $4.4 million for the third quarter of 2014. Retail gross margin was $26.7 million compared to $14.6 million in 2014. This $12 million increase is primarily attributable to expanded electricity unit margins and increased electricity volume. The continued low commodity prices led to favorable supply costs. These favorable supply costs coupled with our ability to optimize margins were key drivers to our elevated unit margins in the quarter. Additionally, our adjusted EBITDA and retail gross margins benefited from expanded spot margins from our acquisitions. G&A expenses for the quarter were $15.5 million, compared to $10.6 million in 2014. This increase is primarily due to increased billing and other variable cost associated with our customer portfolio, as well as increased cost associated with our acquisitions. Bad debt expense for the quarter remained flat at $1.9 million. Customer acquisition spending for the quarter was $5.8 million compared to $8.7 million spent in the third quarter of 2014. This decrease was primarily due to our decreased organic sales in the quarter, as well as recent changes to our residential vendor commission payment structure, which Nathan spoke about. Approximately 113,000 new customers came up less than a [ph] quarter, which includes 53,000 from our acquisitions. Our net income for the third quarter was $5.9 million compared to 400,000 in 2014. Our basic and diluted earnings per share for the quarter were $0.42 and $0.31 respectively, I’ll point out that our diluted earnings per share was impacted by the convertible subordinated debt with an affiliate of our founder. As of today, the balance of our working capital line is $26 million and the balance of our acquisition line is $21.2 million. As you look at our balance sheet, you will notice a few new line items this quarter, which are results of the acquisitions of CenStar Energy and Oasis Energy. Acquired customer intangibles with current and non-current, trademark, and goodwill are the result of business combination accounting. Please refer to the acquisitions footnote in our 10-Q for an extended commentary on the valuation of these assets. That concludes my prepared remarks. I’ll now turn the call over to Nathan. Nathan Kroeker Thanks, Georganne. In summary, I would just like to say that we are very pleased with the strong and adjusted EBITDA and retail gross margin we realized in the third quarter, which historically is a down quarter for us due to the seasonality of our business. As we move through the fourth quarter, we continue to see strong margins underpinned by lower commodity prices. We will now open the line up for questions from our analysts. Operator? Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question is from Mike Gyure with Janney. Your may begin. Michael Gyure Hi, thanks for taking my question. How should we think about your customer acquisition costs spending for, let’s say, the remainder of the fourth quarter? And then maybe directionally, as you move into 2016, whether that would be above or below, what’s your plan on spending for 2015? Nathan Kroeker I think what you’ll see in the fourth quarter, first of all, Mike, it’s good to hear your voice. This is Nathan. I think, what you’ll see in the fourth quarter is the slowdown that we experienced in the third quarter will continue through the fourth quarter. Some of the changes that I alluded to earlier in terms of improving sales quality have a natural effect of slowing sales down a little bit. But what you’re going to see is, you’re going to see us add better quality, higher volume customers that that are going to be more valuable to us in the long-term. My expectation is that those sales will pick up again in the first-half of 2016. It takes about three to six months for a change like this to kind of work its way through the system. In terms of our overall organic customer spend next year it’s probably slightly below what we spent in 2015. But I think we’re going to see as great as much value with the spend, as we did in 2015. And, obviously, all of that is predicated on what type of M&A opportunities are out there. If we decide that we find some excellent M&A opportunities, book purchases, or tuck-ins, we may divert some of those dollars to M&A throughout the year, as we optimize the growth strategy. Michael Gyure Great. And maybe a follow-up on that, as far as the customer acquisition spending, would you envision that being in pretty much the same geographies and locations that you’re in today as opposed to, I would say, new markets? Nathan Kroeker We’ve got 20 new markets between CenStar and Oasis, and we’re certainly incorporating that into the growth strategy. But, I think, we’re in about 66 markets today. We do not have to add new markets in order to realize organic growth. I think the vast majority of what we’re going to do next year will be within those 66 markets, yes. Michael Gyure Great. Thanks. Operator Thank you. [Operator Instructions] We have no further questions at this time. I’d like to turn the call back over to Nathan Kroeker for closing remarks. Nathan Kroeker All right. I’d just like to thank everybody again for participating in today’s call, and we look forward to seeing some of you in the near future. Have a great day. Operator Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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Lipper’s Q3 2015 U.S. Mutual Funds And Exchange-Traded Products Snapshot

By Tom Roseen Conventional Mutual Funds Summary Global markets took it on the chin over the last three months, with fears of slowing global growth, Federal Reserve tightening measures, slumping commodity prices, and drug-pricing issues sending the major indices down during the quarter more than 10% from their recent market highs. Total net assets (TNA) in the conventional funds business (not including exchange-traded products [ETPs] and variable insurance products [VIPs]) dropped below the $15-trillion mark for the first quarter in six. As a result of large declines in the price of oil and on fears of China’s slowing growth, for Q3 2015 the emerging markets funds macro-group witnessed the largest relative (-17.52%) decline in total assets under management from the prior quarter-end, while the large-cap funds macro-group suffered a decline of $152.3 billion-the largest absolute decline in total assets under management. Investors ducked for cover during the quarter and padded the coffers of money market funds. The fund group witnessed the largest relative (+1.35%) and absolute (+$30.5 billion) increase in TNA for the quarter. Open-End Funds’ (ex-ETPs’) Total Net Assets ($Mil) by Macro-Group, Rolling Quarters Through Q3 2015 (click to enlarge) Source: Thomson Reuters Lipper Exchange-Traded Products Summary On fears of slowing global growth, Federal Reserve tightening measures, and slumping commodity prices during Q3 2015, TNA in U.S. ETPs (including exchange-traded funds, exchange-traded notes, exchange-traded commodities, limited partnership commodity pools, master limited partnerships, and exchange-traded fund [ETF] unit investment trusts) dropped below the $2.0-trillion mark for the first quarter in four. For Q3 2015 the emerging markets ETPs macro-group witnessed the largest relative (-26.00%) and absolute decline (-$37.0 billion) in TNA from the prior quarter-end. The alternatives ETPs macro-group experienced the largest relative (+26.35%) increase in TNA for Q3, while the Short-/Intermediate-Term Bond ETP macro-group witnessed the largest absolute increase in TNA (+$14.3 billion) for the quarter. (click to enlarge) Source: Thomson Reuters Lipper In the complete issue of Lipper’s Q3 2015 U.S. Mutual Funds and Exchange-Traded Products Snapshot , we feature a summary of total net assets, estimated net flows, and new fund creations for conventional funds and exchange-traded products for Q3 2015, comparing those changes to prior quarters and highlighting the largest individual gainers and losers of both groups. Lipper’s U.S. Mutual Funds and Exchange-Traded Products Snapshot provides readers a powerful, easy-to-use guide and quick reference tool to help them discern fund trends for the quarter.