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DEX: This Balanced Closed-End Fund Is Trading At A Big Discount

Summary DEX is a leveraged, global balanced CEF about 60% equities, 40% bonds. The 17+% discount to NAV is at three year highs. High distributions produce alpha by capturing some of the discount with every monthly payout. The Delaware Enhanced Global Dividend and Income Fund (NYSE: DEX ) was formed in June, 2007. It invests globally in income-generating securities across multiple asset classes. (Data below is sourced from the Delaware Investments website unless otherwise stated.) The Fund’s primary investment objective is to seek current income, with a secondary objective of capital appreciation. The Fund also uses enhanced income strategies by engaging in dividend capture trading, option overwriting, and realizing gains on the sale of securities, dividend growth and currency forwards. There could be a good medium-term trading opportunity in DEX setting up from now until year-end because of tax loss selling. Over the last year, the average discount to NAV has been -12.75%, while it is currently around -17%. The 1-year discount Z-score is -2.20, which means that the current discount to NAV is more than two standard deviations below the average. Source: cefanalyzer Three Year Historical Premium/Discount for DEX (click to enlarge) From an overall asset allocation perspective, DEX is similar to a global 60-40 balanced fund, but because of the leverage and wide range of asset classes, it is much more diverse than a typical balanced fund you would find at Vanguard or Fidelity. Under normal conditions, the Fund will invest: At most 60% of its net assets in securities of U.S. issuers. At least 40% of its net assets in securities of non-U.S. issuers (but the fund managers have discretion to lower this percentage to 30% if they feel market conditions are unfavorable). This was the asset allocation breakdown as of June 30, 2015: Asset Allocation Breakdown Large-Cap Value 11.54% Real Estate 2.80% International equity 29.76% Emerging markets equity 6.51% Convertible securities 13.13% High yield bonds 32.68% Investment grade bonds 2.36% Other 1.24% DEX has had about average long term NAV performance. But it may be good for a swing trade now because of the very high discount to net asset value. Since inception, it had one big losing year in 2008 when the net asset value fell -38.52%, and it is also struggling so far this year. Here is the total return NAV performance record since inception along with its percentile rank compared to Morningstar’s World Allocation category: DEX NAV Performance World Allocation NAV Percentile Rank in Category 2008 -38.52% -39.30% 50 2009 +48.43% +46.71% 38 2010 +16.60% +23.98% 50 2011 -1.44% -3.21% 38 2012 +17.68% +19.81% 34 2013 +19.01% +11.07% 34 2014 -0.46% +6.14% 90 YTD -7.10% -5.76% 73 The “Top 5” tables below are all as of June 30, 2015: Top 5 Countries United States 51.02% Japan 7.96% France 5.79% United Kingdom 5.24% Canada 2.88% Top 5 foreign equity holdings Teva Pharmaceutical (NYSE: TEVA ) 1.35% Mitsubishi UFJ Financial ( OTCPK:MBFJF ) 1.30% AXA S.A. ( OTCQX:AXAHY ) 1.15% Novartis AG (NYSE: NVS ) 1.14% Toyota Motor (NYSE: TM ) 1.12% Top 5 U.S. equity holdings CA Inc. (NASDAQ: CA ) 0.55% AT&T Inc. (NYSE: T ) 0.52% Pfizer Inc. (NYSE: PFE ) 0.49% ConAgra Foods Inc. (NYSE: CAG ) 0.49% Merck & Co. Inc. (NYSE: MRK ) 0.48% Top 5 U.S. fixed income holdings Inter-American Development Bank 0.46% NuVasive Inc. 0.42% Meritor Inc. 0.41% Blackstone Mortgage Trust Inc. 0.39% Cardtronics Inc. 0.38% Top 5 foreign fixed income holdings Indonesia Govt. Intl. Bond 0.73% Mexican Bonos 0.65% Mexico Govt. Intl. Bond 0.56% Indonesia Govt. Intl. Bond 0.53% Australia & N. Zealand Banking 0.49% Bond Rating Distribution AAA 8.38% AA 0.15% A 5.40% BBB 9.73% BB 24.63% B 36.34% CCC 15.24% CC 0.09% D 0.04% DEX is run by a large team of eleven portfolio managers, which is helpful because of the many asset classes held in the fund. Nine of the managers have earned the CFA designation. The lead manager is Roger A. Early, CPA, CFA. Roger is a Managing Director, Head of Fixed Income Investments with 39 years industry experience. He has been with the fund since 2008. Alpha is Generated by High Discount + High Distributions The high distribution rate of 9.34% along with the 17% discount allows investors to capture some alpha by recovering some of the discount whenever a distribution is paid. Whenever you recover NAV from a fund selling at a 17% discount, the percentage return is 1.00/ 0.83 or about 20.5%. So the alpha generated by the 9.34% distribution is computed as: (0.0934)*(0.205)=0.01915 or about 1.92% a year. Note that this is more than the 1.13% baseline expense ratio, so you are effectively getting the fund managed for free with a negative effective expense ratio! Here are some summary statistics on DEX: Delaware Enhanced Global Dividend and Income Fund Total Assets: 273 Million Total Common assets: 186 Million Annual Distribution (Market) Rate= 9.34% Last Regular Monthly Distribution= $0.075 (Annual= $0.90) Fund Baseline Expense ratio: 1.13% Discount to NAV= -17.44% Portfolio Turnover rate: 56% Credit Rating: Fixed income holdings are mainly high yield Effective Leverage: 30.35% Average Daily Volume (shares)= 65,160 (Source: Yahoo Finance) Average Dollar Volume = $630,000 DEX is only a moderately liquid stock and usually trades with a bid-asked spread about two cents. There is often limited size available on both the bid and asked, so some care must be taken when trading DEX. DEX is an attractive purchase at current levels when the discount to NAV is 15% or higher, although there may be even additional opportunities later this year when tax loss selling kicks in. A reasonable trading approach may be to scale in gradually over the next few months.

Time Management?

Time is our most precious resource. When we’re investing, the length of time an investment can be held is the single most important factor to consider. Given enough time, risky investments become safe, and safe investments become risky. Having an investment plan that takes time into account is critical to investment success. Because there’s always enough time, if we use it well. Time is our most precious resource. We can’t make more of it, it’s difficult to manage, and everyone wants some of yours. We can try to stretch time, to enjoy an event or experience for longer, but the clock ticks relentlessly forward: time waits for no one. When we’re investing, the length of time an investment can be held is the single most important factor to consider. Given enough time, risky investments become safe, and safe investments become risky. Over the last 30 years, risk-free T-Bills have averaged 3.3% per year – barely above inflation. By contrast, the S&P 500 – with all its ups and downs – has grown 10.6% per year. Source: Bloomberg If your goal is to retire in 30 years, safe investments don’t help very much. But if you want to retire in 5 years or less, having all your money in stocks is foolish. There can be multi-year periods, where you’d have to draw on the funds when the market is down. Safe investments keep you from having to sell stocks after they’ve fallen – turning temporary price fluctuations into permanent losses. But the longest duration investments – those that in the short-run are the most volatile – are the ones that return the most over a long period. Having an investment plan that takes time into account is critical to investment success. Because there’s always enough time, if we use it well. Share this article with a colleague

Cutting Through The Rhetoric In Pharmaceutical Stocks

By Mustafa Sagun, Chief Investment Officer, Principal Global Equities It’s easy to get wrapped up in the headlines when it comes to investing. But for long-term investors, it’s important to separate rhetoric from reality. This was demonstrated most recently in the public outrage over Turing Pharmaceutical’s decision to raise the price virtually overnight on Daraprim, a drug that treats the parasite infection tonoplasmosis, from $13.50 a pill to $750 a pill – an increase of 5,000%. According to industry estimates, drugs such as Daraprim usually see a 3% to 20% annual increase. The decision made on September 21 by the firm was pounced on by presidential candidates, such as Hillary Clinton who proclaimed, “Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on.” It wasn’t long before the company reversed course on its product price increase, but nevertheless, the damage had been done as the firm’s decision to increase the price of its product had worked its way into financial markets, particularly impacting healthcare stocks. Since then (September 21 to October 6), the S&P 500 healthcare stocks underperformed the S&P 500 index by about 5%, giving back its year-to-date outperformance. This was mainly driven by ETF selling, as evident from high transaction volumes in key healthcare ETFs (see portfolio insight for more on why ETF selling is an opportunity for fundamental stock pickers). Political rhetoric aside, let’s take a closer look at the reality in this situation to determine if there’s any real negative impact to the fundamentals of healthcare company stocks. The Reality: The reality is that there’s no regulation without legislation. More specifically, there’s no legal way for a sitting president, or any political candidate for that matter, to regulate drug pricing in the United States. Only a change in current laws could do that! And bipartisan legislative action is highly unlikely for at least the next two years or for that matter, perhaps even longer. The other reality is that financial fundamentals are better than ever for biopharmaceutical companies. Business models, product offerings, pipelines, and management quality are considerably better now than they were 10 years ago, resulting in sustainable earnings growth for these companies that is superior to most other sectors of the S&P 500. Another key point is that earnings are stable, as are earnings estimates and guidance. While some stock prices are down more than 20% since mid-summer highs, valuations are attractive and, in fact, quite compelling on a PEG (price earnings per unit of earnings growth) basis. So, the relative underperformance experience cannot be explained by earnings and fundamentals. Rather, the fact of the matter is that short-term concerns, without earnings support, create opportunities for long-term investors. Granted, the healthcare sector has been a long-term winner within the S&P providing a 21% annualized return versus 15% for the S&P 500 since 2012; thus, a pullback is normal. However, we should still recognize that the healthcare sector trades at a lower multiple than the market as a whole while providing higher earnings – two sought out characteristics for fundamental investors. Our healthcare analysts acknowledge that the cloud of uncertainty over drug prices may persist for some time. However, we believe this is an opportunity to take advantage of cheap valuations in companies with improving earnings and fundamentals, as fundamentally nothing has really changed for these companies. They just got cheaper! Portfolio Insight: Focusing on Company Fundamentals As long-term, research-driven fundamental investors, we try to cut through all the rhetoric to focus on the company-specific information that affects earnings and valuations. We believe that it’s important for long-term investors not to paint an entire sector, and every company within that sector, with the same brush. After all, ETF selling by thematic investors is an opportunity for fundamental stock pickers. In other words, a healthcare ETF sells all stocks based on their association to the sector, whereas fundamental investors may buy back a select few due to their superior fundamentals. That’s the essential nature of a bottom-up stock picker; remain calm, stay the course, and focus on sustainable earnings growth that has valuation support. At the end of the day, we seek out opportunities to exploit the behavioral biases that hype and rhetoric create. (click to enlarge) While there are near-term headwinds stemming for the drug price control rhetoric from democratic candidates, fundamentals and earnings have not changed and the recent price weakness has provided further valuation opportunities.