You are right on the mark in comparsion "shopping". It fun to try and guess a FMV(Fair Market Value). And as you say it has to start somewhere and a 3 month T-bill is always the start for any U.S. work.
A few thoughts to add:
Appx. 15% of the funds dividend is "return of capital" or captial gains paid out. Thus that does not reflect a "real" source of reoccurring income so I'd cut that part out in a T-bill comparison. Or $.10
The credit quality of the income is good, but since it's a fund with no maturity a risk premium has to be included for volitility. Ususally some kind of variance from the mean kind number or standard deviation. At this point the stock is right in the middle of it's high and low for 52 weeks, about 18% either way variance. Last year I think was an unusual year with lots of price movement so it's probably some where in the 10% up or down area for varience. I want at least half of 10% up or down varience for principle protection each year. Or 5%($.50/year)
So if you add the riskless rate(4.5%) and the principle risk premium (5%)your looking at 9-10% for this fund. Take away the return of capital($.10)and you have a FMV of $6.50($.62/.095).
But I do feel the fundamentals can get stronger to move the fund higher in the long term. We've certainly discussed this at lenght in the past. And of course risk is a perceived thing and will vary depending on the last bad occurrance I guess. Lastly the fund is at a discount so the payout of NAV doesn't become a real problem till the fund is at a preium I'd think. So in reality there is probably not any reason to cut out he capital gains distributions till the fund is at a preium. I personally like to see a little discount. Any thoughts there?
I don't know if this makes sense or not, the more Wall Street comes up with tools to figure things out the worse the outcome it seems.
You gentlemen have done a pretty good analysis. Another way is risk free return + beta x market premium, which would give a little higher price since I believe beta is shy of 1.0 for FAX. Who knows what the market premium is in this crazy market though? Five percent is a good textbook number, but the market seems to demand nothing from earnings or dividend yield and expect 20% from capital gains. In truth, I think FAX is about right...maybe good for 7. What do you think of KBA? Look at the discount from NAV. Thanks for your thoughtful analysis. It is good to have company like you guys. -wrayce.
at a large discount because it is generating poor earnings. Two other closed end funds selling at large discounts but with better earnings than KBA are MMT and KMM. If you look closely at the company that manages KBA you may find that their management fee is based on NAV and not market value which is true of KMM which is managed by Scudder. The companies managing these closed end funds are primarily concerned with generating income for themselves through the fees they charge to the fund for management. One way shareholders can take advantage of large discounts to NAV is to force the BOD of the managing company to convert the closed end fund to an open end fund which brings the market value up to the NAV immediately.
1)Risk. Nothing is more important. As Will Rogers said, "I am more concerned with return of my investment than return on my investment." Yet nothing is more difficult to evaluate, because it includes too many factors and too many unknowns. The answer is to diversify one's portfolio, and not to risk funds one absolutely cannot afford to lose.
2)Capital Return. I disagree with your calculation of these effects. If part of the dividend is non-taxable, that INCREASES the value of the return (in my case, by 38% of the portion not taxed). I simplified my analysis by leaving out tax effects, because they differ for each individual AND because it really complicates comparisons of returns between alternative investments when you have different (and perhaps unknown at present) percentages of taxable returns.
I'm sorry I probably should have not used words "return of capital" in my last post. The part of the dividend we collect is NOT "return of capital" from an IRS standpoint, it is fully taxable. FAX is actually distributing part of it's NAV to meet the monthly dividend. It's part out of capital gains from it's bond portfolio.
But since this fund is at a discount I agree removing the $.10 from the previous math makes sense. BUt since removing the $.10 now puts the FMV at a premium ($.72/.095) Lets call FMV, NAV or $7.
I have debated with friends a little on this. They feel a yield a little higher then the junk market is FMV. But if you buy a series of junk funds you generally know what you going to get in the end, your principle, this is not the case with FAX. Of course you could end with MORE then you started...what a bonus!
Of course this doesn't mean the price can't go to $9 as the fundamentals get stronger as I feel they will.