To eliminate the likelihood of discounts, and to satisfy the needs of many investors, the CLM folks have come up with a rather ingenious formula. They pay out large, predicable, monthly distributions to their shareholders. The convenient, large, frequent cash flow provides flexibility to shareholders. They can take the cash for other purposes, such as living expenses or other investments, or they can have it automatically reinvested in additional shares at a 5% discount to market price. The cash flow is predicable. It is fixed for twelve months at a time and the yearly adjustment is known precisely three months in advance. Furthermore, because the yearly adjustment is based on Net Asset Value (NAV) which is strongly influenced by market performance, the approximate future distribution level can be estimated on a continuous basis based on the known current NAV of CLM and future market expectations.
These are very desirable attributes to many investors, which has resulted, and may continue to result, in CLM trading a premiums. The varying premium level reflects the current attractiveness of this distribution policy coupled with future expectations. This policy makes it extremely unlikely that CLM will ever trade at much of a discount again.
CLM's NAV can be easily and accurtely estimated between weekly updates by assuming it matches the change in the S&P500 index, which is continuously available. Using this technique, the August 8th NAV for CLM is approximately $4.96 . When computing the performance of CLM's portfolio, one must look at NAV changes as well as the distributions paid out.
On July 31, 2006 (approximately one year ago) the NAV was $5.18 . CLM has paid out $1.086 in distributions since then, so the current NAV of $4.96 means that the return on NAV has been +16.7% in the last year. While this doesn't match CLM's 21% distribution rate, it is not a shabby return at all. Furthermore, the market is off its recent highs. One hopes CLM management can improve performance in the future, and come closer to meeting the generous distribution rate.
The recent press release should help people better be able to judge future cash flows by looking at current NAV levels. The example should be very helpful for investors and allow them to better understand the distribution policy.
Correct me if I am wrong, but no one seems to be arguing that CLM "should" abruptly discontinue their high distribution policy. Doesn't everybody agree (even the shorts) that to stop the policy now would be a betrayal of the current shareholders?
I do think that if more CEF's were to pay out large cash flows which necessarily include some return of capital, the natural premium level at which these funds trade would be lower. It is still a function of supply and demand.
No doubt you call the Bear Sterns administrator at the number you provided, you will get the regulatory boiler plate answer you posted. Why don't you call your friend Ralph Bradshaw in Asheville NC, who made the commitment, who manages the portfolio, and who runs Cornerstone? Ask him if he is contemplating changing the promised percentage to anything other than 21%.
Go ahead, I dare you!
CLM is required by regulatory authorities to retain the right to change it in the future. Never-the-less, and in spite of suggestions to the contrary, they will keep it at 21% of October 30th NAV for the following year...
Wow, I didn't know there was a board for this ETF. I guess there still isn't for its brother fund CRF.
I agree, it trades at a ridiculous premium because of its steady distribution rate. In October the rate will be reset based on the Oct 30th NAV. As the NAV has dropped 8.5% since a year ago expect the distribution to drop and expect a VERY negative response in the market.
I've been short CLM and CRF for the past year (slightly in the red) and expect big things come October. The press releases have become increasingly clear that the distribution WILL be a function of NAV and could drop (will drop if the NAV doesn't improve). They cover their ARSES as there will be a lot of pissed off people when people wake up and realize that the 11%+ yields aren't sustainable, that its just a redistribution of NAV and that they are fools for paying 60% to 100% premiums on this turd.
Somebody said it right, they mimic the SP500. Why pay 1.22% management fee when you can go buy an ETF for .1%?
People are going to get burned bad, I'm just here to warn you guys.
I agree with everything you say. However, I have never been able to contact the fund advisors to ask what the NAV is at any given point in time, or ask any other questions that come to mind. While I own several K shares it is the only fund I know that makes it so difficult to obtain reliable information directly from the fund. Any help you can give me on this issue (i.e., how to contact the fund advisors directly)will be appreciated.
CLM only calculates Net Asset Value (NAV) weekly. It is available each week-end in Barrons and is updated weekly on the ETFConnect web site (www.ETFConnect.com). I have found that it is very accurate to estimate CLM's NAV at all times the market is open by assuming its portfolio performance matches the S&P 500 index (^GSPC on Yahoo). You are seldom more than a penny or two off at the end of each week. Remember to subtract the distribution from the NAV on the ex-dates.