"Market Monitor"-Thomas Herzfeld, President of Thomas J. Herzfeld Advisors
Friday, December 22, 2006PAUL KANGAS: My guest market monitor this week is Thomas Herzfeld, the president of Thomas J. Herzfeld Advisors, a firm specializing in closed end funds and welcome back to NIGHTLY BUSINESS REPORT, Tom.
THOMAS J. HERZFELD, PRESIDENT, THOMAS HERZFELD ADVISORS: Thank you, Paul. Happy holidays.
KANGAS: And same to you. For our viewers who may not know, tell us the difference between closed end funds and exchange traded funds.
HERZFELD: Starting off with a tough question.
KANGAS: There you go.
HERZFELD: Exchange traded funds have fixed portfolios that generally trade around net asset value. Closed end funds have continually managed portfolios and can trade at premiums or discounts to the net asset value.
KANGAS: You are widely considered one of the top experts if not the expert on closed end funds worldwide. Tell us why you specialize in them and what strategies you use to make money by investing in them.
HERZFELD: Closed end funds usually trade at discounts and the idea of buying assets at a discount I always found compelling.
KANGAS: And you can short these as well as go long on the closed ends, right?
HERZFELD: Yes. If you can borrow the stock, it isn't always easy.
KANGAS: So but you trade them frequently in and out, up and down.
HERZFELD: Our strategy going back almost 40 years, is continuous trading. Buy at wide discounts and sell at narrow discounts, sell short at premiums.
KANGAS: What's the outlook for the kind of closed end funds you would like in this coming year?
HERZFELD: We're trying to stay away from where the traffic is congested. We're buying smaller funds now with low yields, and --
KANGAS: Small cap stocks?
HERZFELD: No, smaller capitalized closed end funds.
KANGAS: OK
HERZFELD: The large capitalized closed end funds are a little pricey at the moment.
KANGAS: So you're going for the bargains as usual. Those discounts attract you, don't they?
HERZFELD: Also the muni funds are under tax selling pressure right now and they look cheap.
KANGAS: OK, on your last visit with us just about a year ago, you recommended five closed end funds. Let's see how they've done since then. Nuveen Preferred fund up 19.3 percent. That's a great call and LMP - I guess that's Legg Mason, up 11.7 percent. Those were two of the five. Let's have a look at some more of those funds. Pioneer did well, up 15.4 percent. Eaton Vance, short duration income fund, 9.2 percent gain. And there was one other that you recommended, every one in the plus column. Western Asset high income, up 16 percent, great calls and all profitable. Any further comments? Are you still with these?
HERZFELD: Bear in mind, all of these paid out about 6 or 7 percent in analyzed yield, in addition to the gains.
KANGAS: So that would be what, 8 or 9 percent more than what we showed you in the way of gains?
HERZFELD: Exactly.
KANGAS: That's excellent. But you're in and out, up and down during the year, even in those funds that we showed, correct?
HERZFELD: All the time, yes.
KANGAS: How about some new recommendations?
HERZFELD: Well, we're sticking, as you said with funds a bit out of favor. Western Asset emerging market funds, symbol ESD, trading at a 15 percent discount to net asset value with a 6.8 percent yield.
KANGAS: OK, that's attractive. All right, let's have a second choice.
HERZFELD: Central Europe and Russia fund at a 7 percent discount to net asset value, much cheaper than the Templeton Russia fund which we also like, but that's trading at a premium to net asset value.
KANGAS: OK, go after those discounted funds. All right. Let's try number three.
HERZFELD: Alliance California Income Fund. They cut their dividend about a month ago. It went from a 15 percent premium to a 4 percent discount to net asset value where it's trading now. It's about a 5 percent tax-free yield.
KANGAS: OK, fair enough. We have time for another choice.
HERZFELD: Castle Convertible funds, relatively, one of the smaller convertible bond funds, one of the early ones, trading at a 13 discount. I think the management will do something about the discount and I just want to mention one thing. It will be ex-dividend on Tuesday, $1.78 so you have to adjust the price lower by $1.78.
KANGAS: How big does the discount have to be percentage wise to really attract you?
HERZFELD: Under normal conditions, 5 percentage points wider than average. Some of these mid (ph) that I recommended tonight meet that (INAUDIBLE).
KANGAS: Tom, do you personally own any of the funds discussed here?
HERZFELD: I own all of them. My clients own all of them and we own Western Asset in our fund as well.
KANGAS: OK, so you're well diversified in close end funds which are diversified themselves.
HERZFELD: Yes.
KANGAS: Very good. I want to thank you very much for being with us once again, Tom.
HERZFELD: Thank you very much Paul.
KANGAS: My guest, Thomas J. Herzfeld.
