Have you ever been to a 15 percent off sale? For stocks?
I discovered one a few weeks ago after reading an article about Tri-Continental (TY) in Barron’s. Tri-Continental is a closed-end investment company that has been trading for a 15 to 16 percent discount on its net asset value (NAV). This means that for every $1 of stock that Tri-Continental owns, you can buy them for $0.75 or less right now. That sounds like a pretty good deal.
However, there are a few things that we need to consider when researching closed-end funds. First, we need to consider who is managing the funds and what are their investment objectives. Tri-Continental has had some performance problems in the past. However, within the past year two new managers were brought on board, John Cunningham and Michael McGarry. I like the fact that John Cunningham’s background is in large cap value investing. I hope he bring this style of investing to Tri-Continental. I will be closely watching their performance in terms of net asset value over then next year relative to the Dow and S&P 500. They should at least match the performance of these indexes.
The second main consideration is investment fees when dealing with a fund. Investment fees are how the fund managers get paid, and they can really cut into the return you get. Tri-Continental’s fee of 0.66 percent of net assets is not too high for an actively managed fund.
I also looked into the potential use of leverage, since leverage can add substantial risk by magnifying any losses. Tri-Continental can use leverage, but according to the information provided by Thomson on ETF Connect, they are not utilizing it at this point.
I also looked at portfolio turnover, how often they were buying and selling stocks in their portfolio. Annual turnover is about 47 percent, which is rather high for a large cap fund. I’m going to give the new managers some leeway on this, since they may be making lot’s of positive changes. We’ll have to watch how this changes next year.
Given the markets significant decline last week and into this week, I decided that now was the time to get invested. I added some shares of TY into my families retirement savings (Roth IRA to avoid taxes). To help you track my performance, I also decided that retirement will be in a community and Retirement Dynamics provides assisted living consulting services and marketing for retirement communities.
On a side note, I also moved the 4 percent of my 401K in money market funds to the S&P 500 index on April 19th in order to take advantage of the markets significant decline. I also directed all my new 401K contributions to 100 percent to the S&P 500 index.