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How To Play The January Effect This Year With CEFs




As this annus horribilis draws to a close, we are left ducking shoe after shoe that drops or is flung at us. But this year's abysmal performance has a silver lining. It offers a sumptuous buffet for those who finish off the year with a play on the January effect.

For the novice, this is the trading pattern at the end of the year which the efficient market hypothesis says shouldn't even exist. Usually it is small or micro capitalization stocks which have declined and are then pushed down further by tax-loss selling. The opportunity is to play these for a short term bounce into the new year.

Personally, I focus on closed end funds (CEFs) and within them usually fixed income or municipal bond CEFs. I go into great detail explaining the background, rationale and several actual trades: My Year End Strategy

I won't repeat myself because you can get all the info you need from the above link. This is a very high return, high probability trade but it depends on how poorly the target securities have fared.

This year, I feel like a kid in a candy store. While this abundance is great, it does make it a bit more challenging to filter all the potential plays and find the best ones.

You can sift through the CEFs through a publication like Barron's which not only prints their prices but also their year to date performance and premium/discount to NAV. Online you can use the CEF Association's database or check out ETF Connect and use their Fund Sorter or do an advanced search to only look at certain sub-sections of securities like municipal bond fund CEFs.

Here's an example of the sort of securities to choose from:

january effect closed end fund year end strategy 2008 etf connect

Here's the worst performing closed end fund, down a tantalizing 92% - Scudder Real Estate Fund II (SRO):

scudder SRO year end CEF January effect

Here's one that is in more than a few Morgan Stanley client accounts (placed at $20 no doubt) - Morgan Stanley Emerging Market Fund (FFD):

FFD Morgan Stanley Emerging Mkt Fund January effect

and another which also came out this year and is sure to have a lot of unhappy longs:

RCR RMR Dividend capture fund january effect

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5 Responses to “How To Play The January Effect This Year With CEFs”  

  1. 1 Lord Huggington

    Hello,

    Just stumbled onto your blog for the first time - nice site!

    Looking at your year-end strategy and started flipping through the charts of those various CEFs and if I'm not mistaken, the gap down on TRF with high volume looks like it is about to fit your pattern. Is this more or less correct?

    Also, is there a chance that in many of these cases that the funds will simply be folded given their truly horrific performances in many cases?

  2. 2 Babak

    re TRF, it depends on how steep the discount is to NAV, otherwise, I'd be reluctant to play it.

    it is possible that a CEF will be folded but it rarely happens, you have to remember that the sponsor has a vested interest to keep it going as long as possible to collect the pound of flesh (aka MER)

  3. 3 Charlie

    My favorite closed end fund now is DCS - Dreman-Claymore Dividend & Income, with
    a 34% discount as of today. For most of Dreman's open funds you need to pay a load.
    I like that it gives me a mixture of stocks and bonds, global and domestic.

  4. 4 Ben

    The only problem I see is that I question if there really will be any tax selling pressure, since so few people will need tax losses to offset any gains this year (really ... do you think there are significant amounts of tax gains that need to be offset???).

    On the other hand ... I have heard that there will be a lot of cash (from hedge fund redemptions) available in early 2009 that may fuel a market run-up.

  5. 5 Babak

    Ben, did you know you can carry it fwd or back? ;)

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