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Saba CEFS finds yield in deep discounts

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Saba Capital Management, the New York based USD1.4 billion hedge fund, has recently celebrated the one-year anniversary of its first foray into ETFs, with CEFS, its ETF based on closed-end funds.

Leah Jordan, Vice President at Saba Capital, explains that the product is an extension of what the firm seeks to achieve in its hedge fund model where it focuses on global closed-end funds, principally those in the US and the UK, that are trading at significant discounts to NAV, in the search for yield.

“We actively trade closed-end funds as one of our core strategies,” Jordan explains. “We look at diversified closed-end funds, and about 75 percent of the portfolio is fixed income underlying because this is a yield-oriented product and as a credit hedge fund that’s where we feel we have a lot of expertise.”

Saba is an activist within the closed-end fund space and pass that active management onto the ETF as an extension of what they do in the hedge fund model. The ETF has USD22.9 million under management and has achieved a cumulative return of 11.2 per cent since inception in March 2017.

Jordan says: “With so many low cost ETFs available today, it’s hard to believe that people will pay 2-3 percent to own a basket of equities in some equity closed-end funds, so in the past we have purchased equity funds as an activist to narrow the discount and create an attractive exit opportunity for all shareholders.”

She reports more than a dozen cases where Saba has gone to a closed-end fund management company where it is trading at a double digit discount and suggested a tender or liquidation.
“Over time, the universe of closed-end funds has oscillated between a premium and a discount, and now there are many funds that have been at significant discounts for several years or longer, so activism has become an increasingly prominent part of the space.”

Jordan says that the opportunity set varies over time and is currently at one of the most attractive entry points in history. “If we look at the funds that trade at over a 10 per cent discount, the market value of that universe was about USD60 billion in the middle of last year and today it’s closer to USD110 billion. Part of it could be market outlook with investors worried about the impact of rising interest rates on fixed income, but it’s really a retail dominated market that can trade independently from the institutional high yield space.”

The ETF is sold to a variety of investors, but principally finds its home with investors who are looking for income-generating strategies as it pays a 8.37 per cent annualised distribution yield on a monthly basis.
 
“The key to the CEFS approach is understanding what drives the discounts of different funds and being able to take advantage of fluctuations in real time,” says Jordan. “That’s where an active manager is so important, and that’s exactly what we’ve been able to do during the first year-plus of the fund’s life.”
 

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