Preface: Every six months it’s time to review the previous 12 months of Joe Eqcome’s closed end fund (CEF) research to determine what’s working, what’s not, and why?

Research Reviewed: Since October of 2008, there have been 16 articles written by Joe that had associated investment recommendations. (Most, if not all, have been posted on Seeking Alpha.) Thirteen articles focused on equity-oriented CEFs and three focused on debt-oriented CEFs.

Closed-end funds (CEFs) that invest in large cap stocks have materially underperformed the Russell 1000 (Large Cap) Index over the past stock market cycle as measured by the ETF iShares Russell 1000 Index Fund (IWB). Additionally, the sector portfolio holdings of the three CEFs that invest in large cap stocks don’t appear materially different than that of the large cap ETF (IWB). (See table below).

Case Closed: This is a logical conclusion given the advantages of a large cap ETF like IWB over a CEF. Such advantages include: size and portfolio diversification; low expense ratio (0.15% versus average 1.5% for CEFs); no managed distribution policy, i.e., IWB doesn’t typically make return of capital distributions; market liquidity. For investors looking to participate long-term in large cap stocks, case closed!

Summary: Lower share price closed-end funds (CEF) have a significant price appreciation advantage relative to higher share price CEFs in a stock market recovery. Current beneficiaries may include: BLU, CIK, ASG, ZF, USA and ZTR (see table).

The chart below illustrates the top and bottom share price quartiles of a sample of 121 CEFs based on share price appreciation 3, 6 and 9 months from the October 2002 stock market trough. The average price appreciation difference between the lowest and highest share price CEF quartiles for the 3 periods was 9.9%. (The comparable difference between small cap stocks, as measured by the ETF IWM and large cap stocks, as measured by SPY, was 6.7 %.)