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Money System Management: Real Example, Closed-End Fund

MJ DeMarco

I followed the science; all I found was money.
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Money system management was discussed briefly in UNSCRIPTED toward the back end of the book. I thought I'd relay a real-life example into how I recently managed a money-system investment. While my objective in these investments is a monthly yield, sometimes the instruments move in a fashion where you can make much more.

I this case, I made 37% annualized or a 15.3% return in a matter of months.

The instrument was MZA, a closed-end municipal bond fund that pays monthly dividends FREE of taxation at BOTH the federal and state level.

MZA BlackRock MuniYield Arizona, closed-end fund summary - CEF Connect - Brought to you by Nuveen Closed-End Funds

Now a word on Closed-End funds, or CEFs. These funds have a limited allocation of shares (closed) and their prices generally trade at a PREMIUM or a DISCOUNT to NAV, or Net Asset Value. While the NAV is the real price based on the assets, these shares trade above or below the NAV, hence making up the premium or discount.

For instance, if the fund is trading at $11.00 and the NAV is $10.00, the premium on the fund is 10%. If the fund trades at $9 and the NAV is $10, the discount is 10%.

Closed-end funds fluctuate in their premium / discounts and this simple fact can help you squeeze out gains faster, or more intelligently.

So on to my example:

On February 28th, I sought to purchase MZA. The current price was $14.94 which was a 3.82% premium on NAV. Looking over its history, this premium was about an average as the fund typically trades at a premium.

I wanted to buy 10,000 shares, or $149,400.

Unfortunately the spreads (bid/asks) in CEF's also pose difficulty because they are unusually wide. These spreads are likened to a big commission on your buys.

So over the course of the day, I only was able to pick up 2,102 shares. Oh well.

Anyhow, I held this instrument for 5 months.

I bought 2102 @ $14.94
I sold 2102 @ 16.88 on July 27th
Total gain: $4,042.95.

Additionally, I picked up $780 in monthly dividends.

Total net gain: $4,822.95 or a 37% return annualized on what was a small $31K investment.

How was this possible?

Well first the NAV went up. But NOT by that much.

But more importantly, the PREMIUM spiked from 3.82% to 15.3%. When I noticed this quick inflation, I knew it was an opportunity to sell and lock in gains that would have taken YEARS to accumulate.

The next day the price spiked again to over 17 but then drifted back well below my sell point.

When the premium deflates and moves toward the normal range, I WILL BUY AGAIN. Today the bid price is 16.33 and has moved lower.

The point of this is to demonstrate how to manage your "paycheck pot" assets. Sure we want a monthly paycheck in the form of yield, but sometimes things don't work out that way. Pay attention to what your instruments are doing. It only takes a few seconds per day.

Had I not paid attention, I would have missed out on a 37% gain opportunity.

Closed-end funds can be expensive (this one was right at my 1% management fee mark) but if you learn to pay attention to how they work, you can help alleviate some of that expense by buying/selling smartly.

To research closed end funds, check out etfconnect.com
 
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MJ DeMarco

I followed the science; all I found was money.
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Read Rat-Race Escape!
Read Fastlane!
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Jul 23, 2007
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Utah
This instrument has since retreated, now at 15.79, plus the premium has lost a bit. Now I consider buying again.

I sold at 16.88.
 

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