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Money System Management: Real Example, Closed-End Fund

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MJ DeMarco

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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

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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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MJ DeMarco

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Now at 15.26 ... buying again becomes a consideration.
 
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ZeroTo100

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Now at 15.26 ... buying again becomes a consideration.

I like the concept. This is similar (not the fund but the trading concept) to the way GBTC can be traded. The asset hit $1000 and was trading at double what NAV of coins in the fund were = major short. When the asset trades under the NAV = long.

I like the vehicle but what scares me is the low volume on MZA. Is that typical for a closed end fund? When you sold, was the execution dragged on?

MZA Seems interesting
 
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MJ DeMarco

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I like the vehicle but what scares me is the low volume on MZA. Is that typical for a closed end fund?

Yes, for the smaller ones. The larger ones have tighter spreads. Watching the spread is how you can also get a better discount. Getting a fill wasn't that hard either. But yes, low volume makes exiting / entering more difficult to manage with more weekly peeks.
 

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I'm trying to understand this more. I followed your example so I have some questions.

My brain says "discounts are better because you're buying at less than it's true intrinsic price." Why not find the funds that are trading at a discount, with the expectation they will eventually be priced toward their NAV?

Regarding your example, were you analyzing the 3.82% premium as a discount to it's normal premium level? Therefore, you bought at the lower premium with the expectation that it would eventually trade for a higher premium?

From my limited research, it sounds like a state specific fund would only be tax free if you are a resident of that state. So, an Arizona fund wouldn't be completely tax free for everyone.
 
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MJ DeMarco

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it sounds like a state specific fund would only be tax free if you are a resident of that state

Yes, there are many state specific funds. I live in AZ, hence an AZ fund,

Regarding your example, were you analyzing the 3.82% premium as a discount to it's normal premium level?

Yes. It's now below it's average premium.

Therefore, you bought at the lower premium with the expectation that it would eventually trade for a higher premium?

Yes.

Why not find the funds that are trading at a discount, with the expectation they will eventually be priced toward their NAV?

Because usually those funds are discounted for a reason. In the muni space, this probably means those funds have a heavy exposure to California, Illinois, and other fiscally reckless states. A big discount usually has some meaning behind it, but yea, you can do this. I tend to look at the discount in relation to mean. Above? Below?
 
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MJ DeMarco

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InspireHD

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Just did this again to the tune of thousands, selling now and receiving compressed dividends for years, in the matter of months.

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

Fund is now at a 17% premium, trading above $17.

I bought in again in the 15s.

I sold and took the gains, again.

Wow. I was watching this when it cracked 14.98 and almost pulled the trigger on it (and was kicking myself when it went back to 15.10 and hung there for awhile), but wasn't sure if it was worth it for me not living in Arizona. I ultimately decided it probably wasn't the best for me and started looking around for other funds, but couldn't find any that were similar to MZA. Now, seeing it again, wow!

I'm not sure what the implications are for being out of state or if there are any advantages so I couldn't make a decision.
 
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CareCPA

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My guess is the income dividends would be taxable at your state rates. @CareCPA ?
Most likely. State taxes are a pain because there are 50 different sets of rules, so I can't say for sure that they would be taxable in your specific state, but as a general rule, yes.
 

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I like the concept. This is similar (not the fund but the trading concept) to the way GBTC can be traded. The asset hit $1000 and was trading at double what NAV of coins in the fund were = major short. When the asset trades under the NAV = long.

I like the vehicle but what scares me is the low volume on MZA. Is that typical for a closed end fund? When you sold, was the execution dragged on?

MZA Seems interesting


Lol when gbtc hit $1000 (sept 12th)... now $1970.
 
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Fund is now at a 17% premium, trading above $17.

Fund has moved back again, currently 15.99, although the premium is still a bit high.

Considering a rebuy again.
 

RobD88

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Fund has moved back again, currently 15.99, although the premium is still a bit high.

Considering a rebuy again.

Sounds like somebody just keep handing you their money...thanks for the look into your personal strategy and finances.
 

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MJ DeMarco

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This instrument is now under consideration again.

I sold above the price 17 when the premium was over 20.

Now it is near the average.

For me to buy, it will need to go below the average discount, probably around 2%.

They lowered the distribution rate on this which is why the fund sold off a bit.

I expect it to sell off some more. When it pays 4.5% tax-free (about is equal to about a 6.6% taxable yield) I will buy again.

And then repeat.


Screenshot-mza.png
 

ZeroTo100

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This instrument is now under consideration again.

I sold above the price 17 when the premium was over 20.

Now it is near the average.

For me to buy, it will need to go below the average discount, probably around 2%.

They lowered the distribution rate on this which is why the fund sold off a bit.

I expect it to sell off some more. When it pays 4.5% tax-free (about is equal to about a 6.6% taxable yield) I will buy again.

And then repeat.


View attachment 18920

Thanks for sharing this. Def a nice little instrument. What did you use to find the average premiums that you trade off of? It seems like it hasn't really been trading at a discount in a long time. Can you short these?

If the premium goes to 20% and the 1, 3, 5, year averages are around 10%...Does it make sense to go against the grain? This thing hasn't traded at a discount in a few years.

I do like it though and I like how cef lays everything out for you. Awesome!
 

MJ DeMarco

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What did you use to find the average premiums that you trade off of?

cefconnect.com

If the premium goes to 20% and the 1, 3, 5, year averages are around 10%...Does it make sense to go against the grain? This thing hasn't traded at a discount in a few years.

Yes, that's why I sold. Made thousands in a few short months (would have been YEARS in dividends) because the premium went way beyond average. Now, because they lowered the dividend (which could be perceived as a problem) the premium should drop, in my thinking, at average or below. Interest rates are rising so the bond prices fall as well.
 
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Elif

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Sounds exactly like what you wrote in the book. Further proof that you live by your teachings. Thanks for the documentation
 

Tourmaline

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Very nice thread, thank you @MJ DeMarco

Are you still watching bonds given the current market mayhem?

Sounds exactly like what you wrote in the book. Further proof that you live by your teachings. Thanks for the documentation

Sounds exactly like what you wrote in the book. Further proof that you live by your teachings. Thanks for the documentation

That's not strange at all...
 
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e_fastlane

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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 ...........

To research closed end funds, check out etfconnect.com
Maybe I am missing something, but doesn't this method heavily rely on the market either being steady or growing? In a steady or growing market, just like basically most investments, it's a clear win. It seems like the "method" here is winning a little more than in a normal market investment because you are also timing the premium/discount which doesn't exist in normal market stocks.

But the issue here is you are still subject to the same overwhelming broad market forces. The few % extra you were hoping to eek out by timing the buy gets more than washed away immediately by a huge NAV fall.

Of course it is not too terrible when the market rebounds as fast as it did in 2020... But historically that could have taken 10 years to happen. So mostly you are in the same position of "gambling" as you would be just investing in the stock market except here you are waiting in a fund that does on average worse than a stock market index.

I THINK maybe what you are getting at is two things.
1. You did bond funds, which typically have much less volatility than stock funds.
2. That the difference in the occasional discount vs the typical premium on these could occasionally be so large that it makes any market risk well worth it.

That would make sense. The only flag it would throw up in my head is "why is the discount so heavy right now". I think that means someone is trying to sell as they either need the money or believe the bond is going to fail/sink. Right?
EDIT: I couldnt find anything on MZA as it was closed, but another AZ one is NAZ. If you purchased at it's highest discount rate (cheapest) in 2017 of ~4% discount and you didn't sell when it blipped positive because history shows it has been at a 10% premium just right before, you would have been at a loss for a LONG time. It started losing heavily at the end of 2017 till 2020 when it finally blipped into positive territory. The discount going almost to 20% during this time. Which doesn't even to take into account that the NAV also decreased. So it seems like it has many of the same pitfalls of day trading strategies that do well, until the market reverses and they dont. Or no?
 
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