CLM and CRF rights offers: a success for managers and oversubscribers alike
Author’s Note: This article was published as part of the CEF’s weekly digest released to members on June 29, 2022. Please check the latest data before investing.
Rights offerings for Cornerstone Strategic Value Fund, Inc. (NYSE: CLM) and Cornerstone Total Return Fund, Inc.. (New York Stock Exchange: CRF) have expired. We have analyzed in detail the situation of the rights offering when it was first announced in a previous CEF Weekly Recap.
Basic Rights Offerings
In short, it was a 1 for 3 offer where the subscription price was the bigger 112% of the NAV or 65% of the market price at maturity. Cornerstone rights offerings are relatively unusual as far as CEF offerings go, for two reasons. First, the subscription offer form guarantees that the offer will be accretive to the funds, which is beneficial for long-term shareholders. Second, the funds have a generous over-allotment policy of up to 100% of principal subscription, which means that each fund can increase the number of its shares up to 66.7% at once if the primary subscription and the entire over-allotment are fully subscribed.
Due to frequent Cornerstone fund rights offerings (which have occurred most years), the funds have managed to multiply their assets under management even as the net asset value/share declines due to the payment of unsustainable 21% returns .
Yet, despite the destructive nature of return of capital distributions (destructive ROC), the funds’ total net asset value return (including distributions) has matched or even exceeded the S&P 500 (SPY). This is mainly due to accretive rights offerings which give a boost to the net asset/share value of the funds. In actual portfolio terms, they match the S&P 500 quite closely.
Sell and buy again beats buy and hold
Of course, investors buy and sell at market price, not net asset value. For Cornerstone funds, an individual investor’s performance could be even better if they synchronize their buying and selling with the regular rights offerings the funds make. Here we recommended Income Lab members to sell CLM/CRF ahead of their impending rights offering and buy back later in a previous weekly CEF roundup:
For those who currently hold CLM/CRF shares, my suggestion is to apply the “sell and buy back” strategy in which you sell once in a while and then buy back at a hopefully lower price once the offer is made. rights completed.
This recommendation has once again proven to be correct, with CLM and CRF’s price returns significantly underperforming their NAV returns since the initial announcement of the rights offerings. One could now easily buy back the CLM/CRF shares previously sold and thus gain more than +60% in “free shares” of the fund. This would have been a much better outcome than holding the entire position* for the offer period and subscribing to slightly discounted shares. Free shares are better than discounted shares, right? (* We will discuss the token amount and oversubscription holdback strategy below).
The underperformance is due to collapsing fund valuations, which typically occurs during rights offering periods. The drop in premiums for CLM and CRF was particularly severe this time around, as it coincided with the onset of a bear market in broader equity markets.
Also, do you see this premium peak rising to the +60% level in mid-May? If you recall, this was due to Cornerstone announcing that rights offerings would be suspended. A week later, the managers announced that offers would resume at a later date, and the premium dutifully backed off. We also discussed this in a previous weekly CEF roundup.
Rights issues were highly accretive
CLM closed at a stock price of $9.70 and a net asset value of $7.38 on the expiration date of June 10, 2022, which equates to a premium of +31.44%. The floor of 112% of the net asset value came into effect, resulting in a final subscription price of $8.27. Similarly, CRF closed at a price of $9.10 and a net asset value of $7.10 on the expiration date, for a premium of +28.17%. The final subscription price based on the floor of 112% of the net asset value was $7.95.
CLM received $783 million in subscriptions and CRF received $410 million in subscription requests. These are very impressive figures, given that CLM and CRF had assets under management of $938 and $473 million before the offering, and demonstrate the strong investor enthusiasm for these yield vehicles.
This means that both funds’ rights offerings were oversubscribed, even up to 100% over-allotment shares! As a result, both funds should be able to increase their AUM by 66.7%, with CLM becoming a $1.5 billion AUM fund while the CRF rises to a more modest $784 million.
My calculation at the bottom of the envelope suggests that due to the high subscription rate, CLM and CRF will benefit significantly from the increase in NAV/shares, up to +4.8% for both funds. For the long-term shareholder, this is an astonishing result which he should be delighted with. Indeed, we can see the positive effect of the increase in NAV when the new shares were issued “on or about Thursday, June 16, 2022”, with CLM and CRF falling less than SPY over the past month.
Winning oversubscription strategy
In the original analysis of Cornerstone fund offerings for this year, I proposed a new strategy in which an investor would only hold a token amount of CLM and CRF before the ex-rights date, but then oversubscribe by as much new actions as he wished. at. This would allow an investor to largely avoid the negative price action rights offering associated with the rights offering period, while still being able to participate in the offering to receive new shares. discounts that could potentially be returned to the market for a profit when the premium recovers. I have personally tried this strategy in my portfolio, although I have not made it a portfolio position due to the variability in oversubscription results.
Due to the rapidly declining premiums of both funds as well as negative sentiment in the broader equity markets around the offer’s expiration date, the trade even turned negative for a while. This was a risk we had identified in another weekly CEF roundup before the offer expired:
The profitability of the oversubscription strategy will largely depend on how quickly the CLM/CRF premium recovers, if at all. If CLM/CRF collapses after the end of the offer, it would be necessary either to sell the new shares at a loss, or to be satisfied with holding a long position of these funds, affected by a premium of +12% (which is a bit like a put option, in fact!).
For investors who wish to continue to hold CLM (+18.90% premium) and CRF (+20.72% premium), the current premium/discount valuation of the funds makes them fair in my view. In the event that CLM and CRF return to their previously high premium levels, additional profits could potentially be made. Keep in mind, however, that since CLM and CRF have similar exposure to the S&P 500, the profit/loss calculation for these funds would also be affected by broader market movements as well as premium/discount variations.
Our goal at the CEF/ETF Income Laboratory is to provide consistent income with enhanced total returns. We achieve this by:
- (1) Identify the most profitable CEF and ETF opportunities.
- (2) Avoid mismanaged or overvalued funds that can sink your portfolio.
- (3) Using our unique CEF rotation strategy to “dual compound“ your income.
It is the combination of these factors that has enabled our Revenue generator portfolio to massively outperform our fund benchmark ETF of CEF (YYY) while also delivering growing income (around 10% CAGR).
Remember that building a high-yielding CEF portfolio is very easy, but doing it profitably is another matter!