Capital Income Management


Our goal at Capital Income Management (CIM) is to give client’s superior total return performance while protecting capital. What separates us from other investment advisors is a unique investment strategy that utilizes the inefficiencies that exist between diversified securities commonly known as Exchange Traded funds (ETFs) and Closed-End funds (CEFs). ETFs and CEFs are used by investors to achieve diversified equity exposure in the markets but not many investment managers analyze the relationship between these funds and develop portfolios based around their relative valuations. We have found that active portfolio management of these two mostly passive investment fund classes is all one needs to realize a high income and growth portfolio with manageable risk.

Diversified Securities

History has shown that investing in non-diversified securities such as individual stocks can be a minefield during down or bear market cycles and can make portfolio recovery extremely difficult even when markets recover. We only invest in Exchange Traded funds (ETFs) and Closed-End funds (CEFs) which minimizes any sudden drop in security holdings due to their diversity. ETFs and CEFs give investors the relative safety they need while offering the tradability of individual securities.

High Income Securities

Our goal is to offer clients total annual portfolio income yields of at least 7% so that even if the market goes through a rough patch, our portfolios are still yielding income. CEFs and ETFs give us the means to achieve such high income yields through various income strategies.

Growth Opportunities

ETF's can really only match their benchmark indices but because CEFs can often trade with more volatility than ETFs but yet still retain the safety of diversification, CEFs tend to offer better growth opportunities.

Discount Market Prices

CEFs often trade at premium and discount market prices to their NAV's and will often present opportunities for more sophisticated investors. Our strategy monitors over 100 CEF's for dislocations when premium and discount market prices result in under or overvaluation levels.

Hedging Strategies

The success of our strategy during difficult market periods was due in large part to hedging benchmark ETFs or premium priced CEFs securities that provided downside protection when our portfolios were fully invested or when markets looked vulnerable to a correction.

Understanding Exchange Traded Funds

➤ Exchange Traded funds (ETFs) have become the fastest growing segment of securities in the markets over the past decade both in their numbers and their assets. But what are ETFs and why have they become so popular? Much of the reason lies in the same reason why mutual funds became so popular. That is, diversification in one investment. The advantages of diversification have long been highlighted but they become even more pronounced during market downturns and enhanced market volatility. Like mutual funds, ETFs represent a portfolio of securities that adhere to a particular investment strategy, index or industry sector.

Unlike mutual funds, ETFs generally do not have actively managed portfolios, have significantly lower expense ratios than most actively managed mutual funds and can be traded during open market hours like a stock without the unmitigated downside risk that non-diversified securities retain.

➤ At Capital Income Management (CIM), we utilize ETFs in conjunction with CEFs because CEFs will often correlate with similar indexes that ETFs follow but at a discount or premium price. Analyzing these two securities together can give investors an advantage based on these relative valuation differences. CIM will use ETFs in long positions in our client portfolios as well as hedged positions with CEFs. Hedged positions are most important during difficult market periods to give portfolios downside protection.

➤ ETFs have quickly become one of the primary investments of choice for many institutional asset managers because of their size and liquidity. Many ETFs include some of the most heavily traded securities on the NYSE and other global stock exchanges and are sponsored by some of the largest financial institutions in the world.

NOTE: ETFs and CEFs are not guaranteed and investors can lose any and all of their investment.

Understanding Closed-End Funds

➤ Closed-End funds (CEFs) are one of the most misunderstood and underutilized security classes in the markets today. There are hundreds of equity and bond CEFs trading on the open market exchanges representing over $240 billion in assets, but yet most investors know nothing about them. Like ETFs, CEFs can trade like a stock during open market hours and have diversified portfolios of US based and International stocks and/or bonds. Unlike ETFs however, CEFs can trade at market prices which are significantly higher or lower than their net worth, commonly referred to as the Net Asset Value (NAV).

➤ The NAV is the fund’s total net worth and includes all the fund’s assets minus all its liabilities. For ETFs and mutual funds, investors buy or sell shares at the market price which is designed to trade at the NAV price. This is because mutual funds and ETFs are known as ‘open-end’ funds and can continuously offer new shares to willing buyers and sellers. Thus, funds can match the market price with the NAV. For ‘closed-end’ funds however, the number of shares is set when the security goes public and is ‘closed’ to issuing new shares. As a result, the market price for those finite number of shares is determined by investor demand and that demand can result in market prices substantially different from the fund’s NAV price. Funds which trade at market prices higher than the NAV are said to be at a ‘premium’ whereas funds which trade lower are said to be at a ‘discount.’

➤ This premium and discount feature is unique to CEFs and adds a valuation metric that other security classes do not have. For example, investors who purchase a closed-end fund at say, a -10% discount in essence purchase all of the fund’s holdings at a similar -10% discount. But just because a CEF may have holdings which perform one way does not mean that the fund’s market price has to follow suit. Whereas a CEF’s NAV is only based on the value and performance of its holdings, a CEF’s market price can be based more on investor emotions and market sentiment. And as is often the case, investor emotions can be subjective and sentiment can drive CEF market prices to under and overvaluation levels. For more sophisticated investors who perform due dilligence and analysis on CEFs, the discount and premium valuation metric can often present opportunities. At Capital Income Management, we continuously analyze CEFs for dislocations in their premiums and discounts, looking for opportunities.

➤ Another significant feature of CEFs that separates them from most other investments is that CEFs generally offer exceptionally high dividend yields. This is because CEFs often use enhanced income techniques that most mutual funds or ETFs do not. Enhanced income can come from several strategies that the fund’s use to generate income that the fund then passes on to investors in the form of high distributions and yields. Though yields are a function of current market prices, it is not unusual to see CEFs offering 6% to 9% or more annualized yields paid monthly or quarterly.

➤ Part of Capital Income Management’s analysis of CEFs includes the effectiveness of a fund’s income strategy in current market conditions. Certain strategies are more effective in up markets and some are more effective in flat or down markets and we manage our portfolios to take advantage of this income efficiency dependent on our market outlook. Because of their comparative high yields, CEFs tend to appeal to high net worth investors looking for higher income from their investments. But one should not think of CEFs as boutique investments only appropriate for wealthy investors. CEFs represent a broad mix of equity and bond market sectors and indices and CEF sponsors come from some of the largest and most progressive financial companies in the world.

NOTE: ETFs and CEFs are not guaranteed and investors can lose any and all of their investment.