Central Securities Corp (CET)

[Enterprising Investor]

These Ancient Funds Are Still Beating the Market (11/29/19)

By Leslie P. Norton

You’re never too old to outperform.

Even as the largest actively managed stock mutual funds in the U.S. lag behind the S&P 500, the oldest funds are doing nicely. We’re talking about some funds that survived the 1929 stock market crash, including Central Securities (ticker: CET), Adams Diversified Equity (ADX), and General American Investors (GAM). These closed-end funds might not be bargains, but they’re all up 30%-plus this year, handily beating the S&P 500. Meanwhile, Tri-Continental (TY), another oldie, has risen 24%, trailing the index by just a couple of points.

We last wrote about these funds last year, on the theory that the administration would change the way unrealized capital gains are calculated, potentially reducing taxes for these funds and narrowing their discounts to net asset value. That didn’t happen, but still, the funds have sprung higher and their discounts have slimmed, helped in part by high yields, cheap valuations, strong share-buyback programs, and good investing.

Through Wednesday, $1.9 billion Adams Diversified had returned 34% this year. Mark Stoeckle, its manager, credits the fund’s practice of matching sector weight to the S&P 500 and focusing on stock selection within those sectors. Many large-cap core managers “pretty much ignore basic materials because it’s only 3% of the index,” Stoeckle says. But three of the fund’s top performers are in that sector: Ball Corp. (BLL), Sherwin-Williams (SHW), and Air Products & Chemicals (APD). “It was good stock selection, as well as having the conviction of being in the sector,” says Stoeckle. “To have the kind of performance really goes a long way to outperforming your peers.”

Adams Diversified also had a bunch of standouts in consumer staples and technology, including Costco Wholesale (COST), Coca-Cola (KO), Accenture (ACN), Fidelity National Information Services (FIS), Mastercard (MA), and Visa (V). Unlike open-end mutual funds, closed-ends don’t have to worry about inflows and outflows, and “our entire focus is on compounding returns for our shareholders,” says Stoeckle.

He predicts that stocks will keep rising because the Trump administration “will act the same as every other [one seeking re-election]: They will do whatever they can to keep the economy good before the presidential election.”

Adams became a closed-end fund in October 1929, although it was actually founded in 1854 as Adams Express, part of an older company created by Alvin Adams to carry mail in Massachusetts that eventually began shipping to the South and then to Missouri. In 1910, it was the second-largest owner of Pennsylvania Railroad stock. The closed-end came to life to invest the money gleaned when U.S. railroads bought railroad shares owned by Alvin Adams.

One younger fund, also mentioned in our previous story,was a laggard: Boulder Growth & Income (BIF) has a third of its assets in Berkshire Hathaway, which has trailed the market for years. Boulder also owns big slugs of stocks held by Berkshire, including JPMorgan Chase (JPM, 9.4% of the fund) and Wells Fargo (WFC, 5.4%).

“Every time you see stories that Warren Buffett has lost his touch, that historically has been the wrong guess,” says Jim Branscome, a longtime closed-end fan and retired director of investment analysis at S&P. If you think Berkshire will make a comeback, an easy way to bet on it is to own Boulder, which yields 3.6%.

Much of the fund, Branscome notes, is owned by an early investor in Berkshire, Stewart Horejsi, who reportedly began buying Berkshire after reading about it in John Train’s book The Money Masters.

Branscome is less bullish on the other funds in our 2018 article, given their narrowed discounts. For example, Central Securities’ discount was 17.3% back then, but now is 13.8%. General American’s has slid from 16.5% to 13%, while Adams’ went from 14% to 11%.

“The alpha pond is being overfished,” says Branscome. (Alpha is return above the overall market’s.) Today, Branscome is finding bargains in quality municipal closed-ends. True, they’re leveraged, which heightens risk, but they also boast nice yields.

His favorites include Eaton Vance Muni Bond (EIM), with a discount of 7.8% and taxable-equivalent yield of 6.8%; Eaton Vance Municipal Income Trust (EVN), with a discount of 6.5% and a taxable-equivalent yield of 7.5%; Nuveen Quality Municipal Income (NAD, 9.3% and 7.5%), and Nuveen AMT-Free Quality Municipal Income (NEA, 9.5% and 7.7%). He also likes VanEck Vectors CEF Municipal Income (XMPT), which buys shares of other closed-end muni funds with big discounts.

“I don’t know any other prognosticators who think the market will earn [7%],” Branscome says. “If you want to be in bonds for ballast, the Fed will be on hold, and we’ll be in a noninflationary environment. These are good funds.”

https://www.barrons.com/articles/making-sense-of-retail-stocks-ahead-of-black-friday-51574770501