Equity CEFs: Count Yourself Lucky If You Own GAB Or GGT
I wonder how many shareholders of the Gabelli Equity Trust (GAB) and the Gabelli Multimedia Trust (GGT) realize how lucky they were today.
Because based on both GAB's and GGT's 10% NAV distribution policies, both funds should have had dramatically reduced distributions when declared on Friday, Nov. 13.
In fact, GAB's should have gone from $0.15/share to $0.03/share while GGT should not have had a distribution at all since it had already used up its 10% NAV distribution!
Do shareholders of GAB or GGT realize what would have happened to their shares if Gabelli made good on its 10% NAV distribution policy?
Instead, the Board of Directors decided to keep both fund's distributions the same. Maybe a sigh of relief for today, but there will be NAV repercussions in the future, IMO.
I doubt there were many shareholders of either the Gabelli Equity Trust (GAB), $5.97 current market price, $5.56 NAV, 7.4% premium, 10.1% current market yield or the Gabelli Multimedia Trust (GGT), $7.03 current market price, $7.30 NAV, -3.7% discount, 12.5% current market yield, who realized how lucky they were today and how they dodged a bullet.
That's because the Board of Directors for the two funds decided to continue the current distribution amounts even though both fund's 10% distribution policies called for dramatic reductions for their fourth quarter distributions.
GAB had a $0.15/share distribution for each of the first three quarters this year and the fourth quarter is suppose to either give a bonus, if the fund's NAV outperforms and there's more NAV to distribute, or have a mark down if the fund's NAV underperforms.
The formula for the fourth quarter make-up (or make-down) distribution is based on the fund's NAV closing price of the prior four quarters, so that means $5.88 for Dec. 31, 2019, $3.87 for March 31, 2020, $4.60 for June 30, 2020, and $4.99 for Sept. 30.
Add them up, divide by 4 and take 10% of that and the total comes to $0.4835. But since GAB has already paid $0.45 in the prior three quarters, this 4th quarter should have been $0.0335/share.
You can read all about this in the Press Release. The key sentence here is:
In declaring a distribution of $0.15 per share, the Board of Directors has chosen to distribute $0.12 greater than that called for by the distribution policy
And here is GGT's Press Release in which the Board of Directors decided to keep GGT's distribution at $0.22/share even though the fund had already paid out its 10% distribution in the first three quarters based on its distribution formula. This is from the press release:
In declaring a distribution of $0.22 per share, the Board of Directors has chosen to distribute $0.24 greater than that called for by the distribution policy
We're not talking a few cents here. We're talking about many millions in distributions that the funds could have kept for their NAVs and used to derive income for their next distributions in 2021. It really could be a pay me now or pay me later situation.
And here's the problem for GAB and GGT going forward. Sacrificing NAV to keep shareholders happy and the market prices up in exchange for the fund's NAVs having a more difficult time next year covering their current distributions is not a good long-term plan and really is not in the best interest of shareholders.
Yes, both funds have seen their NAVs improve recently and based on both fund's current NAV's of $5.56 for GAB and $7.30 for GGT, the distributions would have been more like $0.14/share for GAB and about $0.18/share for GGT.
That would have made more sense if you wanted to deviate from the 10% policy but I guess Gabelli didn't want to see their fund's stigmatized with a distribution cut at all.
Conclusion
Why even have a 10% NAV distribution policy if you're not going to follow it?
Maybe it's good for shareholders today. But what will this mean for the fund's NAVs tomorrow if Gabelli keeps doing this and the end result is just more and more NAV deterioration and destructive return of capital in the distributions?
You can say what you want about both GAB's and GGT's distributions being all income as shown in CEF Connect.com, but if the current NAV is lower than when it started the year, that's destructive return of capital and no amount of "income" accounting is going to hide that.
Personally, I would take the gift in GAB at a $6.05 real time market price, up 1.3% and GGT at a $7.16 real time market price, up 1.8%, and run like hell.
Thank you for reading my article. My goal is to give you observations and actionable ideas in Closed-End funds while educating you on how these unique and opportunistic funds work.
CEFs can be one of the most exhilarating and yet most frustrating security classes to invest in, and it's important that you have someone who can be a level head during up and down periods of the market. I hope to be that voice of calm when necessary. ~ Douglas Albo
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
