基本策略是空GUT多GAUBX, 赚几乎无风险的41%的价差。大家觉得如何？
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Summary
GUT’s 40%+ premium over NAV is unlikely to sustain.
GABUX, an open-end twin fund by Gabelli, is a perfect substitute for GUT.
Rights offering is a possible trigger for the price crash,among others.
Main Thesis
In this article I explain why Gabelli Utility Trust (GUT) is a terrible investment at the current price and how you can capture 41% by simply replacing GUT with Gabelli Utility Fund (GABUX). As of August 22, GUT's NAV is $4.96 and price $7.01, representing a premium of 41%. If Mr Market proposes that he is willing to pay $1.41 for a 1-dollar bill of yours, would you ever reject such a deal and insist on holding onto your 1-dollar bill? You probably think that this example is so ludicrous that it would never occur in the real world. Well, you have essentially rejected such a proposal from Mr. Market if you have GUT in your account at this moment.
GAUBX: a Perfect but 41% Cheaper Substitute for GUT
You may argue that this analogy is flawed because you are not holding a generic 1-dollar bill. Rather, you are investing in a fund run by the most brilliant Gabelli management in the most promising utility sector with a stable monthly distribution of 5 cents ( amounting to an annualized rate of 9% at the current price of $7.01). Even if you are correct about all these three aspects of the fund (brilliant management, bright future for the utility sector, and the stable monthly distribution), GUT is still a terrible investment. Why? This is because GUT has an identical twin named GABUX, The Gabelli Utilities Fund. GABUX is run by the same Mario Gabelli, focuses on the same utilities sector, and pays a monthly distribution of 7 cents (amounting to an annualized rate of 10% at the current price of $8.75). The only difference between the two is that GABUX does not have any leverage while GUT uses 30% leverage at the annual interest rate cost between 5% and 6%. The leverage is a two-edged sword: it amplifies both profits and losses. When the utility sector is returning more than 6% a year, as it has been for the first half of 2019, the leverage boosts GUT’s performance. However, the same leverage drags the performance if the utility sector cannot beat the 6%, as was the case for 2018. By switching from GUT to GABUX, you enjoy a higher distribution rate with the same exposure to utility sector managed by the same Mario Gabelli (except with no leverage). If you like, you can also buy GABUX on margin to create the same leverage as GUT at a cost lower than 5% from most brokerage firms at this moment. Therefore, investing in GUT is like buying a 1-dollar bill for $1.41.
Premium will Crash, Possibly with a Rights Offering
Bulls may also argue that Mr Market will become even more generous in the future given that he has been so generous so far; there will be a greater fool tomorrow who will be willing to pay more than $1.41 for your generic 1-dollar bill. It is not impossible, but common sense suggests otherwise. Historically, a fund’s prices ultimately gravitate towards its NAV, often in a violent and ugly manner. On 3/19/2018, GUT’s premium reached 43%. The next day, it dropped to 29%, representing a 10% loss for investors in a day. The gravity is of course applicable to all other high-premium CEFs. Most recently, PHK, one of PIMCO’s flagship CEF, saw its premium dropped from 48% on April 1 to 30% over a day. Finally, even if you are optimistic enough to put your money where your belief is, you have to acknowledge that you are now counting on the extraordinary generosity of Mr Market in the future, not on the brilliant Gabelli management or the bright future for the utility sector.
While the decline of the premium may occur at any time, any rights offering will be a critical catalyst. Historically, GUT always conducts rights offerings after the premium climbs above 40%, as summarized in the table below. Moreover, other funds in the Gabelli family favor rights offerings as a way to expand investment base (and thus increase management fee). Therefore, even though it is inherently difficult to forecast the next rights offering, history suggests that it could be around the corner.
Rights offering Date Price NAV Premium
5/23/2003 $9.30 $6.58 41%
8/12/2003 $9.22 $6.17 49%
8/19/2004 $9.63 $6.58 46%
10/7/2004 $9.84 $6.77 45%
10/15/2012 $7.96 $5.60 42%
3/19/2018 $6.87 $4.82 43%
Summary and Trading Strategies
To summarize, the 40%+ premium of GUT makes it a terrible investment, regardless of your convictions about Gabelli’s skills, or about the utilities sector’s future, or about the clientele preference for stable distribution. The high premium is unlikely to sustain, and the plausible rights offerings could destroy the premium. You earn 41% excess return by replacing GUT with GABUX.
The trading strategies follow naturally.
1. If you long GUT, you should either sell or switch to GAUBX immediately.
2. If you do not long GUT, you should not buy it until the premium falls dramatically
3. If you are comfortable with pair trade arbitrage, you could long GAUBX and short GUT as a pair trade, betting that the extraordinary premium will eventually decline.