It’s CEF Specials Time

It’s that time of the year again when CEFs investors gear up for special distributions as a result of realized capital gains or any additional investment income in excess of paid distributions. We take a quick look at the dynamics of these distributions and how investors can take advantage of them to generate additional returns in their portfolios. The main takeaway is that special distributions exhibit distribution capture dynamics on steroids. Fund prices tend to rise leading up to the ex-dividend date and fall, in excess of the distribution, in the days after. Investors interested in tactically taking advantage of this dynamic should buy the fund a week or so before and sell on the days leading up to the ex-div date and, potentially to buy back in the days after the ex-div date for those who want to maintain the position. As a case study we take a look at the OFS Credit Company (OCCI) distribution dynamics.

OCCI – a CLO equity fund – had two large quarterly distributions paid this year of $0.52 or about 5.6% of current price in July and is set to pay one in October. Technically, these are not special distributions but are both sizable and infrequent enough to generate a similar kind of dynamic.

This is how the total returns looked around the ex-div dates.

The strategy for investors looking to tactically take advantage of this trading pattern is to buy the fund about a week or so before the ex-div date and sell the day before the ex-div date just when buying demand should increase from those looking to capture the dividend.