The pair of Cornerstone CEFs: Cornerstone Strategic Value Fund (CLM) and Cornerstone Total Return Fund (CRF) are pretty unusual CEFs. The business model appears to be: overdistribute and run repeated rights offerings.
For shareholders, these funds have two reasonably appealing features (no, its high yield does not count). First, the rights offerings are accretive to NAV and secondly, the DRIP is accretive as well, allowing investors to reinvest at NAV and enjoy immediate revaluation given the funds’ premiums.
The distribution policy of the fund has been to set the rate at 21% of NAV once a year at the start of the year with an announcement in November. Because the funds’ NAV will tend to drop, all else equal (outside of reverse splits), this means that distributions will drop as well. Investors should, therefore, avoid being long in early November when the announcement will tend to happen.
The most recent announcement was just made after market close on Friday 6-Nov with distributions being cut. We are likely to see some premium compression on Monday as some investors will be taken by surprise.
Thanks for reading.
Check out more of our analysis, portfolios and tools at Systematic Income.
