CET CEF: Performing Well In A Tough Environment For Equities

Thesis

Central Securities (NYSE:CET) is an equities closed-end fund. The vehicle has a very long track record, having been around for several decades. The fund does not use any leverage, and transforms S&P 500 index returns into semiannual dividends. The CEF is a well run, reliable and conservative fund that has performed in line with the S&P 500 in the past year, and has actually outperformed the index on a 5-year lookback. The vehicle compares very favorably with other ‘golden standard’ equity CEFs, namely Liberty All-Star Equity Fund (USA) and Eaton Vance Enhanced Equity Income Fund (EOI).

CET is defined by a large concentrated bet on a private insurance company, namely The Plymouth Rock Company. This name has been in the portfolio for over 30 years and has provided a steady return. In the past year the liquid, listed SPDR S&P Insurance ETF (KIE) is up almost +10%, giving us a good sense of the additive value of Plymouth in a tough year. What we like about CET and Plymouth is that they are old school, steady value accreting instruments. You are not getting the exorbitant valuations or upward moves here that you see in tech, but at the same time no -70% year-on-year performances either. CET is doing what it is supposed to – provide for a well run fund that transforms wider equity market returns into dividends in a consistent fashion.

Performance

The fund has performed in line with the S&P 500 in the past year:

We are comparing CET here with the index and with two other CEFs that are meant to perform the same function – extract dividends from the broader equity markets, namely Liberty All-Star Equity Fund and Eaton Vance Enhanced Equity Income Fund.

We can see a tight cohort performance here, with CET and EOI the closest performers when compared to the index. Longer term CET outperforms:

On a 5-year lookback CET achieves a rare feat – it outperforms the S&P 500! This tells you all you need to know regarding being a long term holder in CET.

Premium / Discount to NAV

The fund’s discount to NAV has a beta to risk-off environments, but hasn’t really fluctuated tremendously in the past year:

There was a nice -12% to -15% range to start the year, with the CEF now settling in a -15% to -18% range. CET is not really a discount play as a CEF – we can see the fund having very little volatility in this structural component:

Sometimes we see very large fluctuations in a CEF’s discount to NAV, depending on market risk-on sentiment as well as a sectoral positioning (as a reminder Utilities CEFs are currently extremely overpriced from a premium perspective). Not here. As a “Steady Eddy” type of fund, CET’s discount has been fairly range bound.

Holdings

The fund is fairly concentrated in its top-10 positions:

The above names account for over 61% of the fund’s portfolio. The largest holding is still a private insurance company, namely The Plymouth Rock Company. Plymouth is an unlisted insurance company which has been held in the portfolio for over 30 years. It has worked fairly well for CET so far. In effect Insurance has performed fairly well in the past year, being up:

The above graph represents the performance of a liquid and listed insurance ETF, namely the SPDR S&P Insurance ETF. Insurance companies have been longing for higher interest rates to boost portfolio yields, and they finally have arrived. Higher interest rates should also reduce pressure on insurance liability calculations.

Conclusion

CET is an equities closed end fund. Think about this vehicle as buying into a conservative tried and tested structure that transforms equity market returns into semiannual dividends. CET is not about the latest and greatest sectoral allocations or outsized ‘get rich quick’ returns, but about steady growth with a nice risk/reward profile. The fund is fairly concentrated, with the top-10 positions accounting for over 61% of the fund holdings. The largest name in the portfolio is a private insurance company, namely The Plymouth Rock Company. Liquid and listed insurance stocks are up for the year, giving us a good sense of the additive value of The Plymouth Rock. CET is not a shiny glamorous toy, but a nice ‘Steady Eddy’ fund that does what it is supposed to in a nice conservative fashion. We like CET. We own CET. However, the bear market is not yet over, with more weakness to come. We are therefore on Hold with respect to this CEF.