CLM: What To Do About The Rights Offering (NYSEMKT:CLM) (2024)

Cornerstone has two high-yielding, high premium, closed-end funds. The funds are preparing another in a series of recurring rights offerings. Here, I try to infer from the behavior of Cornerstone Strategic Value Fund (NYSE:CLM), the larger of the two CEFs, if participating in the rights offering is an advisable strategy.

Should You Exercise Rights from Cornerstone?

The Cornerstone closed-end funds (CLM and CRF) are again planning to expand through rights offerings. In general, these are not funds that I expect to hold or would recommend. But as I learned when I delved into them a few years ago, they have their fans and advocates.

What interests me about them is their nearly unique approach among the widely diverse strategies one finds among equity CEFs. To simplify: Cornerstone funds pay out massive distributions, at rates well above what the funds can possibly earn in any but the most bullish of years. To receive those yields, income-seekers have been willing to pay premiums, at time massive premiums.

The funds cut their distributions routinely, but when they do make a change, they set the new distribution rate for the next twelve months. To keep the whole thing from coming apart as the funds’ values inevitably decay, there are regular expansions of the funds via rights offerings that target a 33% (plus any oversubscriptions) increases in the funds' assets. These are priced at the greater of 107% of NAV or 80% of market price per share.

The funds also offer what amounts to an attractive DRIP (dividend reinvestment programs). Under the terms of the DRIP, distributions are reinvested in the fund at NAV or by a price equal to the average closing price of the Fund over the five trading days preceding the payment date of the Distribution, whichever is lower (source). This is attractive because the funds consistently run premiums, often quite large premiums.

Not all brokers participate in the funds' DRIP program and it is sometimes difficult to get clear information on who does or doesn't from either brokers or Cornerstone. If one’s position is held by a non-participating broker, then reinvestment is at market price, which is not such a good deal as I’ve shown (here).

Finally, the funds regularly expand by rights offerings. If they didn’t they would waste away because they vastly overpay their earnings.

My view of the Cornerstone CEFs is that I stay away from them, but their advocates will argue that they are excellent vehicles for long-term wealth building if you DRIP and you fully participate in all rights offerings.

Previous CLM Research

In an older article (here), I followed Cornerstone Strategic Value Fund, the larger of the two Cornerstone’s CEFs, from mid-July 2011 (the earliest date for which I was able to obtain historical NAVs) through May 2018 to see if the points made by the fund’s advocates held up under scrutiny. I looked at fund performance as a straightforward income investment, or as a total return investment reinvesting the distributions at NAV (via the DRIPs) and at market price. Because the fund’s holdings are large-cap US equities, I benchmarked the strategies to the S&P 500 index fund, SPY.

To summarize those results: Reinvesting at NAV provided highly volatile but reasonable total returns. Put against SPY, the NAV DRIP strategy managed to almost stay close to SPY’s total return for most time periods I examined and even beat SPY for the period beginning at the start of 2016. Reinvesting at market was not competitive with simply holding SPY except for the same investment period beginning in 2016, where it did provide better total return than SPY, albeit less than the NAV DRIP program returned.

In a subsequent article (here) I expanded this to include participation in the rights offerings. My conclusion was that there was no benefit to buying new rights. This strategy necessitates a constant re-infusion of capital.

Cornerstone Strategic Value Fund

There are two Cornerstone funds, CLM and CRF. I’m going to be discussing CLM, the larger of the two. Both have announced another round to rights offerings with a record date of 16 April.

The current premium for CLM is 14.1%. It has fallen from 36.1% on 6 April, the day the rights offering was announced. It had held the premium in the mid 30% range until it tumbled on the rights offering record date (16 April).

This pattern is typical of many CEFs when rights offerings are on the table, but few drop as precipitously as CLM did. This is not unusual for the fund; it is more or less routine.

Distribution Rate

With the 35% premiums the fund’s $0.1602 monthly distribution generated a 14.6% market yield. At the current price the distribution rate is 16.6%. CLM had often run double-digit distribution rates, which is what justified (in the minds of some investors) their double-digit premiums.

Let’s look at the fund. First a quick look at the portfolio.

CLM's Portfolio

The fund holds 97.3% of its assets in equity, 94% of which is domestic.

These holdings look a lot like the top of the S&P 500, so any comparisons using SPY as a benchmark are quite appropriate.

Valuation (Premium and Discount)

Its valuation history is interesting (chart from CEFConnect).

Double-digit premiums are the norm for the fund as the chart and this next table show.

One might find a few funds in the CEF universe with valuation charts that look something like this, but only precious few. And those that do are generally earning their premiums. Such is not the case for CLM. Take the fund’s distribution for a first example of why I say that is the case.

Distribution History

The distribution history for the fund is one of continual decline. The distribution is reset each year for twelve months. As this chart shows there has been only one year in which the distribution increased, and that by an amount that is barely perceptible on this chart, since mid-2008.

Performance History

And, of course, there’s the fund’s performance history. For the last ten years, shareholder return with distributions reinvested at market, totals 95%, slightly (ever so slightly) more than a third of SPY’s total return of 278%. The fund’s market price has declined -71%, and its NAV just about kept pace with its market price having lost -66%.

To be fair, anyone holding the fund would not be (or certainly should not be) reinvesting at market, but at NAV, and as we saw that reinvestment has nearly always been at a significant discount to market. I’ll not repeat the analysis I did earlier (here) in which I modeled that scenario. Readers can see that article for details. I'll simply repeat the conclusions:

“There is no strategy for holding CLM that remotely justifies the extreme volatility the fund consistently demonstrates.

I’ve shown earlier that holding the fund for income is a recipe for collecting your invested capital while gradually going broke.

Holding it for capital growth by reinvesting the distributions, even at the seemingly attractive NAV reinvestment price, does provide a decent rate of return, but here again the returns are too low for a fund with the volatility CLM has.”

This was done during a period when high premiums prevailed, so the DRIP discount to market was greater than it has been until the last six months or so. While I’ve not extended the analysis, I have little doubt that the same conclusions would hold.

Rights Offering: What To Do?

Another feature (if I can call it that) of CLM is that the fund has regular rights offerings. Without them the fund could not sustain itself. Current shareholders are now in decision mode on what to do about the rights they received this week.

From the comments I’ve received on CLM, I infer there are two categories of CLM investors. The first is in the fund for its generally high distribution rates. The second is in it for total return under the assumption that reinvesting those high distributions at a discount to market will drive high total return. For the total return investor, the general assumption is that full participation in the rights offering (at 107% of NAV typically) is advantageous. But this means increasing one’s holding by 33% at a regular pace and doing so by buying into a fund that is continually deprecating its value.

In the second article I referred to above I extended the DRIP analysis to include full participation in a series of rights offerings. At the end of the day, the position with the rights offering purchases did have considerably greater value, but that was largely due to several infusions of new capital. When all cash flows were factored in, the rights offering buyers did much less well than those that held and DRIPed. Again, I’ll simply quote from my conclusions:

“The third strategy, using the NAV-based DRIP and adding at each rights offering, turns out to have been the worst possible play. Only for the bull market period of 2016-17 does it fare better than simply reinvesting at NAV without adding, and only trivially at that. And even then it trails the simple strategy of buy, holding and reinvesting dividends in SPY by a margin of about 30%.”

I’m rehashing that analysis because the current rights offering is underway. I don’t own the fund. Indeed, I would not own the fund. But those that do are interesting in how to play their rights. I can't give you advice, but I can say if I were holding CLM, I would simply let those rights expire. That regardless of whether one is in the fund for the perceived advantage of the DRIP for total return or for the perceived advantage of its high distribution.

I'm a retired individual investor.