Our last article on Cornerstone Total Return Fund (CRF) provided a great fodder for the debate. This was similar to our earlier article on its sister fund Cornerstone Strategic Value Fund (CLM). While we thought the data we provided was powerful enough, there were still skeptics. We thought the best way to address that, was to dig up some numbers that would put the matters to rest.
What Is Undisputed
The total returns for those who take their dividends in cash are exceptionally easy to calculate. CRF paid the following distributions (adjusted for 1:4 split in 2014).
Source: Author’s Calculations
The price on October 9, 2010 was $39.88 and it is $11.13 today. Your total return here equals $7.82 ($11.13+$36.57-$39.88). That is a total return of 19.6% or about 1.8% compounded over 10 years. Of course that number changes depending on your exact purchase, but that does not change how bad the returns are for anyone that purchased this thinking they were getting a “real 20% yield”.
What Has Been Disputed
A number of commentators have claimed to have made money in this fund. We don’t dispute that possibility one bit. In fact we estimated that with distributions reinvested the fund would have delivered upwards of total 102% returns over 10 years. What we are saying though, is that these have lagged the returns of the broad based ETFs like S&P 500 (SPY). That is an important distinction. Remember to the person reinvesting distributions, the yield becomes irrelevant and total return is all that counts.
To show our results, we put information from Y-Charts, Buyupside and Dividend Channel. All three agreed on the numbers. That said, we definitely could not explain why a fourth source, CEFCONNECT, produced completely different results and by a country mile. We felt the absolutely best way to settle this was to dig up information on CRF, as presented by CRF. The fund has every reason to present itself in the best light and its own returns will be the final arbiter.
How Does CRF Calculate Returns
This is where it gets really easy to settle the debate because the fund calculates its returns exactly how investors championing the fund suggest it should.
Source: Language common to CRF Annual Reports
The fund calculates returns at market prices but assumes all distributions are reinvested at NAV. So the fund returns basically give full advantage of the premium to NAV which CRF has enjoyed.
Where Can You Find These Returns
Unfortunately, CRF does not have older reports on its website so we went digging through old SEC files. The oldest one we found was an annual report from 2011 which had returns from 2007 shown in comparatives. To keep the numbers clean we have just shown the years and the returns but investors can check out the links themselves. They might also want to download these files as the 2011 reports might soon be deleted (early 2021).
First below is the 2011 Annual report.
Next up we have the 2015 Annual report. Notice the 2011 returns overlap.
Finally, the 2019 report from their website. Again, note the 2015 return overlap.
Source: Cornerstone Annual Report 2019
Below we have just compiled the numbers from the 3 filings.
How would $100 invested in this fund grow based on what CRF itself claims?
Source: Author’s calculations based on CRF’s returns
That is a 2.2% compounded return over 13 years. How did SPY do? $100 would grow to $317.31.
So CRF itself claims that its returns, calculated by its favorite methodology would trail SPY by a large margin. This itself should settle the debate.
What About Them Awful 2007 Returns?
Astute investors might have noticed that CRF’s 2007 returns were rather horrible considering what happened in that year. That is because CRF wants to take credit for the premium its funds command and hence when that premium normalizes in any year, it really hurts returns. If CRF wants the market price methodology and they chose it, not us, then it has to deal with both sides of this issue. So we sympathize with them, with the returns are accurate as they are.
But just to show what things would be like, we will eliminate 2007 returns. This actually creates a fantastic start point as at the end of 2007 the fund traded at about a 16% premium to NAV.
Source: Cornerstone Annual Report SEC Filing 2011
That premium is the general vicinity at which it trades nowadays. Eliminating 2007 (and we stress that we should not do that in a fair system) bumps total returns to $223.55. That is a 6.4% compounded return.
$100 invested in SPY moves to $321.86. That equates to a 9.4% annualized return.
From 2007, the costs of paying a large premium to NAV was fully apparent as by CRF’s own methodology, the fund produced 2.2% compounded returns. This is even with dividends reinvested at NAV. Right there is the biggest lesson of all. Don’t pay premiums for mediocre funds. Eliminating that year, we still get 6.4% compounded returns, trailing SPY by 3% a year. Even those 6.4% returns have had a lot of help. What we mean by that is investors believe that this fund does things it actually does not. This allowed CRF to raise capital above NAV, and that was NAV accretive.
Source: Cornerstone Annual Report 2019
CRF has trailed SPY’s returns despite being able to raise NAV accretive cash, which no ETF can do. Now imagine if that $1.73 (NAV accretive capital raises) disappeared from NAV, and the fund actually traded at NAV, what would the returns look like?
Can you still make money in CRF? Of course you can. We have never claimed otherwise. Is CRF doing something wrong? Not at all. They run a managed distribution plan and they are very smart to raise funds above NAV. We would do the same as well (probably in much higher amounts). Kudos to them for selling shares at premiums to NAV. We also still rate the fund at a neutral stance and long time readers are aware that we are not afraid to slap extremely bearish ratings.
All we have repeatedly claimed is that fund has trailed its benchmark over long periods. We have also claimed that if you take distributions in cash, your total returns are going to be really bad. We are using the fund’s own numbers in the most favorable way to show you that. We even eliminated 2007, where the fund’s premium to NAV dropped from close to 100% to just 16%. The results are crystal clear and help settle the debate, once and for all.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.