Tortoise Power and Energy Infrastructure Fund (ticker:TPZ) is a closed-end fund issued about six months ago, that appears to a be a reasonable value now for income oriented investors. It invests in a portfolio of companies focused on the power and energy infrastructure sectors and is designed to provide stable distributions throughout economic cycles. The portfolio is balanced and defensive- at least 60% of the portfolio is invested in fixed income and 40% in equities.
TPZ was not a good buy at the IPO price, since it was sold at a 5% premium over NAV. Underwriters initially sell shares in excess of the original amount offered, thereby taking a short position prior to the offering. (Nearly all IPOs have an overallotment option where the underwriter can sell extra shares up to 15 percent of the offering, exercisable for 30 calendar days after the offering. The short position can be covered by exercising an overallotment option or by purchasing in the aftermarket).
Underwriters may also use a penalty bid. They penalize selling group members whose customers flip their shares in the aftermarket by withholding their selling concession. So the price is propped up by artificially providing demand or restricting supply. Once the price stabilization period is over, the price usually drops and the closed-end fund may then start trading at a discount.
TPZ’s price action is typical. It was issued on July 29, 2009 at a market price of 20.0 and a net asset value of 19.06. By February 1, 2010, its NAV increased by 14% to 21.73, but its market price had only increased by 1% to 20.21.
In theory, you should never buy a closed-end fund as an IPO, since you are effectively paying a premium over the NAV price. But there are rare exceptional cases where it may pay to buy a closed-end fund IPO. For example, the Cornerstone CEF’s (CFP, CLM, CRF) trade at premiums of 35% or more. If they ever issue another similar fund and shares are available at the IPO price, it may pay to buy it. As the great philosopher Yogi Berra once said- “In theory there is no difference between theory and practice. In practice there is”.
Here are some recent stats on TPZ:
Ticker:TPZ Tortoise Power and Energy Infrastructure Fund
- Total Net Assets= 149.1 MM
- Expense ratio= 1.20% Discount to NAV= -7%
- Distribution rate: 7.42% (monthly dividends)
- Leverage capped at 20% of total assets at time of incurrence
- One Form 1099 per shareholder at year end; Avoids multiple K-1’s and multiple state filings related to individual MLP investments.
- Turnover Ratio: 2.97% (annualized)
Full Disclosure: No position in TPZ.