Closed End Funds

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Spaceman Spiff's picture
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Joined: 2006-08-08

For some of you that use CEFs frequently, what are the potential pitfalls that I need to look out for with these things?  The Jones info on them, as you might expect, is limited.  I've spent a bit of time on ETFConnect.com and found some good data, but nothing in the way of recommendations.  I know the price fluctuates as can the dividend.  I know that there is an NAV price and market price, but I've not yet figured out why anything other than the market price matters to the client, other than a way to judge premium/discount as a way to decide if it is time to buy or sell.  Seems to me that we would see a lot more of these if they are a great investment.  So what's the story?    

snaggletooth's picture
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Joined: 2007-07-13

Find out how leveraged they are.  The higher the leverage, the more I'd stay away.

troll's picture
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Joined: 2004-11-29

If the CEF you are looking at is leveraged - how are they handling the ars pfds that they issue for the leverrage. If they are planning on redeeming them, i would think this might negatively affect the common holders (i am not an expert on this, so i might be off base.)

BullBroker's picture
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Joined: 2006-12-26

Spaceman Spiff wrote:
For some of you that use CEFs frequently, what are the potential pitfalls that I need to look out for with these things?  The Jones info on them, as you might expect, is limited.  I've spent a bit of time on ETFConnect.com and found some good data, but nothing in the way of recommendations.  I know the price fluctuates as can the dividend.  I know that there is an NAV price and market price, but I've not yet figured out why anything other than the market price matters to the client, other than a way to judge premium/discount as a way to decide if it is time to buy or sell.  Seems to me that we would see a lot more of these if they are a great investment.  So what's the story?    
 
I use them mainly as satellites or "yield enhancers" in fixed income portions of portfolios.  It's hard to justify large positions in them simply because of the leveraging used in them.  You can think of them in the same terms as mutual funds as to, why to use them.  Some people buy bond funds simply because they; don't know how to trade bonds, don't have a large enough position to capture higher yields, would rather rely on professionals who have studied duration and convexity. 
 
I use closed-ends when I want to buy preferreds, because I don't have enough experience with trading preferreds to feel confident in what I am buying.  So I rely on the experience of Closed ends that buy preferreds and I always use stop-loss when buying closed-ends.  I use John Hancock Preferred Income Fund III HPS, Blackrock Preferred Income Strategies PSY, and Blackrock P&F PSW, in fixed income strategies.
 
If a client is a moderate to Aggressive investor I'll use 10%-20% Closed End Preferreds capturing the 8%-9% yield, mix in; treasuries, Corporates, Mortgage-backs, and cash.  Offset the risk of the preferreds and mortgage-backs with treasuries and cash all while increasing average annual yield and maintaining duration.
 
Just like with anything we use, Closed-ends have their place, but like the previous posters stated be careful with the leveraged ones.  This is a tricky time to buy closed-ends because of the deleveraging of some funds due too having to redeem their capital from Auction Markets.  When funds redeem it will have an impact on dividend yield as well as price, but with good solid closed ends it could mean a buying opportunity considering they can find a good alternative way to find capital. 
 
 

Spaceman Spiff's picture
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Joined: 2006-08-08

My curiosity stems from a bit of both.  I have a client who owns PPR and I've been trying to get rid of it for years.  He's stuck on the dividend.  Never mind that it's down 2+% a year for the last 5 years in total return with a 3% expense ratio.  So, I've started looking for alternatives that give him the dividend he wants, but the returns I want.  I also have a prospect with about a $100K position in PHK.  That's what really got me started looking.  I needed to know whether to tell these people that they're crazy to hold on to it, or if they have a great investment to hold for the long term. 
 
Stifel Nicholas and some of the AGE guys use CEFs frequently.  I need to know how to talk about them when I need to.  ETFconnect has given me some education, but zero real world experience.  Thus, my post to the crowd.   

new_indy's picture
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Joined: 2007-03-28

check out cefa, they have all the info you need.  Buy at a discount when possible, and watch for rts offerings on large dividend paying closed end funds as they rarely get back to nav.

Spaceman Spiff's picture
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Joined: 2006-08-08

Thanks.  CEFA seems to be more along the lines of what I'm looking for to educate myself. 

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