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Magic of CEF Discounts
Old 05-01-2006, 12:24 AM   #1
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Magic of CEF Discounts

Last week I bought WIA, a leveraged CEF holding 80% TIPs, and 20% mostly investment grade corps. It has a relatively high expense ratio of 1.49% of net assets (about 1% of total assets.)

The opportunity came from the price at which I bought it. The discount was great enough that the 1.5 % fee's effect on the distribution was neutralized or slightly more than neutralized by the discount price I paid going in.

Of course, if I make further investments, I will have to check to see if this still holds true at whatever discount is available at the time of the investment.

BTW, Bill G. must have felt similarly, because in early April Cascade Investments, his investment vehicle, filed a 13D showing as I remember about a 7.5% position.

There are complexities to this fund, so anyone considering an investment should look at the offering prospectus. The preferred shares financing the leverage are refunded in competitive bid weekly. Management attempts to actively manage this funding risk with a varying amount of 10 yr T Bond puts, and interest rate swaps.

Ha
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Re: Magic of CEF Discounts
Old 05-01-2006, 12:04 PM   #2
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Re: Magic of CEF Discounts

I don't get the discounts on some of these CEFs.

I'm staring at RTU right now (REITs and Utilities).* *15% discount.* *7.8% yield.* * No leverage that I can see.

The only downside is that some of the distribution appears to be return of capital, but I don't see why that is such a big deal.

Edit: oops, some leverage found. 34% of the fund is interest rate swaps.
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Re: Magic of CEF Discounts
Old 05-01-2006, 12:22 PM   #3
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Re: Magic of CEF Discounts

I am watching PDT. When/if the discount gaps out toward 15%, it will be time to buy. I prefer PDT over some others simply because there is a large holder that owns over 40% and invariably steps up their purchases when the thing gets cheap.
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Re: Magic of CEF Discounts
Old 05-01-2006, 04:33 PM   #4
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Re: Magic of CEF Discounts

Quote:
Originally Posted by brewer12345
I am watching PDT.* When/if the discount gaps out toward 15%, it will be time to buy.* I prefer PDT over some others simply because there is a large holder that owns over 40% and invariably steps up their purchases when the thing gets cheap.
For me, with an income investment I hope the discount stays low. I am not looking to do a turn, just to maximize my cash flow.

Quote:
The only downside is that some of the distribution appears to be return of capital, but I don't see why that is such a big deal.
The way I see this "problem" is that it is in fact an opportunity. If I can buy a portfolio at 85% of par, and have them return it to me at 100% of par, they can do that all day long and I will be happy.

Ha

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Re: Magic of CEF Discounts
Old 05-01-2006, 04:49 PM   #5
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Re: Magic of CEF Discounts

Quote:
Originally Posted by HaHa
For me, with an income investment I hope the discount stays low. I am not looking to do a turn, just to maximize my cash flow.
Eh, buy at a fat discount, collect coupons, sell at a smaller discount, repeat as often as possible.
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Re: Magic of CEF Discounts
Old 05-01-2006, 05:18 PM   #6
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Re: Magic of CEF Discounts

I have recently become interested in CEF investing also...My biggest problem so
far has been trying to determine where to put these things, in tax or tax free
accounts...Many income funds are blends with a little this and a little of that. Some
preferred stock that qualifies for the 15% tax treatment, some that doesn't and
they invest in a hogepoge of reits, and stuff like senior debt.
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Re: Magic of CEF Discounts
Old 05-01-2006, 08:30 PM   #7
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Re: Magic of CEF Discounts

Quote:
Originally Posted by katfish
I have recently become interested in CEF investing also...My biggest problem so
far has been trying to determine where to put* these things, in tax or tax free
accounts...Many income funds are blends with a little this and a little of that. Some
preferred stock that qualifies for the 15% tax treatment, some that doesn't and
they invest in a hogepoge of reits, and stuff* like senior debt.
This is a problem. In addition, I don't like generic preferred stocks in the current interest rate climate. Most pfds are perpetual. If a good debt eliminating inflation gets going, these things are suffering. On top of that, some of them don't have much security behind them.

Ha
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