Closed end funds

[brewer12345]

Since we now seem to be past the point in the markets where you can just pick up gems everywhere, I have been spending time monkeying around with CEFs. I thought I would start a thread for any and all interested parties to share info. By way of starters, how about a bit of a primer:

- CEFs are similar to ETFs in that they are baskets of securities traded like stocks. However, they differ from ETFs in that they are fixed pools of money, are actively managed, and generally have higher fees. Many CEFs are also levered (they borrow money to invest), and they frequently trade at a discount or premium to NAV (which can be big).

- an excellent source of info on CEFs is www.cefconnect.com. It is searchable, provides lots of data, and gives links to the sponsor's site and the fund's SEC filings.

- CEFs invest in most anything you can think of and also pursue some esoteric strategies (covered call funds, for example). This can be a good idea or a bad idea, but more choices is always good.

- due diligence on a CEF is similar to a traditional mutual fund. The one major addition would be to scope out the premium or discount a CEF trades at.

That is the basics. So why do I mess with CEFs? If you dig, you can find funds with reasonable expenses investing in stuff you want to own and buy at a fat discount to NAV. At the very least, you get amped up yield/return relative to just buying the underlying assets. If you are lucky, the fund or asset class comes back into favor and the discount narrows (or goes to a premium). Sometimes the fund manager hastens this along by buying back fund shares in the open market. If you are like me, you sell when the discount goes away and move on to the next fat discount. As a kicker, many CEFs have generous yields.

 

[nwsteve]

Brewer
I share your interest in closed end funds and have fund this site also helpful CEFA - Closed-End Fund Association. It is from the Closed End Funds Assn and also several sorting mechanisms and displays current premium/discounts prominently as well provides a graphically history and compares current to other discount funds in same category.
One other caution to add is to closely look at management and expense fees. Some of these managers appear to be richly rewarded.
I currently have positions in some fixed incomes portfolios (global) and utilities (UTG). I have been shopping recently for yields for my tax sheltered accounts in the preferred stock family.
Nwstevce

 

[Htown Harry]

I've also been buying a few CEF's over the past year or two. It's an interesting subset of the market, but does require extra diligence.

One potential trap: the published yield rates found in the mainstream stock listings. Many funds use "managed" yields that include a return of capital component.

I have a funny story about my learning experience on this aspect. In October 2008 I had bought a dividend stock fund, BDV, before I knew to check for the actual "income only" yield at the site recommended by nwsteve. Bought it at 8, then watched it get below 7 at the depth of the market in March 2009. Not too bad a dip, considering.

By late 2009, it was back above 8 but not gaining as much as I wanted given the published yield and the general market run-up. It was going sideways around $8.50 for most of the fourth quarter. I had discovered the managed distributions were part of the issue and also thought I could find a better alternative, so I put in a 60-day limit order to sell if it got to 9.

Cramer to the rescue. He touted the fund's high yield on his show one day in late December and BDV immediately shot up well past my price. It peaked at 9.46 a few days later.

It's now at 9.22.

Current CEF holdings: BIF, TSI, MSD, DGS.

This blogger puts out an overview of the CEF marketplace every Sunday: Joe Eqcome's Articles -- Seeking Alpha

 

[clifp]

The blog looks like promising resource. I really like CEF during times of lots of fear and volatility.In Fall of 08 there were plenty of equity CEF that had 15% and even 20% discounts. It seems to me that most of the discounts narrowed and some cases disappeared so I got rid of most of CEF.

I am looking forward to this Nov and Dec which is generally a great time to sell CEFs and the discount rates widen due to tax selling. I suspect we may see quite a bit as people take profits ahead of the capital gains rate rising at the end of this year to 20%.

 

[brewer12345]

I have been buying BKT (agency MBS at a big discount) and FOF (a fund of CEFs - doubly discounted). Recently sold off JFR and GIM.

The blog looks interesting.

 

[LOL!]

HH: I own DGS, but I do not think it is a closed-end fund. Or did I miss something?

 

[Htown Harry]

HH: I own DGS, but I do not think it is a closed-end fund. Or did I miss something?

My mistake. It's an exchange traded fund.

 

[brewer12345]

Its getting awfully close to NAV, so I puked out half my FTF for some JQC. It is starting to get hard to find double digit discounts on fixed income CEFs, so this game may go away for a while soon...

 

[Dawg52]

Brewer or anyone else, EVV is one I have owned for awhile. Rode it down and now back up. Has churned out some nice distributions along the way but not a double digit discount guy at this point.

Any thoughts on this one? Good time to unload?

CEFA - Closed-End Fund Association

 

[brewer12345]

EVV is no raging bargain, but still at a modest discount. Personally, if I owned it I would probably hang on and let it go if it got within 2% of NAV.

 

[GusLevy]

I prefer to utilize CEFs for most of my investment portfolio. The reason I prefer CEFs vs open-end funds are the common reasons: 1) intra-day liquidity, 2) discount/premium valuation, 3) portfolio size is limited.

I use ETFs for short-term trading purposes but the only fund that I will probably consistently own for the long-run is a fund like DVY (which I do currently own) which is structured to mimic a low-cost open-end fund with respect to risks and costs. Most ETF structures are not, in my view, optimal for long-term investment due to the leverage issues in addition to the overall costs.

I also would point out that CEFs (and ETFs) are probably the easiest and most practical investment vehicles for the small investor such as myself to be able to utilize low-cost institutional borrowing rates at times like what we have experienced for the past several months. When the yield curve is positively sloped with short rates at these sublime low rates we should all be as levered as possible within our individual risk comfort parameters. The free ride will obviously not last forever - I have been slowly reducing my levered CEFs into non-levered CEFs recently. As history tells us, when the Fed tightening begins out of a recession it will be swift and violent as the market will run for the Exit immediately.

 

[Htown Harry]

Bogeleheads has a CEF wiki

I came across this wiki doing some research. Pretty good overview, with a number of links to more information:

Closed End Funds - Bogleheads

 

[Ronnieboy]

I don't get the difference in price between the NAV and the listed/traded price.

I was looking at buying some VKI or VLT through my Zecco account to get a monthly dividend that seems to be relatively consistent over the years.

I kinda sound like another poster who wanted to stick the majority of their funds in Vanguard High Corporate Bond fund and live off the dividend.

But what is the downside of owning a few hundred thousand shares of VKI (exempt from federal taxes as far as I can tell) or VLT and living off the monthly dividends or having it as gravy on the side?

 

[nwsteve]

Its getting awfully close to NAV, so I puked out half my FTF for some JQC. It is starting to get hard to find double digit discounts on fixed income CEFs, so this game may go away for a while soon...

Brewer
Took a gander at JQC--when considering CEF's what your approach/feeling about expense ratios? Noted that JQC seemed high at nearly 2.0%. Likewise leverage--both FTF and JQC are showing leverage ratios in the 34-36% range
Thanks
Nwsteve

 

[Texas Proud]

A long time ago my brother mentioned about him buying closed in funds... I was not a fan.... but I said I might as well buy some and pick up the price as they got closer to NAV....

And I waited.. and waited and waited... seems that the discount that I had bought it at was the going rate... nobody wanted to get in any closer to the NAV... and that was a full year waiting... yes, the price did go up for me (it WAS a long time ago).... but the discount percent did not change much at all...

SOOO, like always... buyer beware... make sure that you are buying something that YOU LIKE... if you do get some narrowing to NAV then that is just gravy...

 

[brewer12345]

Brewer
Took a gander at JQC--when considering CEF's what your approach/feeling about expense ratios? Noted that JQC seemed high at nearly 2.0%. Likewise leverage--both FTF and JQC are showing leverage ratios in the 34-36% range
Thanks
Nwsteve

The expense ratios are misleading because they include the interest cost of the borrowed money. If you look at the info at www.cefconnect.com they break down total expenses so that you can see management expense. I generally look for management expenses of 1% or less.

As for leverage, it depends on your risk tolerance, goals, etc. I am comfy with some leverage if I like the underlying assets in the fund and I am geting a juicy discount to NAV. But I am in no hurry to buy levered equity CEFs. I have traded out of FTF because it ran up to NAV or thereabouts, but leverage in that fund was done via repos/dollar rolls on the fund's agency MBS, so no big deal to unwind or create the leverage. In the case of JQC, its a little messier because the leverage is in the form of auction rate preferred that is frozen in place.

 

[frequenttraveler]

ETF for CEF's = PCEF

I just posted on another thread about a CEF ETF—that’s right, an ETF that tracks an index of CEF’s.

Its symbol is PCEF—and it has decent volume, and is tracking at an 8+% annual payout rate—AND pays monthly dividends.

I own this, and plan on buying more. It’s volatile; just be sure you know that going in. CEF’s are swingers; they move at an exaggerated rate in response to market movements.

(note: no personal or business connection with PCEF or its sponsor.)

Jim

 

[nwsteve]

Question for you long term closed end fund experts--do you routinely sell your closed end fund when it goes to a premium?
I have several income based CEFs and seen 11-15% discounts move to near or slight premium positions in the last week or so. The positions are all in tax sheltered positions so no tax issues. All the funds generate attactive yields on purchase price north of 7% (obviously lower now). So is playing the discount to premium move the right reason to close positions? Quandry is where I would put the dollars to get the yield currently locked in.
Thanks
Nwsteve

 

[brewer12345]

Question for you long term closed end fund experts--do you routinely sell your closed end fund when it goes to a premium?
I have several income based CEFs and seen 11-15% discounts move to near or slight premium positions in the last week or so. The positions are all in tax sheltered positions so no tax issues. All the funds generate attactive yields on purchase price north of 7% (obviously lower now). So is playing the discount to premium move the right reason to close positions? Quandry is where I would put the dollars to get the yield currently locked in.
Thanks
Nwsteve

I certainly do. Actually, I am in the process of roundtripping FTF, as I sold it at about NAV and then bought back in during the May flash crash at a double digit discount (since tightened). I have sold out of GIM a few times in the past when it went to a premium.

 

[Nords]

Question for you long term closed end fund experts--do you routinely sell your closed end fund when it goes to a premium?
I have several income based CEFs and seen 11-15% discounts move to near or slight premium positions in the last week or so.
All the funds generate attactive yields on purchase price north of 7% (obviously lower now).
Quandry is where I would put the dollars to get the yield currently locked in.

Which do you think will make you more money (perhaps for less effort)-- trading for cap gains or holding for dividends?

I don't know if there's a "right" answer, but that's the question you're trying to answer.

It's a lot easier to book a cap gain and wait for a buying opportunity than it is to depend on [-]BofA BP[/-] an investment to keep paying its dividend. But taking a cap gain and waiting for the next buying opportunity may eventually fall behind the buy-and-hold-for-the-dividend strategy. Buffett, of course, claims to follow either strategy.

 

[clifp]

Question for you long term closed end fund experts--do you routinely sell your closed end fund when it goes to a premium?
I have several income based CEFs and seen 11-15% discounts move to near or slight premium positions in the last week or so. The positions are all in tax sheltered positions so no tax issues. All the funds generate attactive yields on purchase price north of 7% (obviously lower now). So is playing the discount to premium move the right reason to close positions? Quandry is where I would put the dollars to get the yield currently locked in.
Thanks
Nwsteve

I see no reason to hold a CEF at premium. The expenses are generally much higher than an index fund. As for what do with the money that certainly is a quandary.

One potential thing you can do is look at the 10 ten holding of the CEF and buy them. For instance I looked at both several CEF equity income, and bond funds from Pimco, Nueveen, Nicholas. Typically the top holding represents 25% of the assets of a CEF. So for <$100 in commission you can replicate a good chunk of the CEF lock in the premium you received, and avoid the 1-2% ER charge.

 

[Tommy2]

CEF for retirement

any negatives for building many CEF's that pay monthly div's and reinvesting for about 7 yrs then start paying out.

reinvest 10 percent after that and see where it goes.

I have a spreadsheet and it looks good...... the ability to change variables works well.

 

[rsingh6675]

Any of your favorite CEFs please

Currently I have some money in----DSU, HIS, AFB, AWF.
Are there any good dividend paying CEF's. Please let me know.
Thanks

 

[Tommy2]

I have HIS on a watch list and it looks ok. I also like AFB and AWF just the name alone is a little confidence boost. Blackrock, court is still out on them right now....still looking at them.

Look at 2 of these 4 they are tax exempt municipal CEF's that pay monthly dividends. They pay 7 and 8 percent but with no taxes they are more like 11 percent. Look them up on CEF connect.com it will tell you the tax equivalent at the bottom of the window.

CXE, PCK <---no taxes. I also have shares of/ but no money invested in AOD. It has had a recent turn of bad luck. I still have my drip shares.

larger stake in CFP.

Recent muni cef funds that I have been looking at......

MFM, MHI, FMN, VGM, VMO

CMU..... Price/ Nav works here.

Let me know what you think.

CMU on the non taxable and CFP on the taxable.

These are the two I am going with.