Closed End Funds of Funds (PCEF)

[nwsteve]

Just came across an offering from Powershares that provides an ETF of all CEF funds of funds--essentially all debt type issues--PCEF. It has a mix of domestic and international and currently yields 7.8%. Price has been reasonably stable since it came to market in 2010. Average discount to market in portfolio is 7.5% according to Kiplinger article that is the source of my interest.
Major downside is 1.9% expense ratio but then they are managing a basket of funds. Largest position is PIMCO Dynamic Credit Income Fund (3.6%). Top 10 largest positions total around 25% of portfolio.
Thinking of putting in my IRA to enjoy the 7.8% yield but am struggling with the expense ratio. Still not much out there I can hold as a single position, get diversity and still carry a 7+% yield.
Comments, please

 

[brewer12345]

I have owned FOF for about 5 years, and it has essentially the same strategy. No complaints.

 

[jim584672]

Since it is a fund of funds couldn't you just find out what funds it holds and buy them directly? Would save you some fees.

Also, I would bet these funds are returning capital to get a yield of 7.8%. If the NAV is declining then the ROC is destructive and should be avoided.

For me the expense ratio is far too high and I would look elsewhere.

 

[target2019]

Since it is a fund of funds couldn't you just find out what funds it holds and buy them directly? Would save you some fees.

147 Holdings!

 

[nwsteve]

147 Holdings!

Exactly! It is the diversification in this segment of instruments coupled with the yield that makes it of interest. 65% in debt issues.

Nwsteve

 

[aja8888]

I would look at some of the Kayne Anderson CEFs.

Kayne Anderson Capital Advisors, L.P. | Strategies | Energy Closed End Funds

 

[sheehs1]

Was interested enough to take a look at it. Haven't spent a lot of time…just a glance and from what I see on the site, 100% of the distribution is "ordinary income" with no return of capital. I'm sure the funds it holds are returning some capital and are leveraged but I'll assume it is because the distribution comes from PCEF and not the underlying funds.

 

[pb4uski]

Interesting that you started this thread. I had been intrigued by the Kiplinger article and was just looking at the fact sheet for this ticker.

 

[nwsteve]

Was interested enough to take a look at it. Haven't spent a lot of time…just a glance and from what I see on the site, 100% of the distribution is "ordinary income" with no return of capital. I'm sure the funds it holds are returning some capital and are leveraged but I'll assume it is because the distribution comes from PCEF and not the underlying funds.

Definitely want to have it in your IRA/Roth accounts.
I decided to take a position in my IRA--I like the relative stability of the nav with attractive yield. I get more delta in daily market volatility than initial position.
Nwsteve

 

[bad_LNIP]

Since it is a fund of funds couldn't you just find out what funds it holds and buy them directly? Would save you some fees.

There is the other element of discounts on top of discounts with FOF as it is a CEF, not an ETF. The combined discount of the funds purchased and the FOF CEF discount is usually around 15-18%

 

[sheehs1]

I decided to take a position in PCEF today. I liked the diversification of the almost 148 positions, the yield and the "ordinary income" distribution with no return of capital.

 

[samclem]

Exactly! It is the diversification in this segment of instruments coupled with the yield that makes it of interest. 65% in debt issues.

Nwsteve

Obviously (as you surely know), just because the FOF holds a lot of CEFs doesn't mean it is diversified. E.G if all the underlying CEF managers have jumped into financials (or utilities--whatever) in order to boost yield--then the FOF would be highly overweighted in financials compared to the market.
Chasing yield . . . often does not end well.

 

[brewer12345]

Obviously (as you surely know), just because the FOF holds a lot of CEFs doesn't mean it is diversified. E.G if all the underlying CEF managers have jumped into financials (or utilities--whatever) in order to boost yield--then the FOF would be highly overweighted in financials compared to the market.
Chasing yield . . . often does not end well.

Always a risk, to be sure. That said, FOF managers publish regular commentary on what they are invested in and break down the portfolio by allocation to different strategies (covered call vs high yield bond vs whatever). Rarely do they have more than a third of the portfolio in one strategy and each strategy allocation usually consists of many different individual CEFs. I would not bet the farm on this fund, but excess concentration isn't the sort of thing that keeps me up at night with this one.

 

[sheehs1]

Obviously (as you surely know), just because the FOF holds a lot of CEFs doesn't mean it is diversified. E.G if all the underlying CEF managers have jumped into financials (or utilities--whatever) in order to boost yield--then the FOF would be highly overweighted in financials compared to the market.
Chasing yield . . . often does not end well.

Diversified in that it holds positions in most all sectors (Basic Materials, Financials, Energy, Industrials, Technology, Health Care, Utilities, etc.) , holds bonds, some option writing funds..etc. and that there is no "return of capital" in their distribution which I think is a plus. I individually hold a couple or more of the underlying positions. That said, I never put more than 4% of the portfolio in any one position. Not breaking the bank and won't keep me up at night.
And let's face it: If things tank…everything regardless will tank. (if you are invested).

 

[samclem]

And let's face it: If things tank…everything regardless will tank. (if you are invested).

Not always--or even usually.

In some general market downturns, the correlation between sectors increases. In 2008, just about everything got hit. But that wasn't the case for all pullbacks in equity prices. From '00 to '01 the general market downturn didn't affect everything.

But, over the long haul and over most time periods, there's considerable inter-sector variation. So, CEFs concentrated in some sectors might deviate considerably from a broader market index.

 

[sheehs1]

I hear you samclem. Guess I am remembering 2008. I also didn't see where PCEF was heavily weighted in any one sect, meaning while financials is at 23%, there are other sectors at 10% or more (healthcare, energy and technology) with other sectors represented as well. So yes they have more financials but it is also spread around others sectors.