Closed-end Fund Income Investing

First post for me on this topic, but I've been doing a lot of research into these lately.

My opinion, this fund looks like it has a lot of market risk in it. The price vs. NAV seems to correlate with the stock market. It's also leveraged at 33%, so I think when/if the market turns, you could lose principal.

My objective is to find something where the share price stays relatively flat and just allows me to collect the monthly payout. This could be a very different objective than yours.

Quote from KevR1025:

First of all, thank you for this thread. It has really gotten me interested in CEF's.


What do you think of JQC:

Nuveen Preferred and Convertible Income Fund 2 operates as a diversified, closed-end management investment company. It invests primarily in preferred securities, convertible securities, and high yield securities.

Fund Quick Facts
As of 01/10/2007
Closing NAV: $14.29
Current Distribution Rate: 8.10%
Closing Share Price: $14.07 Premium/(Discount): -1.54%

Monthly div. and share price has steadily caught up with NAV.
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Is there anything significant when a CEF declares Long Gains or Short Gains....

one example is PFN... for the first time since inception, it declared a long/short gain and I have already received that money.... On jan 5 it then declared its normal dividend....

another example is SBG... several times it declared a long/short gain that looks like it replaced the normal dividend... Should I be concerned about long/short gains replacing dividends....

What issues are involved with the above and what should I be looking at...


thanks in advance

Toucen
 
I would only worry if as you said the gain distributions are to replace lost dividend income. Since funds usually invest in long-term type of securities with consistent, some-what predictable income I think it would not be the normal case that gains would be replacement of lost dividends.

Watch the NAV closely to spot any trouble in the fund itself or share price action. If the yield and price still hold up while the NAV is not dropping, then all things are still ok.
 
I'm looking for a way to grow some excess cash. We used t-bills last year, but I'd like to try and squeeze some better growth. This is money that can go *poof* and no one hurts other than being a bit steamed over losing money. My goal for the short term is to get my feet wet with this stuff, so I'm aiming at preserving as much principal as possible and focusing on a flat return on the underlying CEF itself. My primary focus, as I mentioned previously, is just to collect that monthly return and reinvest. With that in mind, I'd like to diversify among some very boring assets and some not so boring assets. At this point, I think the diversification should look like this:

U.S. Government Debt
Mortgage and Corporate Debt
Municipal Bonds
Global Debt & Junk Bonds
Convertibles

I think the federal and local government debt is going to offer some stability here, I expect the mortgage and corporate debt to rise and fall within a tolerable range and the last two to provide a bit of movement to the thing overall.

Is my assessment of these asset classes fair? Am I missing an asset class that anyone would consider important? We're really staying away from the stock market and REITs because we're already invested in those using other vehicles.

I appreciate any insight.
 
So assuming my asset types are correct. I've gone through and selected funds that meet the following criteria:

1) Price less than or equal to NAV
2) Yield > 6%
3) Fund management fees < 2%
4) Leverage < 10% (except for municipal bonds, which all seemed leveraged 30% or more)

U.S. Government Debt - TIP
Mortgage and Corporate Bonds - EVG
Municipal Bonds - DMF
Global debt and Junk Bonds - GCF
Covertibles - CVF

I'm going to start watching these funds and others within their respective sectors and probably start slowly letting in cash over the next month. I'm still going to quadruple check my research.
 
I am nto sure what kind of coverage you said you have in equities already but I would also include funds with preferreds, private debt palcements, dividend equities and even real estate (commercial real estate is different from home buying). I say this just so you are not loaded with fixed income products but also have capital appreciation possibilities with a rising stock market, or better yet, you are adding in more securities with less correlation so that the entire fund balances out. In other words, rate increases could hurt all fixed income products but if the market is rising the equity sides could help offset that. TIP is good but you could also mix in some short maturity treasury funds.

Also, look at the durations of the funds you are considering to make sure you are not all long-term or all short-term. For treasuries do not just choose a fund loaded with 30-year treasuries in other words.

Final note is that most funds use leverage so finding one with under 10% might weed out a lot of good funds. leverage is not necessarily a bad thing as it is the main reason many funds have such a nice yield. With rates holding steady the leverage is not cutting into profits as it was when rates were rising. So think about considering funds with more leverage than 10%.

Quote from spreadn00b:

So assuming my asset types are correct. I've gone through and selected funds that meet the following criteria:

1) Price less than or equal to NAV
2) Yield > 6%
3) Fund management fees < 2%
4) Leverage < 10% (except for municipal bonds, which all seemed leveraged 30% or more)

U.S. Government Debt - TIP
Mortgage and Corporate Bonds - EVG
Municipal Bonds - DMF
Global debt and Junk Bonds - GCF
Covertibles - CVF

I'm going to start watching these funds and others within their respective sectors and probably start slowly letting in cash over the next month. I'm still going to quadruple check my research.
More...
 
Thanks for the insight. I have another portfolio that is strictly dedicated to equities and options. I also own commercial real estate (i.e. the bricks and mortar) and my exposure is to my liking with that asset.

This is really the type of money that I would normally throw into a CD or a t-bill but I'd like to see if I can do better with rather limited risk.

The reason why I selected something with < 10% leverage is that typically leverage = volatility. Maybe in a flat rate environment I should make higher leveraged plays and in a volatile rate environment, shift to less leverage? How often do you rebalance?

Like I said, my objective in this account is to preserve capital and make better returns than a CD or a money market. I'm willing to suffer small drawdowns for better returns.

Quote from optioncoach:

I am nto sure what kind of coverage you said you have in equities already but I would also include funds with preferreds, private debt palcements, dividend equities and even real estate (commercial real estate is different from home buying). I say this just so you are not loaded with fixed income products but also have capital appreciation possibilities with a rising stock market, or better yet, you are adding in more securities with less correlation so that the entire fund balances out. In other words, rate increases could hurt all fixed income products but if the market is rising the equity sides could help offset that. TIP is good but you could also mix in some short maturity treasury funds.

Also, look at the durations of the funds you are considering to make sure you are not all long-term or all short-term. For treasuries do not just choose a fund loaded with 30-year treasuries in other words.

Final note is that most funds use leverage so finding one with under 10% might weed out a lot of good funds. leverage is not necessarily a bad thing as it is the main reason many funds have such a nice yield. With rates holding steady the leverage is not cutting into profits as it was when rates were rising. So think about considering funds with more leverage than 10%.
More...
 
The funds leveraged up to 33% or so do not have as much volatility as you think, it all depends on how they manage it. Many funds use derivatives to hedge interest rate risks, including swaps, so a rising rate environment can hurt a highly leveraged fund but if it is a good diversified fund with low relative duration, it will not drop as much and diversification of your portfolio will preserve the annual yields pretty nicely.

The ones that are dropping or experiencing a sinking NAV you can simply cut out and replace with better funds.

Quote from spreadn00b:

Thanks for the insight. I have another portfolio that is strictly dedicated to equities and options. I also own commercial real estate (i.e. the bricks and mortar) and my exposure is to my liking with that asset.

This is really the type of money that I would normally throw into a CD or a t-bill but I'd like to see if I can do better with rather limited risk.

The reason why I selected something with < 10% leverage is that typically leverage = volatility. Maybe in a flat rate environment I should make higher leveraged plays and in a volatile rate environment, shift to less leverage? How often do you rebalance?

Like I said, my objective in this account is to preserve capital and make better returns than a CD or a money market. I'm willing to suffer small drawdowns for better returns.
More...
 
Replace with JDD, increasing dividend trend, steady nav, and just experienced a pullback yesterday. Take a look this morning.

Quote from optioncoach:

The ones that are dropping or experiencing a sinking NAV you can simply cut out and replace with better funds.
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