Closed-end Fund Income Investing

About 10 - 12% returns on CEF portfolio compared to 4% and under for t-bills. I am comparing the amount of money I put in CEFs v. the amount I would put in T-bills, you have to remember that. So you cannot compare 25% of your portfolio in CEFs v. 100% in t-bills. The effect on your total portfolio depends on how much of it is in CEFs. I like looking for the extra returns and selecting CEFs based on their underlying portfolios. I am putting idle cash and margin to work at higher returns then if I put the same amount in t-bills.

For people who want to avoid the extra work and research then tiered maturitiy T-bills are a great substitute. I enjoy the research into CEFs so the extra returns is worth it.

Quote from gatorplease:

I'm curious Coach, How much better have you done with this formula than say using 3 month treasuries, which have next to no risk?
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Quote from optioncoach:

There was a lot of interest generated from my SPX Credit Spread Trader thread on my use of Closed-end funds to generate monthly income, put my credit spread margin to work and hedge some of the returns of option trading with the monthly income and capital appreciation.

Basically I use closed-end funds as buy and hold investments, not for flipping or trading. I look for CEFs that meet the following criteria:

1. Should do well in the coming year based on fundamental economic factors in the market and the type of investments the fund makes (i.e., in a rising rate environment focus on shorter duration funds, buying REIT funds when real estate is doing well,, etc..) Basically I do a detailed analysis of the fund investments and see if they should do well based on all market factors.


2. Look for funds which are diversified within their holdings and not heavily loaded in one sector or sectors unless that is the sector I am looking to be invested in.

3. Look for a yield of 6% or better, same after-tax yield levels for muni funds. THIS ARE NOT RISK_FREE INVESTMENTS SO HIGHER YIELDS DOES BRING RISK. ALWAYS REMEMBER THAT RISK COMES WITH YIELDS!

4. Look for funds trading at a discount or flat.

5. Avoid heavy leverage where possible.

6. In addition to diversification with each fund, strive for diversification with all funds together - not all REIT funds or corporate bond funds.

7. STOP LOSS- With good diversification, share price drops can be diversified away in a good CEF portfolio and you will be left with the yield. However I still want the extra boost from share appreciation so I try and cut losers when I can. My short-cut formula is to cut any fund when its share price loss equals it dividend yield I had when I first got in. This is a no-brainer way to cut losses and an easy rule to follow. The monthly income will insure that unless the drop occurs immediately, you will never suffer the full stop limit loss. SO if a fund is down 7% in 4 months and that is the Stop limit loss level, the actual loss will be loss due to 4 months of dividends and you simply sell the fund and look for the next one. I may hold onto funds in limtied cases and it is a case by case determination

8. AS long as a fund is paying a good yield and share price loss is not at the stop loss limit, you never sell and hold to keep that monthly income. Exception is if you forsee fundamentals changing for that funds sector and you wish to close out and take the profit in the share appreciation. My other rule is that if the gain is 20% or more in a year, you are free to take the money and run since the dividend yield was greatly outpaced by the share appreciation and the gain is more now then you could get in a few years so better to cut and reinvest the proceeds elsewhere to avoid losing those gains for the sake of a dividend. 20% is significant enought to take profits.

I am attaching the DEC 2004 issue of the free newsletter I started but discontinued do to time constraints and family obligations. The reason I put this here is that the first half lists the 6 reasons why you should consider adding CEFs to your portfolio. I also list 4 CEF picks which I wll discuss in the next post in more detail. I AM NOT STARTING THE NEWSLETTER AGAIN AND NOT SOLICITING ANYTHING HERE EVER. PLEASE READ THIS SENTENCE TWICE BEFORE ACCUSING ME OF LOOKING TO PUSH A PRODUCT. THIS NEWSLETTER WAS FREE AT ALL TIMES AND I STOPPED IT DUE TO TIME CONSTRAINTS AND PERSONAL REASONS. I HAVE NO DESIRE TO DO IT AGAIN AND POSTED IT HERE JUST TO SAVE TIME IN HAVING TO REPOST THE 6 REASONS THAT ARE IN THERE. IT ALSO STARTS THE DISCUSSION ON SOME CEFS.

Ok, feel free to add comments and discussion on CEFs. The purpose of this thread is to discuss income CEFs as a tool to add monthly income and stability to idle cash in your portoflio or for money used as margin for credit spreads, short puts or for any reason you like really. This thread is not about trading or flipping CEFs and it is more long-term since the goal is annual yield and income as an addition to your portfolio.

Phil
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Don't worry too much about premium/discount. Remember these funds trade this way for a reason and will likely continue to do so.

Stop loss on a fund? Now I've heard it all.

I would look at some good income trusts and diversify accross those.

Best of luck to you.
 
A CEF trades like a stock so a stop loss helps preserve the income stream so drops in share price do not eat it all up. The focus on the discount is because a fund that is doing well wil have the NAV move out ahead of the share price many times and thus the discount. The reason I study the annual or quarterly reports is to make sure there is not a negative reason for the discount. But many funds trade at a discount for the fact that the NAV moves quicker than the shares since CEFs are not as heavily followed or traded. The discount lets you get in with a better yield and if it is a good fund that discount will narrow adding some share appreciation on top of the income. But like I said, it requires the additional study of the fund.

Phil


Quote from ArbProfit:

Don't worry too much about premium/discount. Remember these funds trade this way for a reason and will likely continue to do so.

Stop loss on a fund? Now I've heard it all.

I would look at some good income trusts and diversify accross those.

Best of luck to you.
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Quote from optioncoach:

A CEF trades like a stock so a stop loss helps preserve the income stream so drops in share price do not eat it all up. The focus on the discount is because a fund that is doing well wil have the NAV move out ahead of the share price many times and thus the discount. The reason I study the annual or quarterly reports is to make sure there is not a negative reason for the discount. But many funds trade at a discount for the fact that the NAV moves quicker than the shares since CEFs are not as heavily followed or traded. The discount lets you get in with a better yield and if it is a good fund that discount will narrow adding some share appreciation on top of the income. But like I said, it requires the additional study of the fund.

Phil
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If you've found an edge in it then congrats, hit it hard.
 
An edge but a conservative one really. My approach is for income at 7 - 10% a year yield on invested capital since this part of my portfolio backs up my credit spread trading and other option positions (i.e., I am not shooting for 7-10% on my portfolio, just on the capital I place in CEFS which can be up to 70% at times). CEFs are very overlooked in the trading world (mutual funds and index ETFs still get all the glamour) and one can use them to generate diversified monthly income at worthwhile yields. They require the same due diligence in stock selection but quite worth it in my opinion.

I was hoping this would remain as a journal but the powers that be took it out. I doub there is enough interest to keep it going here so I will let it die its own slow death. Anyone interested in discussing CEFs, just PM and we can chat there.

Thanks!

Quote from ArbProfit:

If you've found an edge in it then congrats, hit it hard.
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what does "it could be a good time to look at a few of the ones that have gone to a big discount to nav."

"discount to nav" phrase mean?

I know what discount (bonds) are, but don't know the lingo of "nav"


I'm a big (corporate) bond fellow myself.. Have you looked at Interactive Brokers corporate bond margin details? 10% cash with 90% on margin is pretty fierce-- haven't branched out into what you are talking about here yet.. so pretty interested in the thread! I can google CEF's but do you have some "choice" links I can do some research ?


cheers,


k.
 
Quote from fandelem:

what does "it could be a good time to look at a few of the ones that have gone to a big discount to nav."

"discount to nav" phrase mean?

I know what discount (bonds) are, but don't know the lingo of "nav"


I'm a big (corporate) bond fellow myself.. Have you looked at Interactive Brokers corporate bond margin details? 10% cash with 90% on margin is pretty fierce-- haven't branched out into what you are talking about here yet.. so pretty interested in the thread! I can google CEF's but do you have some "choice" links I can do some research ?


cheers,


k.
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closed end funds will at times sell for less(or more) than the value of the assets in their fund. when they sell for less than the bonds or whatever asset they hold is worth they are said to be at a discount to nav( net asset value). sometimes that can be a good time to buy them hoping the market will correct the disparity and bring the value into line.

here is an example of a cef that i own. it is currently 9.7% undervalued to its nav.
http://etfconnect.com/select/fundPages/gen.asp?MFID=3730
 
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