Closed-end Fund Income Investing
- Thread starter El OchoCinco
- Start date
that is probably why we have a 9% yield and a 9% discount.
That is why looking under the hood is important, to see what % of the fund's assets are in MBS. You to also be careful about hypoerbole with respect to the housing market. Growth is slowing a bit but we are far from a crash. It is naturally for housing price growth to slow after jumping doouble digits for 5 years or so. But slowing growth is still positive growth.
You also have to understand the nature of MBS. Most MBS put out by Freddie and Fannie contained diversified pools of mortgages where defaults come in at the low single digits due to the huge pool of mortgages. Also, MBS usually deal in 30-year fixed mortgages so we are not really counting those interest only people who bought a house way over their head and could default. Also, Freddie and Fannie only buy mortgages up to a certain amount ($325,000? I forget) so those $700,000 homes are not being backed by Freddie and Fannie or those MBS. More importasntly, all Freddie and Fannie loans have minimum underwriting criteria so it is usually reserved for those with above average credit scores and financial situations which makes defaults less likely. Also, with interest rates rising, the amount of refinancings has slowed, also because most people have already re-fied, so as pre-payments slow, MBS have longer lives and funds who use them get more steady flows of income. The downside is that money is locked at lower rates so MBS prices may fall slighlty affecting the NAV (that is why the % in MBS is important).
So a fund owning MBS does not mean it is a bad thing. Housing market has not crashed yet nor has it shown signs of negative price growth or negative growth overall. Also the nature of MBSs means that risks are diversified pretty well and the mortgages are with people with above average credit in homes in the lower to mid ranges of most residential areas.
Again, that is why I grab the quarterly or annual report to see what the fund is holding and assess the risks of these holdings. I do not feel that MBS are a great risk given the real estate market for the reasons cited above, but for obvious reasons (diversification) I do not want a fund heavily loaded with them.
You also have to understand the nature of MBS. Most MBS put out by Freddie and Fannie contained diversified pools of mortgages where defaults come in at the low single digits due to the huge pool of mortgages. Also, MBS usually deal in 30-year fixed mortgages so we are not really counting those interest only people who bought a house way over their head and could default. Also, Freddie and Fannie only buy mortgages up to a certain amount ($325,000? I forget) so those $700,000 homes are not being backed by Freddie and Fannie or those MBS. More importasntly, all Freddie and Fannie loans have minimum underwriting criteria so it is usually reserved for those with above average credit scores and financial situations which makes defaults less likely. Also, with interest rates rising, the amount of refinancings has slowed, also because most people have already re-fied, so as pre-payments slow, MBS have longer lives and funds who use them get more steady flows of income. The downside is that money is locked at lower rates so MBS prices may fall slighlty affecting the NAV (that is why the % in MBS is important).
So a fund owning MBS does not mean it is a bad thing. Housing market has not crashed yet nor has it shown signs of negative price growth or negative growth overall. Also the nature of MBSs means that risks are diversified pretty well and the mortgages are with people with above average credit in homes in the lower to mid ranges of most residential areas.
Again, that is why I grab the quarterly or annual report to see what the fund is holding and assess the risks of these holdings. I do not feel that MBS are a great risk given the real estate market for the reasons cited above, but for obvious reasons (diversification) I do not want a fund heavily loaded with them.
What are the tickers so I can look them up?
Phil
Phil
Almost forgot... here is some very good reading on Covered Call cefs.
http://www.cefa.com/Education/WachoviaCovrdCall11.15.05.pdf
http://www.cefa.com/Education/WachoviaCovrdCall11.15.05.pdf
Tricontinental = TY
Z seven = zsev.pk
Never mind about Z seven - they are open ending the fund.
So then what about the old standby ADX? Particularly for the 5% stake in PEO? 15% discount
Here are a few fun floating rate loan participation funds to check out:
EVF: Discount 11%, yield 7% bid @ 7.70
A and AA rated loans
EFT: Discount 11% yield 8%
BBB and below rated loans
PFN: Discount 9% yield 8.7%
few AAA, mostly BBB and below
Also interesting is JPS - Discount 13.6% and yield 8.2%. A and AA rated secs. Think this one is preferred stocks.
Not sure if the 1% premium is worth the junk for EFT but there was insider buying on EFT.
I like EVF for now. Not getting greedy. If discount increases I probably will buy more.
By the way, these two sites are useful for closed end fund evaluation -
www.etfconnect.com
and
www.cefa.com
I'm of the opinon that these year end discounts may not last much longer as tax loss selling post dividend payments occurs. Wouldn't be surprised to see the discounts close in the beginning of the year, but frankly CEF's are relatively ignored it seems right now... until some goober publishes some fluff in IBD or WSJ and the sheeple start buying.
How much of a discount do you expect in the reits? 16% seems like a pretty high discount. DVM is not 100% reit by the way.
I've only been involved with CEFs for about a year, but I came to the same conlcusion as you, that year-end tax selling on "losing" positions is advantagous to some (the loss already made up for by the low-tax rate dividend) and is having an impact on prices. I'd expect to see a pop after year-end on some of these which have gotten to what seems like huge discounts (i.e. DVM), but as you pointed out, these funds seem to be largely ignored by most on and off the street, so who knows....