Closed-end Fund Income Investing

El OchoCinco · Oct 8, 2006

This is why I hold CEFs for the long-term. Look how VVR came back. Still own it.

Quote from optioncoach:

Actually I own VVR (knew it sounded familiar lol). Picked it up in Jan 2005. Down 4% since I bought it but been harvesting that yield while offsetting the share price moves. As the chart shows it did decline in price and increased its discount over 2005 but the NAV has been pretty steady. Its price has come off the large discount from last November and the discount has narrowed. I still like VVR and will hold on to it and perhaps add some more.

One thing I like is that the dividend has increased from $0.396 a share in April 2005 to $.0507 for Feb 2006. No more than 12% in any one sector and no more than 2-3% in any one security. Rising interest rates will help the portfolio but also squeeze a little their use of leverage. Overall, though, it should still result in a net positive return for the year, perhaps move back to a premium.

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El OchoCinco · Oct 8, 2006

CIK now trading at $4.15 and discount narrowed to -2.35%. Small share price appreciation while pocketing the almost 9% yield to date..... Still own it.

Quote from optioncoach:

Here is another fund I have owned for about 2 years and going to add more to my position today:

CIK - Credit Suisse Asset Management Income

Pricing Info As Of: 01/30/2006
Closing NAV: $4.26
Closing Share Price: $3.96
Premium/(Discount): -7.04%
Current Market Yield: 9.09%

The dividend was cut back in August of last year but has held solid since. I held this one from a discount to a premium and it dove back to a discount when the dividend was cut but to its credit the NAV has held up failry well. There was some volatility in the NAV and share pricing but if this fund is part of a good diversified CEF portfolio, the nice 9% yield can be mined with minimal risk.

It invests mainly in low grade fixed income securities but its largest holding is only 1.2% of assets and the average credit quality is B, so risk is spread out as best as can be in such a low-grade portfolio.

Average duration is about 4.34 so the fund appears to have taken measures to hedge itself in a raising rate environment.

The fund took a hit in 2005 of about 9% in its share price while the NAV was UP 2%. SO you have to deal with price volatility which is understandable on an issue currently priced below $5.00. However I like its duration, average coupon yield of just under 9% and diversity. As long as I can keep my holdings diversified to offset the volatile price swings, I will be happy to pocket 9% in income.
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El OchoCinco · Oct 8, 2006

BGT held up well over the year so far currently at $18.78. Discount has narrowed to 2.24% but still paying almost 8%. Still own it.

Quote from optioncoach:

A CEF I currently own and decided to double my position in.

BGT - BlackRock Global Floating Rate Income

Price: $17.97 (1/24)
NAV: $19.25
Discount: -6.65%
Yield: 7.68%

BGT invests primarily in floating and variable rate loans from around the world. At least 80% of its assets will be in in such intruments of U.S and non-U.S. issuers. This also will include senior and secured loans made to corporations and businesses.

I think this is a great play to get international exposure and also to take advantage of rising interest rates around the world even if it seems the extent of rate hikes might have slowed. 67% of the fund's assets are in the U.S. so there is a good balance of U.S. v. non-U.S. assets.

The fund has increased its dividend from $.0933 a share to $0.115 a share and is still trading at a nice discount. The discount did drop as low as 12% late last year but still is decent in my opinion. More importantly the NAV has traded in a nice tight range of $19.48 - $18.96 so despite some volatility in the share price, the fund's assets have been pretty strong and should continue to support its dividends.

The fund can take advantage of rising rates well due to its low effective duration of 1.2. That means that current assets will not suffer too much as rates rise and principal and income can be reinvested at higher rates rather quickly.

As for risk, despite the U.S./non-U.S. balance, most of the top 10 holdings are debt of soverigns such as Ukraine, Panama (my favorite) and Venezuela, but no one holding is more than 2.56% of the total portfolio. So some foriegn risks but well spread out. Also the risks are that most floating rate loans are in the BBB and below rating. But again, good diversification can reduce the negative effects of default risk.

Overall I like the rising dividends, the play on rising interest rates abroad as well as in the U.S., the solid NAV and internal diversification.
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El OchoCinco · Oct 8, 2006

Never grabbed RQI which was a mistake since it has ha da great 2006. Currently trading at $24.90. No clue why I never pulled the trigger

Quote from optioncoach:

Did some more research and came up with the following interesting REIT CEF candidate:

RQI- Cohen & Steers Quality Income Realty Fund

Share Price: $20.00 (12/02)
NAV: $23.12
Discount: -13.49%
Yield: 8.40%

RQI invests in REIT stocks and REIT preferreds and I like it as as large-cap REIT, Office sector addition with a great yield supplied by that discount. The discount has widended from its low of about 6% in early January but I feel that this widening is a result of two factors, (1) pullback in the huge run-up of REIT stocks and (2) rising rates hurting the profit margin due to use of leverage. However, the NAV has increased slightly over the last quarter and I feel the above two factors will not be as big a weight on the NAV and share price.

First, I have read from analysts that continued expansion of the U.S. economy and improving occupancy rates will keep REITS growing and thus keep the NAV growth positive. Also, many believe the FED is near the end of its monetary tightening cycle, all things remaining constant so further squeezes in profit margins from leverage should be minimalized. Moreover, the fund, at 33% leverage, has entered into fixed rate swaps for half that leveraged amount to lock in as much of their interest costs as possible to protect as much of the dividend stream as they can. Based on the above, I think it is not a bad time to grab a REIT CEF, especially one at such a nice discount and with that nice yield.

Another reason I like RQI is diversification. Geographically, the fund has 21% in the South Atlantic, 21% in the Pacific, 18% in the Mid-Atlantic and 11% in the North East Central (Chicago), so the REIT holdings are spread out over the major metropolitan centers in the U.S. Also, no one holding makes up more than 5% although the top 10 holdings do make up 33% of the fund. THis is because most of the holdings are in large-cap REIT stocks such as Vornado, EOP, CarrAmerica, etc. But still, the sectors still range from OFFICE (25%) to Hotel (1%) so you have a pretty good diversified real estate investment with no one sector in any part of the country being able to drag down the fund.

The discount is at the high for the year but the NAV has upticked the past 6 months or so and if conditions continue to improve I would hope the share price would follow. However, my main enticement is that 8.4% yield and diversification of CEFs within a portfolio can help hedge away most of that share price risk will still collecting nice monthly income.

Downside naturally exists on increasing rates related to leverage and unexpected weakness in office space sector.

So for REITs with a slight bias towards office properties, I like RQI.
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El OchoCinco · Oct 8, 2006

Still own it and it is currently at $14.84. Unfortunately I did not get in until $13.98 but still paying nice yield...

Quote from optioncoach:

Another candidate I am looking at this afternoon. This fund has a nice blend of common stocks, preferred stocks and corporate bonds for good income and intrafund diversification.

CSQ- Calamos Strategic Total Return Fund

Price: $13.71 (1/5/06)
NAV: $14.95
Disc. -8.29%
Yield: 8.53%.

According to Calamos, the portoflio is about 41% in common stock, 30% in convertible securities and 27% in high yield/corporate bonds. Good credit rating diversification as well with 31% investment grade and 40% B and below. (22% at BB).

Their fund summary as of NOV 2005 includes equity holdings such as Washington Mutual, Bristol Myers and Johnson and Johnson, Convertible Preferreds such as Ford Motor Capital Trust and Chubb Corp, and high yiled holdings such as At&T and Advanced Micro Devices- so some nice diversification. I also like the small overseas exposure of the fund (about 8% of assets).

WaMu is the funds largest holding at 3% and the top 10 holdings only make up about 15% of the fund.

The dividend has increased over the past year and the NAV has also moved higher. The discount was as high as -10% and has improved and I still think there is more room for the share price to grow. With interest rate hikes slowing down, the 32% leverage will not keep biting into the fund's income.

I like the mixing of the 3 types of securities together and the range of sectors the fund invests in. The discount could narrow as the fund's assets improve with a better year than last year. I do not expect a raging bull market but we can always do better than flat and that should help many of the common and preferred securities. Stabilization of rate hikes should also stop biting into the high yield portion of the portfolio and shrinking the margins on the leveraged assets.

So with a nice yield of 8.53% and a big discount which could move back towards its 5 - 6% range of the summer, I think total return for the year could push 10%. Risks are always present with common and preferreds so naturally in a lousy stock market or continued rising rate environment you will want to keep an eye on the price.
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El OchoCinco · Oct 8, 2006

Just updating some picks here so I can get back into posting as I rebalance my portoflio and add new CEFs.

TO be fair, here are some dogs I am going to unload this week:

FRA & FRB - both Blackrock floating rate income strategies. Other floating rate funds did well, this both are down about 9% so I got to cut them.

OUI - realty income, started off well but down close to 10% as well.

Diversification in different funds allows me to absorb those losers and still keep my high yield. Will dump these this week and look to load up on another 10 funds or so....

Sorry for the absence...

toucan · Oct 8, 2006

Optioncoach...

I see a lot of funds with falling prices.... Is it typical for CEF prices to drop in the fourth quarter.... say due to end of year selling.

Looking forward to your search for replacements..

Toucan

makloda · Oct 9, 2006

I just discovered and read most of the journal and couldn't find any reference to www.cefa.com.

I like the performance graphs here which I believe INCLUDE dividends, i.e. the little chart shows the total ROI a CEF has generated over time.

Here is an example of a fund: http://www.cefa.com/FundSelector/FundDetail.fs?ID=3195

I'm sorry if this site was posted before, just wanted to share.

One thing I would love to find is a CEF search tool that ranks funds by daily volume, e.g. > 250.000. Sometimes I find funds that might interest me just to discover they trade around 5000 shares a day with a 1% spread. Any suggestions?

El OchoCinco · Oct 9, 2006

Yes CEFA is a good link. Looks like they updated their website in a big way!

Does etfconnect have a volume screener?

No Option · Oct 9, 2006

Phil:

Glad to see you have started posting to this thread again.

I've been quite happy with CSQ (been involved in Calamos funds for a while)

I'm also pretty happy with EFT - the discount rate has narrowed to 3.03% but is paying a nice 8.94% dividend.

Please let us know about your other adjustments as well as funds you might consider adding...