I think you caught me for not doing enough research. My trade idea would be better suited for a covertiable that was trading near it's covertable price.
Coach, Where does the research start? In other words, assume you recognize a change in market fundamentals (e.g., rising interest rates) and you want to find a fund that will do well in that environment. How to you begin the research to track down that animal? -Chris
Hey, I just noticed that the powers that be put this back in the Journals section! OptionCoach I hope you keep adding to this journal, I have found it very enlightening. I didn't even realize that CEF's existed until you started this thread. Thank you.
Great question and I will go into detail when I have some time, today was so hectic! I was also researching some muni bond funds today but nothing really caught my eye. Phil
Chris: Basically I start with a top down approach to narrow my research area to not waste time looking through hundreds and hundreds of funds. I begin with an overall market outlook to determine which areas or sectors would be best and which to avoid. For example, in a rising rate environment I will avoid all government bond funds or bond funds in general with long durations. Then I go to www.etfconnect.com and they have a search function where I can pick a specific sector to look through or search based on discount and yield and whether you want an equity or fixed income fund. Now if you are just looking from scratch then you will really have no specific guidance where to start because there are many different sectors of CEFs. There are fixed income and within that there are government, corporate, international, municipal, specialty, etc. In equity there are dividend stocks, preferred stocks, convertible, growth and income, etc. My advice is to start with sectors you are familiar with or are comfortable with such as fixed income-corporate or equity-growth and income. When searching I look for the following criteria which can be seen by clicking on a ticker from your search or entering a ticker and calling up a fund report at the website: 1. Dividend yield > 5% 2. Trading at a discount (no min or max discount but want the edge of buying $1.00 worth of assets for $0.95). 3. Consistent or rising dividend. Avoid funds who have lowered dividends 2 or more times in a year. Always choose funds with monthly dividends, avoid annual or quarterly dividends. 4. Credit rating, if applicable. If you are looking at high yield corporates then you have to expect low average credit ratings. However if you are only looking for, let's say BBB or above then look at the average credit rating of the holdings if relevant (i.e. bond funds). 5. Top 10 Holdings. I want to see good diversity in the top 10 holdings. I do not want to see the top holding at 15% of the total assets. 5% and under for the top 10, under 1% per holding the best for good security diversification within the fund. 6. Sector Holdings. Depending on what fund you are looking at, the sector diversification may be relevant. You may be wary if the fund has 45% in one sector unless you are looking for exposure in that sector. For example, in REIT CEFs you might want to diversify the real estate sectors as well and avoid funds to heavy in one sector. This is more subjective because it depends on what exposure you want. A REIT CEF with 35% in commercial real estate may be fine if you consider it a strong sector but you might avoid a CEF with 35% in hospitality sector if you feel hotels, etc. are riskier. 7. History of Discount/Share Price/Nav. See how volatile the NAV has been the past year and compare it to the share price. I fund with steady or rising NAV is a sign of strength while a fund whose NAV has been decreasing steadily all year long may have a fundamental problem. Look for hisotry of the discount to see if the discount is at an extreme now or recovering from an extreme. Sometime the best time to enter is when the discount fell to -10% and is now back to -7% while the NAV has been steady indicating bullish interest. A CEF with rising NAV and increasing discount may be worth looking into because many times share prices lag NAV since CEFs get so little coverage and are often bought and held with little volume. On the other hand, a NAV decreasing while the share price is holding may mean trouble ahead. Nothing is definite so you would have to look deeper into the holdings and read the annual reports to look for possible reasons. 8. History of returns. Past history is not indicative of future results. But if over the past 1, 5 and 10 years the annualized share and nav returns have been consistent then it is a good sign of a well managed fund. 9. Leverage. Most funds have leverage and you cannot really avoid it. However funds with over 40% leverage are gonna see their profit margins squeezed due to leverage through variable rate preferreds, the most common form of leveraged used by funds. Many funds have between 30 and 40% leverage and I cannot say leverage is all bad as it does allow the fund to boost its returns. I do not have a clear rule either way but I try and avoid 40% and over. 10. Avoid chasing extremes. Do not go after funds with the highest discount or the largest yield unless you have good reasons (1 - 9) to back it up or expect it to continue. 11. management fees are generally low in most CEFs but fees 2% or higher should be avoided when possible. 12. If you like Dogs of the DOW theory you can try and find the funds with discounts over 10% and play the value game or the recovery game and try and trade them like stocks, while earning a dividend. Just look for most of the rules above before leaping. Sometimes a fund will go deep discount due to dividend change or a NAV moving faster than share appreciation. Either way it may present an oppty but sometimes a deep discount occurs because the fund is in serious trouble. So #12 is for those wanted to look for more risk in CEFs lol. Sometimes the best way to start is to go to www.etfconnect.com and pick one asset class of funds and just look through the summaries to see distinctions and what they invest in. Phil
DDF- Delaware Investments Dividend and Income Fund Share Price (11/11): $11.99 NAV: $12.55 Discount: -4.46% Yield: 8.01% DDF invests mainly in dividend common and preferred stocks as well as convertible securities and corporate bonds. It has a consistent dividend, its top holding id 1.73% of total assets, largest sector is Healthcare at 10.46% and also invests in Banking, Utilities, Telecom and Real Estate, and has a great track record. The NAV is slightly down this year but the share price has done better and therefore has reduced the discount high of -10% to the current 4.46%. I think this fund gives you a good diversification into dividend stocks and corporate bonds but it does juice the yield by looking for lower credit quality issues. However, the diversification within the fund helps to offset negative impacts from defaults or poor sector performance. The fund also keeps leverage to a maximum of 25% so rising rates will not squeeze those margins too much. If the market holds any strength into the first half of 2006, the fund should see continued share appreciation and NAV growth. On the down side, I think the fund will still hold steady enough to milk that 8% yield.
I too am beginning to get bit by the CEF bug. I bought into EVF, another floating senior loan fund recently. With rising rates, and a rising dividend yield currently at 7%, and a 10% discount to NAV, I decided to pull the trigger. The fund is 20% leveraged. Since senior debt is collateralized, I view this as safer than a high yield bond fund, and the 10% discount to NAV gives me some wiggle room. The fund is well capitalized and diversified in loans, so defaults in one or two of the loans should not hurt it significantly. Why do you prefer EFT to EVF (besides the 1% increase in yield right now), as it seems that EFT is a less mature fund than EVF and its NAV discount (now at 7%) is only widening? Granted it has a lower management fee structure of 1%, but that is probably only a teaser rate (need to do some DD and check the annual report). However, if the discount continues to widen, I agree it will probably be a superior fund to the EVF. I am beginning to start hunting around with CEF's now in december due to expected tax loss selling... some of these may go for some very attractive discounts, particularly in the bond funds.
Interesting thread on probably one of the most powerful investing method. I'd keep an eye out on REIT yields which are going to be attractive when housing softens some more. Also some Canadian Mining companies pay out hefty dividend rates. FDG is one of my favorites that I have in my long term account.
I will take a look into EVF and see what I find. I do not mind having a few floating rate loan funds. With a decent market outlook next year I will also start looking into preferred and convertible stock funds with the hope that rate increases tail off by March as some have said.
I am also looking into more REIT CEFs with a focus on commercial properties. Most commercial leases are long-term and have escalation clauses so if the CEF has a good portoflio of commercial properties in good diversified markets, they should still do well in either a rising rate environment or if the residential real estate market starts to soften. I still think they are good for 7%+ yields and they certainly require good DD to look at the holdings and the diversification. Will do some more research in the coming week for more candidates since I have some free cash.