Closed End Funds

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Tatala
Posts: 29
Joined: Sat Jan 19, 2019 9:28 pm

Closed End Funds

Post by Tatala » Tue May 28, 2019 7:12 am

I understand this is an index fund board, but has anyone had any experience with these?. A friend of mine is telling me he gets income every month on these to a tune of about 6.5-7% paid monthly. Are these any better than my 3 fund portfolio, because he sure makes it sound good. Tells me that even if the market goes down he will still get his dividend?
Thx

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Closed End Funds

Post by rkhusky » Tue May 28, 2019 7:27 am

The wiki has more information: https://www.bogleheads.org/wiki/Closed-end_funds

You might also look at https://www.bogleheads.org/wiki/Exchange-traded_fund, which has some similarities.

Dave55
Posts: 441
Joined: Tue Sep 03, 2013 2:51 pm
Location: Colorado

Re: Closed End Funds

Post by Dave55 » Tue May 28, 2019 8:30 am

I used to own PDI - Pimco Dynamic Income and PCI - Pimco Dynamic Credit and Mortgage. Both highly leveraged, can sell off suddenly like stocks (due to the leverage and other factors). You still get the distributions though. I like the simplicity of the 3 funder. CEF's are somewhat complicated, many are highly leveraged, and PDI is selling at a huge premium over the NAV now, so that makes it a very unattractive investment at this time. There is a huge following of CEF's on the Morningstar discussion boards. You can learn some of the basics over there.

Dave

Beliavsky
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Joined: Sun Jun 29, 2014 10:21 am

Re: Closed End Funds

Post by Beliavsky » Tue May 28, 2019 8:34 am

Tatala wrote:
Tue May 28, 2019 7:12 am
I understand this is an index fund board, but has anyone had any experience with these?. A friend of mine is telling me he gets income every month on these to a tune of about 6.5-7% paid monthly. Are these any better than my 3 fund portfolio, because he sure makes it sound good. Tells me that even if the market goes down he will still get his dividend?
Thx
I invest extensively in CEFs and follow them closely. Many CEF investors are yield-focused, and CEFs that invest in high yield bonds and employ leverage can produce high yields, at the expense of volatile and declining net asset values. High yields do not justify investments with low total returns. I think the closed-end fund structure makes sense for relatively illiquid assets such as municipal bonds, preferred stock, convertibles, mortgage-backed and other asset-backed securities, and bank loans. PIMCO has some high-performing multi-sector bond CEFs such as PCI and PDI that they run almost like fixed income hedge funds. They use interest rate derivatives to hedge exposures and take duration positions.

I suggest reading the Morningstar closed-end fund forum (I post there) and CEF articles on Seeking Alpha. If you come up with a CEF idea you can post it here for a more skeptical view :).

Vanguard Fan 1367
Posts: 882
Joined: Wed Feb 08, 2017 3:09 pm

Re: Closed End Funds

Post by Vanguard Fan 1367 » Tue May 28, 2019 8:38 am

I used to pick up tips for buying things from magazines, friends, acquaintances, etc. I bought a closed end fund which I won't identify but later one of those magazine articles or internet blurbs said that it was amazing that this particular fund could get away with what they were doing. I did ok with the investment so maybe the "get away with" article was off base but I sold the closed end fund.

I should read the WIKI on ETF's so that I know the difference between them and closed end funds.

Beliavsky
Posts: 927
Joined: Sun Jun 29, 2014 10:21 am

Re: Closed End Funds

Post by Beliavsky » Tue May 28, 2019 8:44 am

Vanguard Fan 1367 wrote:
Tue May 28, 2019 8:38 am
I used to pick up tips for buying things from magazines, friends, acquaintances, etc. I bought a closed end fund which I won't identify but later one of those magazine articles or internet blurbs said that it was amazing that this particular fund could get away with what they were doing. I did ok with the investment so maybe the "get away with" article was off base but I sold the closed end fund.

I should read the WIKI on ETF's so that I know the difference between them and closed end funds.
CEFs are actively managed, do not publish holdings daily (although most do publish a daily NAV), and do not have an ongoing creation and redemption mechanism to tie market prices closely to NAV. In response to activists or to ward them off, some CEF advisors do engage in tender offers to buy back shares at close to NAV when their CEFs trade at wide discounts.

not4me
Posts: 575
Joined: Thu May 25, 2017 3:08 pm

Re: Closed End Funds

Post by not4me » Tue May 28, 2019 12:39 pm

To expand a bit on CEF vs ETF...while some similarities, there are key differences. Not to be picky, but also want to watch the distinction between ETFs & ETNs. Broadly speaking, the CEF is almost expected to have leverage while the ETF won't. That amplifies gains AND losses. The "active manager" of the CEF then has a static pool of $s that doesn't fluctuate as shares are bought/sold. Investor A must find investor B to trade with, not the provider. So, if market takes a short term dip, the manager isn't forced to sell any asset in a panic. The discount/premium to nav is where this is seen. Liquidity can also become an issue.

Also to be clear, the "dividend" may be better thought of as a "distribution". It depends on the underlying asset to a degree; however, the manager can manage what is distributed better than with an ETF. There may be times when the distribution is classified as "return of capital" -- which isn't taxed in the year it is distributed, but in the year the share is sold. The ability of the CEF manager plays a bigger role, but they get much more compensation (note the expense ratio, which will likely include the borrowing cost of the leverage).

Topic Author
Tatala
Posts: 29
Joined: Sat Jan 19, 2019 9:28 pm

Re: Closed End Funds

Post by Tatala » Tue May 28, 2019 12:44 pm

Beliavsky wrote:
Tue May 28, 2019 8:34 am
Tatala wrote:
Tue May 28, 2019 7:12 am
I understand this is an index fund board, but has anyone had any experience with these?. A friend of mine is telling me he gets income every month on these to a tune of about 6.5-7% paid monthly. Are these any better than my 3 fund portfolio, because he sure makes it sound good. Tells me that even if the market goes down he will still get his dividend?
Thx
I invest extensively in CEFs and follow them closely. Many CEF investors are yield-focused, and CEFs that invest in high yield bonds and employ leverage can produce high yields, at the expense of volatile and declining net asset values. High yields do not justify investments with low total returns. I think the closed-end fund structure makes sense for relatively illiquid assets such as municipal bonds, preferred stock, convertibles, mortgage-backed and other asset-backed securities, and bank loans. PIMCO has some high-performing multi-sector bond CEFs such as PCI and PDI that they run almost like fixed income hedge funds. They use interest rate derivatives to hedge exposures and take duration positions.

I suggest reading the Morningstar closed-end fund forum (I post there) and CEF articles on Seeking Alpha. If you come up with a CEF idea you can post it here for a more skeptical view :).
Thank you..its ok to stay open minded

Karamatsu
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Joined: Mon Oct 27, 2008 2:42 am

Re: Closed End Funds

Post by Karamatsu » Wed May 29, 2019 12:40 am

I used to speculate in CEFs. They were a wild ride in 2008-2009, and when leverage funding dried up it looked like many of them would go under, but banks were willing to lend to them and none of the ones I held actually folded, which is more than I can say for some preferred stocks. But CEF structure is used as a wrapper for all kinds of things, including some pretty bizarre speculative strategies, and the ER is often higher -- sometimes a lot higher -- than you'd expect from the index fund world. I think you have to love finance and reading financial documents to have a clue about what you're doing, manage the risks, and avoid getting taken in. Always remember that the managers are in this for their own benefit, not yours.

PS Just to add, I don't own any CEF shares now... I'm reformed :wink:

hster
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Joined: Sat May 11, 2019 9:19 pm

Re: Closed End Funds

Post by hster » Tue Jun 11, 2019 2:31 pm

seekingalpha has the most active CEF community and articles.

Read this article which will list all the big CEF contributors to follow:
https://seekingalpha.com/article/426646 ... interviews

CEFs are a complex vehicle not only because of the leverage but because of NAV/price gaps and it takes time to understand and appreciate the risks/reward for this particular type of investment. Even if you don't invest, it's worth knowing about.

I am overweight in tax exempt muni CEFs and have some Cohen and Steers reit CEFs for the income part of my portfolio. Unlike passive investing, entry price is critical in CEFs and you need to understand historic discount/z score which you get from cefconnect.com and cefdata.com. You can't tell anything by looking at a CEF price chart.

Good luck.

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nedsaid
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Re: Closed End Funds

Post by nedsaid » Wed Jun 12, 2019 11:53 am

You don't hear much about Closed End Funds anymore. They still exist but with the popularity of ETFs, little attention is paid to them now. I owned a Global Health CEF, I nicknamed it Global Disaster. The manager, John Kaweske, got fired for front running the mutual funds that he managed with trades for his personal accounts. I held it for a while and sold at a loss.

The Closed End Funds have an appeal in that there is a set amount of shares that trade, a manager doesn't have to worry about inflows or redemptions. The weakness is that a CEF can trade at a discount to its Net Asset Value forever.
A fool and his money are good for business.

skepticalobserver
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Re: Closed End Funds

Post by skepticalobserver » Wed Jun 12, 2019 12:53 pm

Items of note about CEF’s.

Don’t confuse yield with payout. A portion of the high payout funds often include return of principal (i.e., your own money).

Many CEF’s with payout use leverage. An interest rate increase can damage the NAV. Additionally, CEF’s can sell preferred shares which may impact the NAV.

CEF’s may do “rights offerings,” which means creation of new shares to sell to the public, resulting in the dilution of the number of shares owned by current CEF stockholders, effectively devaluing those shares.

Research here for individual CEF’s: https://www.cefa.com/

Beliavsky
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Joined: Sun Jun 29, 2014 10:21 am

Re: Closed End Funds

Post by Beliavsky » Wed Jun 12, 2019 3:57 pm

skepticalobserver wrote:
Wed Jun 12, 2019 12:53 pm
CEF’s may do “rights offerings,” which means creation of new shares to sell to the public, resulting in the dilution of the number of shares owned by current CEF stockholders, effectively devaluing those shares.
Whether shareholders are diluted depends on the price at which new shares are offered and the premium or discount the fund is currently traded at. If a fund trades at a premium and issues new shares, that will be accretive to the fund, since those shares are being sold for a price above NAV.

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