Is Anybody investing in Closed-End funds (CEF)?

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Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

Just came across some articles about CEFs ... Is Anybody investing in Closed-End funds (CEF)?like PHK, PFN, NSL, JFR? What are cons and pros of CEFs? I understand that significant portion can be invested in junk bonds, right? Are they safer than HYG or JNK?
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by westcoastfella »

I hold both PDI and PCI from Pimco, they account for about 2.5% of my portfolio, as part of the "high yield bond" segment.

If you've read a few articles about them, then you probably have already seen a list of pros and cons. I like active management for something like high yield/global/junk bonds, because I don't have access to everything that professionals do, nor do I have the insight/time to keep up on markets like this, and I don't want to own an index in this space. From my POV, best to let a professional do it and pay the fee. The main advantage for CEF for me is that they help to mitigate things like forced redemptions or forced purchases that happen when money flows in and out of a mutual fund - high yield can be fickle.

Downsides for me include: trading fees (mitigated by not trading them frequently) and prices that are sometimes above NAV (PDI is such a fund, currently trades at 5-6% above NAV).

My understanding of my CEF's is that the manager pretty much has free reign on investing the contents of the CEF along the lines of the general prospectus. In the event that they cannot find suitable investments at suitable prices, they can invest the money elsewhere as they see fit, junk bonds included. This should be detailed in the CEF information.

I don't have a comment on whether they're safer or not - high yield is inherently risky no matter the investment vehicle.
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

It weren't a real "articles", but some mentions on seeking alpha :), I couldn;t fund some real articles about CEF. For high-yiled I hold only HYG (less than 1% of my portfolio), was thinking to add some income CEF, but not sure how to select the most suitable for current valuations...
so, wanted to ask, what were the reasons that you bought PDI and PCI and not others?
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by Peculiar_Investor »

The search function turned up a couple of older topics, http://www.financialwisdomforum.org/for ... 3&t=105687 and http://www.financialwisdomforum.org/for ... 3&t=111012 that seem to indicate that at least a few members invest, or invested, in CEFs.
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by Arby »

There are over 150 closed end funds listed on the TSX, covering almost every type of asset class.

https://www.tmxmoney.com/en/research/cl ... funds.html
http://globefunddb.theglobeandmail.com/ ... ed_end_rep
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by OptsyEagle »

I have a fairly negative opinion of CEFs in Canada, at least. It is a cesspool of unethical behavior, if you ask me. There will be exceptions but there are becoming harder to find. The biggest problem with them, is that an investor can sell them bet they cannot redeem 100% of their investment, from the fund. What this means is that the fund manager, once a fund is created and sold to investors, can basically do whatever they want. If an investor doesn't like it, they can sell their shares but the fund still retains their assets and therefore retains their fees. Basically, if an investor does not like what management is doing they can leave, PROVIDED they go out and find a new customer to replace themselves with.

Not really the kind of structure to create accountable managers. What you will see is management, wanting to grow their assets and therefore their fee income, will constantly issue new share offerings. They will do this many times by way of a rights offering since most CEFs trade at a discount to their NAVs. This creates a constant dilution to the current holders. These offering are usually done under a rights offering, to the owners, where most investors seem to see it as getting money for free. In actual fact they have about 1 minute of time to sell those rights to recoup enough money to pay for the dilution of their current holdings. It is complicated math that most investors as well as regulators seem to ignore, but overtime this dilution will result in reduced returns. To add insult to this, the managers will expect the current investors to pay the brokers fee, out of their fund, to pay the cost of this secondary offering. Most open end funds pay their own marketing costs, but the regulators seem to think that CEF holders should do it, in these funds. The managers use the term economy of scale to tell the regulators that it is in these investors interest to do this. It is not. It is ALL in the interest of the managers and that is who should be paying for it, if it should be allowed at all.

Stay away from CEFs in Canada. CEFs are managed for the benefit of the manager, who hope that their investors can get something out of it as well, but seem fairly happy when they don't. Poor performance doesn't create much of a longer term issue for them, because as the investors figure this out and leave, that investor provides the manager with another unsuspecting customer for them to take advantage of for a while. This is done by them selling their shares at whatever price they can get for them, to another investor...or they keep them. In either case the managers fees are not effected, so why would they care...and in my experience, they don't.
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

Stay away from CEFs in Canada
Actually, I never considered CEF in Canada, only on NYSE .... and my biggest problem ... what criteria I need to consider to select one...
except to check discount/premium to NAV.... btw, this is also kinda tricky parameter, i noticed that majority of CEFs that trade with discount, were trading with discount for many years, and opposite....
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by westcoastfella »

gibor wrote: 22 Jun 2017 21:13 so, wanted to ask, what were the reasons that you bought PDI and PCI and not others?
At the time I bought PDI, I was looking for an addition to my high-yield bond sector, and thought it looked attractive both in terms of yield (9% at the time) and managed by Pimco who are well respected as managers of various bond funds. It trades at a premium to NAV, a few months ago I cycled half of my PDI into PCI - similar to PDI but has a larger concentration in MBS and trades at a discount to NAV. Both are considered high yield, and both are inherently risky, so a closed fund managed by Pimco seemed a good way to go. At the time both funds had favourable analysis.
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by Taggart »

I used to look at closed end funds back in the 80's and 90's, but I don't remember actually purchasing one. Years ago when John Templeton was alive, he ran a emerging markets closed end fund listed in Toronto that I think was pretty successful. Late in the 90's when Argentina was into a major economic crisis I considered investing a small percentage into the Argentina closed end fund, but when I actually went to purchase, the directors decided to shut the fund down. I know that at one time Burton Malkiel was invested in a few CEF's so you might want to try and find some of his earlier editions of "A Random Walk Down Wall Street" to see what he says about investing in them.
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

westcoastfella wrote: 23 Jun 2017 13:27
gibor wrote: 22 Jun 2017 21:13 so, wanted to ask, what were the reasons that you bought PDI and PCI and not others?
At the time I bought PDI, I was looking for an addition to my high-yield bond sector, and thought it looked attractive both in terms of yield (9% at the time) and managed by Pimco who are well respected as managers of various bond funds. It trades at a premium to NAV, a few months ago I cycled half of my PDI into PCI - similar to PDI but has a larger concentration in MBS and trades at a discount to NAV. Both are considered high yield, and both are inherently risky, so a closed fund managed by Pimco seemed a good way to go. At the time both funds had favourable analysis.
Yeap, I also have good opinion about Pimco...
As per http://news.morningstar.com/CELists/CEReturns.html
PCI is the only one Pimco CEF (out of about 20) that trades in slight discount to NAV :)
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by Sensei »

Hi,

I've been seriously investing in CEFs for three years in the US. I could say a lot about them, but I'd be reiterating what others have said above so I'll be brief. The chief attraction for me is the professional management and generous but steady dividends. Pimco, as stated above, is worthy of respect. Daniel Ivascyn who replaced Bill Gross as CEO is phenomenal manager.

The negatives are that being closed, fund prices don't offer 10 bagger returns by any means. My own current fund (HPI) has averages about 8% over the last 10 years. Also, CEFs use leverage and most ratios are 20 to 30% of NAVs. This seems not unreasonable to me but YMMV.

My investing procedure is to wait for significant discounts to NAVs and buy. If the fund price closes in on the NAV, one strategy is to sell as CEFs seem to follow cycles. 2015 was a great time to buy when great discounts were to be had across the board. Now is not a good time to buy. In the past I owned USA, PDI, PCI, RCS, and HPI (which I still have). I'd also be looking for 7-9% yields.

I think these are other places to investigate for those with an interest in CEFs:
General:
Contrarian Outlook (I've learned the most from this website)
Nuveen CEF Connect

Well known and legitimate CEF families are to be found by searching for Cohen Steers, Nuveen, Crumrine Flaherty, Pimco, John Hancock, Liberty, Aberdeen, and Powershares. However, it is necessary to do your own due diligence for each fund.

One thing I often do is back check the distributions. For example I found out that Liberty Allstar Equity fund pays a dividend based on 8% of it's net asset value and decides yearly. That means some variability. Another important point is that USA Equity fund will never close the NAV gap. It trades on average at an 11% discount. These may sound like negatives to some people, but it is still worth a look. Currently yields about 9%.

My own fund HPI is very consistent and has paid the same distribution monthly for years. Not much growth but yields 7.7% and I feel quite safe with this CEF.

Anyway, good luck!
Cheers

"A dividend being paid today is always a positive return." Josh Peters, Morningstar
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

My investing procedure is to wait for significant discounts to NAVs and buy.
Here I'm a bit confused, I checked discounts/premiums as per http://news.morningstar.com/CELists/CEReturns.html
for example NexPoint Credit Strategies Fund NHF , now it's at almost 12% discount to NAV, 11%+ yield... so what is wrong with it?
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

Also I'm curious if I have to pay dividend withholding tax on US CEF if i hold it in RRSP?
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by Sensei »

Hi,
gibor wrote: 24 Jun 2017 14:16
My investing procedure is to wait for significant discounts to NAVs and buy.
Here I'm a bit confused, I checked discounts/premiums as per http://news.morningstar.com/CELists/CEReturns.html
for example NexPoint Credit Strategies Fund NHF , now it's at almost 12% discount to NAV, 11%+ yield... so what is wrong with it?
On the surface of things, the logic seems counter intuitive as you infer. However, a few points should be noted. CEFs only issue a limited amount of units and this does not change. The units then go to the open market and the managers have nothing more do with them. Their job is use a wide variety of strategies to increase the distribution and NAV by managing the underlying assets. They don't have to worry about fund redemptions. They may buy or sell bonds, buy or sell equities, or use various derivative strategies. Also, they use leverage and this is most often done by initiating their own bonds or preferred shares. These are the fundamental reasons why CEFs act differently than other cousins like ETFs (usually indexed), or mutual funds which frequently issue new units to cover redemptions.

Having said that, there could be many answers to your question about NHF, but I'll give a few possibles:
1. It could be something to do with the credit rating of NextPoint. (couldn't find any at Moody's. Too small?)
2. It could be something to do with the assets. (In NHF's case micro-cap equity)
3. It could be something to do with management.
4. Leverage situation. (I found nothing on NHF's website but did see 23% at CEF Connect. Doesn't seem too bad.)

However, here is some more data and you can decide for yourself. According to Morningstar
1. 52-week market price range of NHF 9.82 to 23.15
2. The average discount to NAV is 12.6% over 3 years. In other words it is now trading above its 3-year average. Also, it may never reach its NAV.

This continued discount to premium may be a market reaction to management. The NAV swing maybe something else. In my view, management matters and that explains why, all else being equal, Pimco's funds often trade above their NAV. In 2015 early 2016, normalization of interest rate policy rumours hit all CEFs and there were some good deals to be had even at Pimco. In NHF's case, it is fund specific most likely. More information about NHF
I don't think I would be interested in something like this since there are other alternatives which I list above. (I forgot to mention Gabelli CEFS. Mario Gabelli is a legend in the investing community.)

As a rule of thumb, many CEFs can converge from a discount to NAV price to the NAV price assuming that managers use appropriate strategies. For example, HPI's NAV is currently 21.86, but I paid 20.02 when it was trading at approximately an 8% discount to NAV. Incidentally, that pretty much covers the MER of 1.79%. (Another consideration.)

We might also say that if the discount to NAV is say 10% we are buying $1 worth of assets at 90 cents. On the other hand, the NAV can be a moving target, so maybe not. :wink: You have to look at the discount to NAV and make a guess about whether it will converge to the NAV price. For a fund like PDI, I'd jump on almost anything below NAV, but that seems like a distant possibility for now.

I encourage others to do the maximum dd before deciding on any particular CEF.
Cheers

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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

Sensei, thanks for replies :)
I don't think I would be interested in something like this since there are other alternatives which I list above. (I forgot to mention Gabelli CEFS. Mario Gabelli is a legend in the investing community.)
NextPoint was just an example, also Gabelli CEF GGO is trading 11% discount to NAV, several big Nuveen's NXJ, NTC, NQP, NUM etc.. Pimco's only PCI is trading slight discount 2.7%...
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

Sensei, thanks for replies :)
I don't think I would be interested in something like this since there are other alternatives which I list above. (I forgot to mention Gabelli CEFS. Mario Gabelli is a legend in the investing community.)
NextPoint was just an example, also Gabelli CEF GGO is trading 11% discount to NAV, several big Nuveen's NXJ, NTC, NQP, NUM etc.. Pimco's only PCI is trading slight discount 2.7%...

and again :)
do I have to pay dividend withholding tax on US CEF if i hold it in RRSP?
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by Sensei »

Hi,
and again
do I have to pay dividend withholding tax on US CEF if i hold it in RRSP?
Others may have to answer that question. For taxation purposes, I am not a resident of Canada, so not eligible for an RRSP.

BTW, you mentioned Morningstar, so perhaps I should thank you. I was not aware of their coverage of CEFs and I will add it to my list of worthwhile places to research and/or read about CEFs. The three year average discount to NAV seems likes a useful metric.

There is a slight hitch to GGO. It doesn't pay a distribution, so that is something else to consider.
Cheers

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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

So far I placed on my watch list 2 Nuveen's CEFs: more conservative JMM and more risky JDD
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

So far I placed on my watch list 2 Nuveen's CEFs: more conservative JMM and more risky JDD..do you have any opinion on those?
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Re: Is Anybody investing in Closed-End funds (CEF)?

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gibor wrote: 24 Jun 2017 14:20 Also I'm curious if I have to pay dividend withholding tax on US CEF if i hold it in RRSP?
I don't think so, hold both PDI and PCI in my RRSP and do not see anything withheld from the monthly distributions. In general payments from US entities should not have anything withheld due to special tax treatment of RRSP's.

However, it occurs to me that I don't actually know if the CEF pays a "dividend" or not. The holdings inside the CEF could be a multitude of things that give off non-dividend payments (interest payments, ROC), and may be treated differently tax-wise. I don't usually investigate the nature of payments for RRSP holdings because it does not really matter to me.
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Re: Is Anybody investing in Closed-End funds (CEF)?

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westcoastfella wrote: 25 Jun 2017 19:54
gibor wrote: 24 Jun 2017 14:20 Also I'm curious if I have to pay dividend withholding tax on US CEF if i hold it in RRSP?
I don't think so, hold both PDI and PCI in my RRSP and do not see anything withheld from the monthly distributions. In general payments from US entities should not have anything withheld due to special tax treatment of RRSP's.

However, it occurs to me that I don't actually know if the CEF pays a "dividend" or not. The holdings inside the CEF could be a multitude of things that give off non-dividend payments (interest payments, ROC), and may be treated differently tax-wise. I don't usually investigate the nature of payments for RRSP holdings because it does not really matter to me.
In any case, the characterization of distributions by a foreign fund does not matter, even for a (Canadian) taxable investor: everything is "foreign income", regardless of what the foreign-listed ETF or CEF calls it
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

In general payments from US entities should not have anything withheld due to special tax treatment of RRSP's.
not for everything , for example for LP stocks you will be paying dividend withholding tax even within RRSP and this is huge
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by pmj »

westcoastfella wrote: 25 Jun 2017 19:54
gibor wrote: 24 Jun 2017 14:20 Also I'm curious if I have to pay dividend withholding tax on US CEF if i hold it in RRSP?
I don't think so, hold both PDI and PCI in my RRSP and do not see anything withheld from the monthly distributions.
Maybe you could check the payments you receive against either the PDI & PCI websites, or against Yahoo/Google?

As a more general Q, if there were tax withholdings against a stock in an RRSP - EG an LP - would they be visible, or would they disappear at an earlier stage?
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by gibor »

I've never held LP (actually because of this tax), but when I had Israeli ADR in RRSP, I've seen this tax deducted on transaction listing
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Re: Is Anybody investing in Closed-End funds (CEF)?

Post by westcoastfella »

pmj wrote: 25 Jun 2017 21:37
westcoastfella wrote: 25 Jun 2017 19:54
gibor wrote: 24 Jun 2017 14:20 Also I'm curious if I have to pay dividend withholding tax on US CEF if i hold it in RRSP?
I don't think so, hold both PDI and PCI in my RRSP and do not see anything withheld from the monthly distributions.
Maybe you could check the payments you receive against either the PDI & PCI websites, or against Yahoo/Google?

As a more general Q, if there were tax withholdings against a stock in an RRSP - EG an LP - would they be visible, or would they disappear at an earlier stage?
I have done so, and the payments indicated by Pimco match my per-unit payments each month.

I think for tax withholdings it would depend on the broker, and the holding. I have my RRSP at Questrade, and hold an ADR there (UL). Like gibor, with each dividend payment there is a visible charge for holding administrative fees for holding the ADR. It is small, usually ~1% of dividend payment
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