Closed End Funds in the Current Market
US stocks have headed down from SPX 1440, the 80 week moving average, and the 2CS reading in the 70's. I was shaving off stocks into that expected event, and raised some cash. At little more than 2% in a currently dubious currency, cash truly is trash, especially if you can find any reasonable alternatives.
Being retired and living off my assets, **every** investment has to pass two tests for me. The most important test is that it pay a dividend of 4% or better, tax-adjusted. So if a tax-free municipal bond or fund pays 3% and my overall US Federal tax is, say, 30% at the margin, then 3% /.7 = 4.29% and it passes. So I am always looking for good investments that have capital gains potential but which pay me to wait for the capital gains. This was why I bought four US, and one Canadian oil/gas, trusts last year for the major tax-deferred account. They are now paying monthly income at an 8-15% annual rate on original purchase price, and they really didn't make me wait very long.
I gradually began looking at closed end US funds. They are like ETF's in a sense, but are NOT indexes. They are managed, and they include all sorts of asset classes. When interest rates are low, US closed end funds have issued preferred shares or simply borrowed money short term to increase their leverage and their returns. I bought a few state-specific closed end municipal tax-free bond funds last year and two foreign sovereign bond funds which were and are paying 6.5-9%. But I didn't really have a feel for the power of these funds until I happened upon Steven Selengut's website http://www.sancoservices.com/brainwashingbook.htm and then his book: "The Brainwashing of the American Investor".
Normally I am turned off by and ignore people with book titles like that, but fortunately I didn't. Selengut is a money manager in South Carolina, and he has helped me to another quantum leap in my thinking and the practice of investing in retirement. I do disagree with one of his basic ideas, namely that you should never buy a mutual fund. HIs concept, as I understand it and agree with, is that mutual funds add to investing another big layer of expense at my expense, and that they are issuing new shares all the time which is diluitive to net asset value. In the case of many funds and fund managers I would have to agree. They are taking 1-2% of your assets each year and getting rich at your expense for very little or no value added to indexing. And many mutual fund managers become very, very wealthy with a lot of talk but little value-added justification. Even Hussman! :)
But I spend a good bit of money for subscriptions and data and a lot of time finding funds which are run longer term by good people who either charge extremely little and/or who really deliver the goods. I own some Vanguard funds, as you know, especially municipals and Wellesley Income and the Energy and the Mining funds, which do an excellent job AND charge me tiny expenses. Then there are SGENX and LSBDX and PRWCX and RPSIX and PCRIX and a few others who keep delivering excess value in what they do within tolerable volatility bounds. But there is a lot of truth in Selengut's charge. The mutual fund folks want to keep you locked up, and they don't want you to trade. They problem is that THEY decide what is "excessive trading", not you or I. In my heart of hearts I really would like to buy and hold the ideal portfolio forever through thick and thin. I work at it, And I want to do it. But there are times when you have to make changes, for a host of reasons. Maybe you need extra money for a crisis or a special reward event, or because it's suddenly obvious that XXXXX fund is about to go down the tubes. I have had phone calls and paper work with apparent high school dropouts running "excess trading" desks at major mutual funds that caused me never to buy their funds again. Hey! It's my money, not yours!
Enter closed end funds. They don't care if you trade in and out of their funds ten times a day. They probably would like the increase in volume and liquidity. In case anyone from Vanguard reads this, "Don't worry. You guys will always have my vote for what you do best: very low costs and in highly specialized areas like municipals and special sector and income funds." But for money otherwise at the 2% money market margin, thanks to Chairman Bernanke, closed end funds, which you may not want to own forever, can increase your returns dramatically, and you can get out or in at any time of the day you want with no black stars on the management company's report card.
Selengut is teaching me that there are closed end funds in every asset sector which pay higher than normal yields and with long term gains. His approach is to look for quality: you don't necessarily want the highest yield as you may be buying junk. But you want something better than the average intermediate term bond fund, currently at 3.5-4% at best. He also teaches, mainly in regard to stocks but also in closed end funds, that you only buy funds that are down off their highs of the year, and if you get a really good gain, you cut it back and look for another or for multiple other down-on-their-luck funds. When I first read this I kept saying to myself, "OK, Steve, great idea, but where's the list of good funds?" But then it came to me that he is a money manager, so if I want his list he is going to have to manage my assets. I might do that at some point as he is younger than I am. But I'm still in the saddle for now.
If you have the time and interest you can use ETFConnect.com, Morningstar.com, and FinanceYahoo.com to develop some closed end fund ideas yourself for little or no cost. I will mention some funds that I buy, but I am NOT an investment advisor so these will just be "diary entries". Do read Steve's website and if he is your kind of person, buy his book. The book ranges a bit, and he's taking about his true love in the markets with some passion, but it is an eye opener compared to the usual investment junk advice that we retail peons usually get.
One gem I found on my own and bought today is Eaton VanceTax Advantaged Global Dividend Opportunities Fund (ETO). This fund is heavily weighted to global inflation beneficiaries which pay decent dividends. Here is a list of recently reported holdings: http://eatonvance.com/mutual_funds/monthlyholdings.php?fund=ETO They are paying a monthly dividend at an annual rate of ~6.5% and are selling at a 10% discount to NAV on conservative 21% leverage. One thing Selengut preaches is that nearly all enterprises at all levels of business use some borrowed money to increase returns, and if done moderately and creatively it's good thing. 6.5% sure beats 2% in a money market fund right now, barring capital losses of course.
May I say once again that I am not an investment advisor, and I do not manage money except that of my family. This is my diary which may or may not be of interest to others. I have no connection with Selengut except as a reader, and no connection with the investment world except as a private investor