On February 26,2013, I authored the article: Protected Principal Retirement Strategy: Playing Defense - Man-To-Man Or A Zone (here). In this article I identified four closed-end funds (CEFs) and two mutual funds that have demonstrated the potential to produce gains during bear markets. With the likelihood of a correction or new bear market beginning at some point in the near future, I spent additional time researching exactly how each of these performed during the last bear market - October 9, 2007 - March 9, 2009.
I tracked each of the six funds throughout the duration of this bear market, and calculated the total return of each (price plus dividends paid). It is (in my opinion) virtually impossible to time the markets, buying at the lows and selling at the highs, but for the purposes of this article I did assume that each of these funds were purchased on October 9, 2007, and sold on March 9, 2009.
Here are the results:
MFS Intermediate Income Fund (MIN)
On October 9, 2007, was trading at $6.07/share, and the dividend was $.025/month. By March 9, 2009, the share price was $6.06 and the dividend was $.047/month.
During the duration of the bear market, paid dividends totaling $.826/share. In the bear market's 17 month period, the monthly dividend fluctuated from a low of $.025 to a high of $.0504. Had an investor bought and held for this period he would have had a total return of 13.44% (all of which would have been due to dividends).
Blackrock Income Trust (BKT)
traded at $5.96/share on October 9/2007, and was paying $.031/month in dividends. At the close of the bear market on March 9, 2009, BKT's price per share had declined to $5.77/share and had paid a total of $.453 in dividends.
If one had bought and held for the entire 17 months of the bear market, the total return would have been 4.4 percent (7.6 percent due to dividends and a loss of 3.2 percent in the stock price). During the bear market the dividend fluctuated from a low of $.024 to a high of $.031.
First Trust Mortgage Income (FMY)
On October 9, 2007, FMY's share price was at $16.55, and the monthly dividend was $.085/share. When the bear market ended on March 9, 2009 the share price had declined to $15.22, but the dividend had increased to $.11/month.
The total return for during the bear market was a paltry 2.0 percent. The share price lost just over eight percent while gains from dividends were 10.4 percent.
Nuveen Global Government Enhanced Income (JGG)
The price of declined from $17.33 on October 9, 2007, to $14.83 on March 9, 2009 (over 14 percent). The quarterly dividend at the beginning of the bear market was $.405, and at the close of the bear market had declined to $.3746.
Over the course of the bear market, paid a total of $2.40 in dividends for a total return of about zero percent (gains from dividends were 13.9 percent for the 17 month bear market).
PIMCO StocksPLUS Short Strategy A (PSSAX)
(PSSAX) gained in price during the bear market period (from $7.79/share to $7.86/share by March 9. 2009). During this period it paid a total of $6.27 in capital gains, income etc. Included in this was gain of $5.655 paid in December 2008.
The total return for (PSSAX) for the bear market was a whopping 80.5 percent. Without the significant distribution in December 2008, the total return would have been reduced to 16.9 percent. Still impressive.
Grizzly Short Fund (GRZZX)
On October 9, 2007 (GRZZX) traded at a share price of $4.68. When the bear market ended on March 9, 2009, the share price had increased to $11.25 (141 percent).
During the 17 month bear market it paid a total of $2.00 in gains to shareholders. Therefore, the total bear market return for GRZZX was 183.7 percent.
Before jumping entirely on the mutual fund bandwagon, it must be kept in mind that the objectives of the four CEFs are significantly different than those of the two mutual funds. The CEFs have as their objectives income generation, capital preservation and total return. They try to accomplish these ends by buying primarily debt instruments.
The mutual funds on the other hand have as their sole objective the shorting of stocks and market indices.
So, is there a viable strategy here for the next correction or even worse, a bear market? I personally do not think one can count on such a large mutual fund distribution such as was paid by PSSAX. However, one can assume that if the market plunges there would be certainly be a capital gains distribution (by both funds).
I would lean towards a combination of mutual funds plus a few CEFs (I guess you could call this diversification of a type). Most definitely I would look at GRZZX, MIN and possibly FMY.
Hopefully, our markets will not suffer a major decline and this strategy will not have to be put into play.
P.S. My return calculations for these six funds might not be exact enough for some, but they are probably much closer than if they were performed by a government agency.
Additional disclosure: This article does not constitute either a buy or sell recommendation for any of the funds mentioned.