Recognizing Leverage In The CEF-PGF Comparison

Reader JonD correctly pointed out in comments on my earlier post that I had ignored the aspect of leverage when I compared PGF's yield, which is not leveraged, to that of a CEF which is leveraged to right about a third of its asset base.

While I accept this criticism as a matter of principle - it is unfair to compare leveraged and unleveraged funds, the latter fighting with one proverbial hand tied behind their backs - I don't think this is a huge factor in this case. The recent Bill Gross comment shows that leverage (especially as little as 35%) doesn't get you that much extra juice these days.

Specifically, The BPP uses its own preferred shares for leverage, on which it pays just over 4.5% (according to their last report). Assuming they take that and invest it in something that yields even as much as 8% (surely an over-estimate), that would still only account for about 1.1% of yield. Subtracting that, BPP - which trades at a premium and has a larger fee, mind you - still beats PGF by a few dozen basis points.

One might also argue that the extra risk taken by the CEF's in leveraging is comparable to the extra risk taken by PGF in concentrating on a limited number of issues.

Thanks to JonD for pointing out this fundamental flaw in my previous analysis. Now we have a more complete picture.

Comments

[JonD:]

good point. yes, where is the yield for PGF?

it looks like BPP might have lower credit quality and the majority of its holdings are categorized as "other" whereas PGF is all financials (both according to ETFConnect.com).

I own Nuveen's JPS, yielding 7.5% today, nearly the same as BPP's 7.6%, but at only a 1.28% premium vs. BPP's 7.13%. Also, relative to BPP, JPS is more diversified (by industry), has slightly lower leverage (31.44% vs. 33.80%) and a lower fee structure (.96% vs. 1.26%). all according to ETFConnect.com. no data on JPS's credit quality.

i own a couple of Nuveen CEFs - (JPS and JRO) --- generally speaking, I think they are cheaper than like product from BlackRock - don't know why. perhaps b/c of the greater publicity from the Merill Lynch merger.

and I prefer them to PGF, too, for reasons you already highlighted.

2006 Dec 06 11:55 AM

[Javaharv:]

What is your take on CVY, is has performed so far without any yield. Do you think that it will live up to its hipe???

2006 Dec 07 09:15 PM