Nuveen Quality Preferred Income Fund: Profiting From Panic

Aug.18.11 | About: Nuveen Quality (JPS)

By Amy Calistri

On Monday, Aug. 8, the S&P 500 took an 80-point dive. That was a buying opportunity. Now, I don't mean it was a buying opportunity in the traditional "stocks rise in the long term" idea, meaning you should buy on any dip. Truth is, I don't know whether we've hit a bottom. We could see even more turmoil in the weeks and months ahead. For most securities, there is still plenty of risk.

But the buying opportunity I saw is one only seen in panics... and even then, only in a handful of income securities. In fact, just days ago it offered a chance to lock in an 8.7% yield from the security I'm going to tell you about -- a yield 15% higher than it is today. And that's to say nothing of the 12% capital gain investors have seen in just five days.

Take a look:

Click to enlarge

As you can see, this high-yield opportunity happened quickly. The security is already back to its pre-dip price levels and has soundly beaten the S&P 500. But those who took advantage are sitting on a double-digit gain and locked in unusually high yields.

But how could you have known it was a buying opportunity? After all, you can see from the chart that these shares were falling with the overall market. How would investors have known what lay ahead?

Well, the high-yielding security in the chart is the Nuveen Quality Preferred Income Fund (NYSE: JTP).

It's a closed-end fund that holds a basket of preferred stocks. In fact, about 80% of the fund's assets are in preferreds, while the remaining 20% are in debt securities. More than 85% of the assets in the fund are "investment-grade quality" -- meaning they carry a very low risk of default.

But look at what happened when there was a market panic. Skittish investors dumped shares without regard to their safety or what they were actually worth. So while the safe securities JTP holds were worth one price, the market price of the fund fell with the overall market. In this case, the shares traded at a discount of 11.5% to the value of the fund's underlying assets on Aug. 8.

The result is clear. Once the market settled down, investors saw the disconnect and quickly scooped up the shares -- leading to that 12% rise in the share price.

This same sort of scenario seems to play out every time there is a panic. My colleague Carla Pasternak recently told you she was watching for it. We also saw it happen during the panics in 2008 and 2009, too. Put simply, market panics usually lead to a chance to scoop up funds for a fraction of their actual value... and lock in higher-than-usual yields in the process.

Disclosure: Amy Calistri and/or StreetAuthority, LLC hold a position in JTP.

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