LMP Capital And Income: A Closed-End Fund Offering Income And Some Appreciation

| About: LMP Capital (SCD)

LMP Capital and Income Fund is traded on the New York Stock Exchange under the symbol SCD. It is managed by Legg Mason Global Asset Management. This closed-end fund was launched in 2003.

SCD had a poor track record but Legg Mason now has everything under control. In 2006 SCD had net assets of $ 633 million and leverage of $ 220 million. As of June 30, 2011, net assets have been reduced to $305 million with no leverage.

At one time SCD carried one of the highest discounts to net assets of any other closed end income fund. Management has been engaging in regular tender offers to reduce the discount to under 5%.

In many ways these tender offers are doing a disservice to existing shareholders of the closed-end fund. SCD, under prior management, racked up net capital carry-forward losses of approximately $ 203 million, which expire as follows:

2015 - $52 million
2016 - $26 million
2017 - $121 million

By reducing its assets, SCD is diminishing its chances of ever making full use of these tax loss carry forwards which will expire in the next five years. If anything, everything should be done to be able to utilize these losses.

SCD has a portfolio which very much appeals to me. Its portfolio consists of the following:

Equities - 65%
Convertible preferred - 10%
Credit sensitive bonds - 15%
Short term instruments - 10%

The equity portion of the portfolio is primarily invested in Real Estate Investment Trusts and telecommunication services which all produce healthy dividends.

I do not believe in the use of tender offers to reduce the discount from net asset value for closed-end funds. It is a form of slow self liquidation. Better to merge or simply liquidate but a slow death is not the answer. I think it is sinful to shrink fund assets when there is a substantial tax loss carry forward to use up.

As my readers know, I favor those closed end funds that sell at substantial discounts. We have and still are investors in SCD but with the narrowing of the discount, its appeal does diminish.

Disclosure: I am long SCD.