Flaherty & Crumrine/Claymore Preferred Securities Income Fund: A Good Or Bad Investment?

Summary

I start with a link to bring all newbies up to speed concerning this series of articles.

This fund's portfolio is primarily composed of banking, financial, insurance and utility preferreds.

According to the numbers, this fund is a definite winner, one I'd have been proud to own.

For those of you unfamiliar with this series of articles, it's basically an approximate five-year profit and loss review of a number of Exchange-Traded Funds (ETFs) and Closed-End Funds (CEFs) that primarily invest in and hopefully profit from dividends earned from their investments in preferred securities, which they then distribute to shareholders. This link will provide you the information necessary to fully appreciate and understand the following article, the differences inherent in CEFs and ETFs, and the remaining articles of this series. It will also serve to eliminate lots of reading redundancy for my regular readers.

This report concerns the Flaherty & Crumrine/Claymore Preferred Securities Income Fund (NYSE:FFC), hence the following description and chart:

Click to enlarge

The above affords us a view of the fund that pretty much explains what we need to know about it as an investment; consequently, as I dig into the fund's database, I will highlight any details I believe are worth our interest. For those interested, this link will provide all the pertinent information you might require.

  • According to Morningstar, FFC is a three star investment.
  • This fund is leveraged by 34.1%.
  • It is currently premium priced at 13.89%.
  • This fund also utilizes a hedging strategy.

Click to enlarge

A three star rating from Morningstar places this fund squarely in the center of this group of funds. Not the best and certainly not the worst run fund.

Personally, I don't like the amount of leverage this fund employs, which might act as a double-edged sword. By using this leverage, this fund is able to distribute a steady stream of income; however, in the event of an interest rate rise of any consequence, or some event that disrupts the banking, financial service, or insurance sectors of the economy, this amount of leverage can cause serious problems.

Personally, I don't like buying retail; currently, expect to buy this fund above retail. Consequently, it will be easier to suffer price depreciation. By buying low, your chances of price appreciation are improved simply because you have reduced the size of the hill you want to climb.

Hedging might be effective, but it does cut down on the profit as it moderates potential losses. I'm a bit greedy and, consequently, I'm not overly fond of hedging, it's like betting against oneself. Not that it's bad, it's just not my cup of Tetley.

This fund's portfolio is composed of primarily bank, financial, insurance and utility preferreds as displayed below:

Click to enlarge

Now for that five-year performance chart, even though it IPO'd on 1/28/03:

Click to enlarge

It displays FFC's performance over the past five years. This fund's performance, although somewhat choppy, has performed well. During this time, this fund has gained value from $18.38 on 6/18/11 to its current $21.65, a $3.27 increase.

FFC has distributed $8.39* for each share invested at an approximate price of $20.12 on 2/11/13.

*I got the dividend distribution figures from DividendInvestor.com.

  • (8.39 + 3.27)/18.38 = 66.44% yield over 5 years.
  • 66.44/5 = 12.69% per year yield.

Therefore, if my math is correct, the investor would have profited by a yearly dividend yield of 12.69% over the past 5 years.

A very impressive profit over the past 5 years; however, at the price of additional risk as a result of its utilization of leverage.

In conclusion, if my calculations are correct (please review them carefully to determine if any were made in error, and the wrong conclusion was consequently arrived at), this has been an impressive investment.

I like this fund's performance over the past five years that I have reviewed; however, it has performed well in an extremely low interest rate environment, which might change in the future as the world economy improves. On the other hand, rates might stay low for the foreseeable future because it seems that any time the Fed is poised to move rates higher, some market dislocating event seems to pop up. Brexit forestalled this latest rise. The Chinese slowdown slowed down another raise. The EU is not performing up to par, and for that reason, Draghi has kept European Central Bank's interest rate at historically low levels.

Bottom line: This fund as compared has performed well simply because it has taken on more risk, possibly more appetizing to me than a more conservative investor. Most intelligent investors know their appetite for risk and invest accordingly. You should do the same. I'm simply the messenger, certainly not an advisor.

Now let's compare FFC to its sister fund, the Flaherty & Crumrine/Claymore Total Return Fund (NYSE:FLC): Both are basically the same, utilizing hedging designed to increase their income in the event of a significant increase in long-term interest rates, and to be somewhat resistant to the effects of further interest rate reduction. While FLC invests primarily in the preferreds of the banking and utilities sectors of which 80% are investment grade and 20% below investment grade, FFC invests in hybrid or taxable preferreds. As far as I can tell, I believe both funds share a similar risk profile; consequently, your decision to favor one above the other should be determined by share price at the time of purchase or sale, which might lead to a more attractive yield and potentially greater price appreciation. However, one thing I like better about FFC is that its expense ratio is 0.88%, which is lower than that of FLC's 1.28%.

The following is the list of funds I have and will investigate to give you a clear picture how each has performed over the past five years. Initially, I had decided to judge each over the entire life of the fund, but was dissuaded by a number of followers who advised that the results would be unfairly skewed by the recessionary contraction of 2008-9. Here's that list of funds, which has grown considerably as a result of additions you requested: iShares U.S. Preferred Stock ETF (PFF), PowerShares Preferred Portfolio ETF (PGX), Global X SuperIncome Preferred ETF (NYSEARCA:SPFF), PowerShares Financial Preferred Portfolio ETF (PGF), VanEck Vectors Preferred Securities ex Financials ETF (PFXF), SPDR Wells Fargo Preferred Stock ETF (PSK), PowerShares Variable Rate Preferred Portfolio ETF (VRP), iShares International Preferred Stock ETF (IPFF), John Hancock Preferred Income Fund II (NYSE:HPF), First Trust Preferred Securities and Income ETF (NYSEARCA:FPE), Flaherty & Crumrine/Claymore Total Return Fund, Flaherty & Crumrine/Claymore Preferred Securities Income Fund (FFC), Flaherty & Crumrine Dynamic Preferred and Income Fund, Inc. (DFP) and Flaherty & Crumrine Preferred Income Opportunity Fund (PFO), Clough Global Opportunities Fund (GLO), First Trust Strategic High Income Fund II (FHY), First Trust High Income Long/Short Fund (FSD), Prudential Global Short Duration High Yield Fund (GHY), ProShares UltraShort S&P 500 ETF (SDS), First Trust Intermediate Duration Preferred & Income Fund (NYSE:FPF), Cohen & Steers Select Preferred and Income Fund, Inc. (NYSE:PSF), Virtus Global Multi-Sector Income Fund (NYSE:VGI), DNP Select Income Fund (NYSE:DNP) and John Hancock Premium Dividend Fund (NYSE:PDT).

Below is a screenshot taken from my IB platform I populated to keep you apprised of the order of my reviews, and as a bonus, the funds' current prices as I write 7/7/16.

Click to enlarge

Notice the 2015 dividends are placed just to the right of the fund symbols. To the right of that are the last trade prices as I write. Of further interest, at the far right of the screen are the prices of the 13-week highs and lows of each fund.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Because this is a series of fund performance studies, although each is an entirely different study, the method I utilize to arrive at each conclusion is quite similar, and more effective because by using the same parameters, I am comparing apple to apples, not apples to pears.