Since the preferred CEF showdown (links to the showdown at the end), runner up fund Hancock Preferred Income Fund's (HPI) performance was going well with the fund being down 1.74% since the Hancock showdown, while the S&P500 is down 8.12% since the same date.
Visually, the fund has done the following in the last three months:
Price returns over the last three months:
HPF: -5.37% (Showdown winner)
FFC: -3.87% (Showdown close 2nd)
And since the "showdown":
Price returns since the Showdown:
HPF: -1.66% (Showdown winner)
FFC: +0.22% (Showdown close 2nd)
Recently, however, the performance of the fund, and that of its peers, has rolled over, down 7.89% since May 7th while the S&P500 is down "only" 5.43%. As a result of the steep drop, a reader asked me to revisit the fund to see if everything was still fundamentally sound and if it was performing in-line with its peers - in this case using the following
- Flaherty & Crumrine/Claymore Preferred Securities Income Fund Inc. (FFC),
- John Hancock Preferred Income Fund II (HPF)
- Nuveen Quality Preferred Income Fund 2 (JPS)
Price return since May 7, 2012:
HPF: -6.86% (Showdown winner)
FFC: -1.31% (Showdown close 2nd)
I have to say, Flaherty is just kicking the competition to the curb!
We have established that the fund has been roughly in line with its peers, but what about the fundamentals of the fund?
Lets take a look.
As you can see from the comparison tables above, there have been some changes in the top ten holdings of the fund since the showdown.
These can be summarized by:
|US Bancorp||Interstate Power and Light|
|Kimco Realty||Qwest Corp|
As I see it, the fund has increased its exposure to rate sensitive issuers (US Bancorp and Kimco) and reduced its exposure to the more stable utility/telecom. Lets see if this holds up from a sector weighting.
Sure enough, financials have increased 5% at the expense of telecom, consumer, and other/industrial. This has not significantly changed from the end of March to the end of April (obviously we don't have May's yet).
The question is why. My thoughts as to the rationale behind these changes are:
- Utilities have been redeeming preferred stock and they provide little call protection and lower yields - the same holds true for the other/industrial sectors. Many names are just plain rich.
- Financials, while more volatile, add additional yield to the portfolio while, if chosen carefully, adding very little incremental risk.
Bottom line: While the preferred market has fallen over the last 2 weeks, it is primarily due to increased concern over the banks (and the fund's weighting has increased in this sector) and Europe (two of the top ten are European and the portfolio has positions in Santander as well). These factors, when combined with the "risk off" nature of the markets over the last two weeks have dragged preferred stocks down. Nothing has significantly changed in the portfolio (aside from the increase in financial exposure - and I do not consider that to be incredibly significant), it is still sound and should perform well. Also, the market price has been driven down more than the NAV, so the managers are still awake at the wheel and steering the ship.
Showdown Links:Preferred CEF Showdown, Part 1: Flaherty & Crumrine - My Top Pick Preferred CEF Showdown Part 2: Spectrum Asset Management - My Top Pick Preferred CEF Showdown Part 3: John Hancock Advisors - My Top Pick Preferred CEF Showdown Final: The Shootout - My Top Pick
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.