Two Problematic Types Of Closed-end Funds (CEF: JTP, FMO)

Roger Nusbaum submits: I have been struck lately by the number of articles devoted to the beating that closed end funds have taken. The list includes Barron's, the Wall Street Journal, and countless newspaper articles that have come through my RSS feed.

I suppose the obvious way to look at it is that if so many experts say they are now cheap they will get cheaper. I'm not sure this holds up here. CEFs do have a purpose, which is easy access to yield. They have their drawbacks and can be volatile but they have that yield. A well-diversified portfolio that only owns a few CEFs to capture certain parts of the market should be able to weather any downturns.

Two of my least favorite types of CEFs are (1) those that own preferred stocks, and (2) CEFs that own MLPs (master limited partnerships). I have written about both of these before.

An example of a CEF that owns preferred stocks is the Nuveen Quality Preferred Income Fund (JTP). The fund yields 8.3%. The 52-week high is $14.75, the 52-week low is $11.86 and it closed Monday at $13.07. The person that bought at $14.75 is down 11.3% at Monday's close. Compare that to the price range for an individual preferred I own for clients. The 52-week high is 26.60. the 52-week low is $25.13 and it closed Monday at $25.49. The person who bought at the year high and sold at the year low (the worst possible trade that could be made) lost 5.5%.

JTP 1-yr chart:

Further, the individual issue returns $25 back at maturity. The fund has no such safety net. Buying the preferred stock of an AA, or higher, rated company does not really carry unreasonable risk. I have been writing about this since the start of the site. This is an instance where the funds are actually riskier than the individual issues.

Ditto MLP funds. I have written about these several times in the past and studied the performance of some individual issues (like FMO) compared to a couple of funds. You can read that here and see the chart here.

I tend to think CEFs are best used in conjunction with things like treasuries and individual preferred stocks. I use several CEFs for access to things like convertible bonds and foreign bonds. Too much of anything, no matter how conservative, can be very risky.

« Any opinions expressed on the Seeking Alpha sites are those of the individual authors and do not necessarily represent the opinion of Seeking Alpha or its management. »