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  • Closed-End Funds: Finding Cheap Income In A Popped Muni Bond Bubble [View article]
    I felt there was sufficient coverage on SA of how to take interest rate risk into account (e.g. http://bit.ly/1fbEMJx), but most articles covering muni bond CEFs were approaching from the perspective of a trader looking for capital gains, rather than a long-term investor looking for income.

    The Vanguard report at http://bit.ly/17X3YNz makes a convincing argument that income-oriented investors do not need to be significantly worried about interest rate risk. As long as the fund continues to re-invest matured capital into new bonds of equivalent duration and creditworthiness, rising interest rates are a net positive for buy-and-hold investors.

    IMO the most significant risk for muni CEFs not covered in this article is the likelihood of default, as seen in Detroit. I have a higher confidence in the general creditworthiness of American muni bonds than some other investors, and I think that the managements of the major funds are doing well at mitigating this particular risk.
    Sep 23 11:23 AM | Likes Like |Link to Comment
  • Closed-End Funds: Finding Cheap Income In A Popped Muni Bond Bubble [View article]
    I can't speak for CEFs outside the bond market, as I don't have much interest or background in them, but most of the healthy funds I looked at had recovered to their pre-2008 levels before the current drop. According to cefconnect.com, all of the funds mentioned in this article were issued at $15.00 with a NAV of $14.33 (± $0.01).

    For example, PCQ had a NAV and price above its initial offering in 2005-2007 and 2012-May2013.
    * Chart from PIMCO: http://bit.ly/1eBZ1in
    * Chart from CEFConnect: http://bit.ly/1eBYZHg

    I believe that the price/NAV behavior of these CEFs from 2007 onward is due to the unusual economic environment prevailing during the mortgage bubble and recession, and that they will eventually return to their 2000-2006 behavior when interest rates normalize.
    Sep 23 11:13 AM | Likes Like |Link to Comment
  • Closed-End Funds: Finding Cheap Income In A Popped Muni Bond Bubble [View article]
    Yes, you are correct; I read the wrong row from the PIMCO earnings statement at http://bit.ly/15NrZqN

    I will submit a correction to the SA editors. Thank you for noticing.

    For reference, the original article reads:
    ---

    Let's look at the financials for PMF to determine how safe its dividend is. PIMCO recently reported a quarterly income per share of 18 cents, with 4.96 cents per share of left-over income from previous quarters (Undistributed Net Investment Income, UNII). PMF pays a monthly dividend of 8.13 cents. Doing the math:

    * The average monthly income per share was 18 / 3, or 6 cents.
    * This is 2.13 cents below PMF's monthly dividend.
    * PMF has a buffer of 4.96 cents per share, which could sustain the current dividend shortfall for about two months.

    Based on this data, a reasonable investor could expect PMF to cut its dividend by somewhere between 25-30% within months. I would not consider buying PMF at this time, due to its unsustainable dividend.


    The corrected version reads:
    ---

    Let's look at the financials for another PIMCO fund, PMX, to determine how safe its dividend is. PMX recently reported a quarterly income per share of 18 cents, with 4.96 cents per share of left-over income from previous quarters (Undistributed Net Investment Income, UNII). PMX pays a monthly dividend of 7 cents per share. Doing the math:

    * The average monthly income per share was 18 / 3, or 6 cents.
    * This is 1 cent below PMX's monthly dividend.
    * PMX's buffer of 4.96 cents per share could sustain the current dividend shortfall for about five months.

    Based on this data, a reasonable investor could expect PMX to cut its dividend by somewhere between 15-20% within months. I would not consider buying PMX at this time, due to its unsustainable dividend.
    Sep 22 06:44 PM | Likes Like |Link to Comment
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