For those of you unfamiliar with this series of articles, they're 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 Total Return Fund (NYSE:FLC), hence the following description and chart:
Let's dig into the facts learned from FLC's prospectus. Management fees, which includes fees to an advisor and servicing agent is quite complicated and difficult to figure, however, let's see if we can work them out. Plus, there are added fees not included in the above: Transaction costs, such as commissions when securities are bought or sold, and any applicable taxes if held in a taxable account. The more active the trading account, the higher these fees. From my research thus far this appears to be standard operating procedure for funds such as this.
Management Fees for Advisor:
- Advisor is paid a yearly fee of .575% on 1st $200 million of the funds average weekly total of managed assets.
- It's reduced to .50% on the next $300 million.
- And to .45% above $500 million of average weekly assets managed.
Management Fees for Servicing Agent:
- .025% paid for $200 million for average weekly total of assets serviced.
- .10% for next $300 million and
- .15 above $500 million.
According to Flaherty's own figures this funds expenses ratio totals a whopping 1.28%. This bothers me because it seems as it's at the high end of fund management fees; however, this fund has performed well and I can't get too upset about fees charged when I'm making a nice profit because of its management.
At least 80% of the Fund's total assets will be invested in a diversified portfolio of preferred securities and other income-producing securities consisting of various debt securities. At least 80% of the Fund's holdings of preferred and debt securities will be investment grade quality at the time of purchase. Up to 20% of the Fund's total assets may be invested in securities rated below investment grade.
The Fund will invest 25% or more of its total assets in securities of companies in each of the utilities industry and the banking industry. To increase fund performance, this fund will employ leverage and hedging strategies. Which might add an element of additional risk.
Although I'm unfamiliar with the broad group of perferreds held by this portfolio, according to the mix I don't foresee any existential threat, especially because 80% are investment grade and the remaining 20%, although below investment grade, because they are primarily invested in banking and utilities preferreds I still can't envision a problem. Personally, my portfolio is primarily composed of non-rated preferred securities, and for the most part I am unconcerned. Of course I am predisposed to taking more risk than the average investor, but my track record has been pretty good and I have prospered.
Of course, the price paid for the preferreds populating this portfolio is of major importance that I can't really comment about because I am not privy to that information; however, by the way this fund has performed, I'm inclined to give management the benefit of the doubt. Over the past five years they have distributed a steady stream of dividends, which nicely complemented this fund's share price appreciation.
The following is a list of its top 25 holdings:
Now for that five-year performance chart, even though it IPO'd on 8/27/03:
It displays FLC's performance over the past five years. This fund's performance has performed nicely during this time. Actually, from 7/18/11 until the present, this fund has increased in value from $19.09 to its current price of $21.98, a $2.89 increase.
FLC has distributed $8.4475* for each share invested at an approximate price of $19.09 on 2/11/13.
*I got the dividend distribution figures from DividendInvestor.com.
- 8.4475/19.09 = 44.25% yield over 5 years.
- 44.25/5 = 8.85% yield per year.
Therefore, if my math is correct, the investor would have profited by a yearly dividend yield of 8.85% over the past 5 years. But it gets better: The price appreciation was $2.89, so let's figure the total gain:
- 8.4475 + 2.89 = 11.3375/19.09 = 59.39% over 5 years
- 59.39/5 = 11.88% yield per year .
A very impressive profit over the past 5 years, however, considering it's amount of leverage, 34.1%, this fund entails an increased amount of leverage risk, consequently, the investor's increased reward. The decision to invest in this fund should be taken with this knowledge and according to the individual investor's tolerance for risk.
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.
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 (PFF), PowerShares Preferred Portfolio ETF (PGX), Global X SuperIncome Preferred (SPPF), PowerShares Financial Preferred Portfolio (PGF), VanEck Vectors Preferred Securities ex Financials (PFXF), SPDR Wells Fargo Preferred Stock ETF (PSK), PowerShares Variable Rate Preferred Portfolio (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 (FLC), 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 (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' closing prices for the week.
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 of the close of trading on 7/5/16. 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.