First Trust Strategic High Income Fund II: A Good Or Bad Investment?

| About: First Trust (FHY)
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FHY is a CEF that IPO'd 3/29/06 and was priced at $20.00 with a NAV of $19.06.

Because it is a CEF, its management fees are a bit high, which would be okay if it performed well.

It hasn't, and considering its leverage and below investment grade portfolio risk, this has proven to be a poor investment.

Yet, it offers an attractive 14.42% discount to attract buyers, a deal I recommend passing on.

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 First Trust Strategic High Income Fund II (FHY), hence the following description:

As is customary with CEFs, management fees total 1.27%, plus unnamed expenses of approximately 0.28%, and interest costs of leverage of .66%, all totaling 2.21%. Transaction costs include 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.

Its effective leverage is just under 27.98%, which appears to be within the bounds of such leveraged funds. The inception date of this fund was 3/29/06, at which time its NAV was $19.06 and its inception price was $20.00/share. As I write, its share price is $12.27 and its NAV $14.01. Which translates to a healthy discount of -14.42% were you to buy in at $12.27. However, over this past year, it has traded at an average discount of -14.55%, which indicates to me that this is not a highly regarded fund.

From the following list of its top 10 holdings, it's apparent that this fund primarily invests in corporate debt, both domestic and foreign, a majority of which is rated below investment grade.

Now for that past five-year performance chart we are primarily concerned with, although acknowledging that it IPO'd on 3/29/06:

It displays FHY's performance over the past five years. This fund has not performed well during this time, falling in value from $15.27 on 7/25/11 to its current $12.25, a loss of $3.02. Worse, from inception until the present, shares of this fund have fallen in price from $20.00 to its current $12.25, a $7.75 drop. Although many of my followers think it's fair and most relevant to only review the past five years, others believe otherwise and want me to cite its performance from inception. Consequently, I've decided to divide this baby and give each of you half. However, I'm only going to work the numbers for the past five years because I agree that the past five-year span is most relevant, and I ran out of fingers and toes counting backwards to inception.

Yet, as I have mentioned before, even during these past five years, one's entry point pricing makes a great deal of difference in determining how well this fund performed for the individual investor. Unfortunately, with this fund, any entry point would have been higher than where it is currently priced.

FHY has distributed $7.065* for each share invested at an inception price of $20.00 on 7/25/11.

*I got the dividend distribution figures from

  • 7.0625/20.00 = 35.25% yield over 5 years.
  • 35.25/5 = 7.065% yield per year.

Therefore, if my math is correct, the investor would have profited by a yearly dividend yield of 7.065% over the past five years. However, unfortunately less because the price per share over the past five years has fallen by $3.02:

  • 7.065 - 3.02 = 4.045/20.00 = 20.22% over 5 years
  • 20.22/5 = 4.045% per year yield.

A poor profit over the past 5 years; however, utilizing our DRIP calculator, a $10,000 investment over this time would now be worth $12,563.24 or a 4.66% annually compounded gain, a tad more than the unDRIPed gain, which leads me to believe that share purchases were made under basically neutral conditions. Considering the amount of leverage this fund has employed, 27.98%, and the below investment grade quality of its holdings, the risk/reward ratio of this fund as an investment has been truly quite disappointing.

For those of you still interested in adding this fund to your portfolio, at $12.25, you will be buying it at a nice discount from its 14.01 NAV. However, discount or not, I'd be very wary of investing in this fund, it evidently trades at this much of a discount regularly, which as I have stated above, alerts me to the fact that investors do not hold this fund in high regard. Consequently, discretion might be the better part of valor.

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 ETF (NYSEARCA:SPFF), 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), John Hancock Preferred Income Fund III (NYSE:HPS), Nuveen Preferred Income Opportunities Fund (NYSE:JPC), John Hancock Preferred Income Fund (NYSE:HPI), Clough Global Opportunities Fund (GLO), First Trust Strategic High Income Fund II, 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), John Hancock Premium Dividend Fund (NYSE:PDT), Cohen & Steers Infrastructure Fund (NYSE:UTF), and Flaherty & Crumrine Preferred Income Fund (NYSE:PFD).

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 as I write.

Notice, the 2015 dividends are placed just to the right of the fund symbols. To the right of that are the trade prices at the moment 7/25/16. 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.