Entering text into the input field will update the search result below

Why We Are Seeing Distribution Divergence In Preferreds CEFs

May 01, 2020 1:38 PM ETFLC, FPE, JPI, JPT14 Comments


  • The highly unusual market environment, marked by extreme volatility and a sharp drop in short-term rates, has rewritten the distribution coverage rule book for CEF investors.
  • We discuss why one fund family cut distributions while another raised them in the context of the preferred CEF sector.
  • Among perpetual preferreds CEFs we continue to like FLC for its highest current yield and widest discount.
  • However, as the overall sector premium is quite rich we would also tilt to term CEFs: JPI and JPT or the open-end fund FPE.
  • This idea was discussed in more depth with members of my private investing community, Systematic Income. Get started today »

April was a bad month for CEF distributions with over 90 funds declaring cuts. Within this seemingly one-way move, the preferreds sector stood out for its surprisingly divergent behavior with one set of funds cutting distributions and another set increasing. In this article we explore the reasons for this behavior and any lessons to be learned for income investors.

Within the preferreds CEF sector we continue to like the Flaherty & Crumrine Total Return Fund (FLC) for its highest current yield, widest discount and above 100% coverage by our estimates. However, as the overall CEF sector appears quite rich in discount terms, we would also tilt to either the two Nuveen term funds: Preferred & Income Term Fund (JPI) and the Preferred & Income Term 2022 Fund (JPT) or the active First Trust Preferred Securities and Income ETF (FPE).

The Ups and Downs Of Preferreds CEFs

The chart below shows April distribution announcements for preferreds CEFs. Five funds managed by Flaherty & Crumrine increased distributions while three of four Nuveen funds decreased them.

Source: Systematic Income Service

There can be many reasons for changes in distributions - some benign and some less so. Benign reasons are those due to price or NAV-linked managed distribution policies or target term funds preserving NAV into their termination dates. Distribution cuts for these reasons are not indicative of the underlying fund earning power and can be forecasted by investors without a lot of difficulty. This is also why these types of distribution cuts are usually not met with price drops which can otherwise deliver a double whammy to income investors of both income and capital losses. Less benign reasons are those that are indicative of a loss of fund portfolio earning power and it is these cuts that income investors tend to, rightfully, worry about.

Check out Systematic Income and explore the best of the fund, preferred and baby bond markets with our powerful interactive investor tools.

Identify the most attractive CEFs and track the entire market with our evidence-based bespoke metrics. Get investment ideas from our quantitative yield-target portfolios and systematic strategies.

Pick up the best preferred stocks and baby bonds that fit your criteria.

Check us out on a no-risk basis - sign up for a 2-week free trial!

This article was written by

ADS Analytics profile picture

ADS Analytics is a team of analysts with experience in research and trading departments at several industry-leading global investment banks. They focus on generating income ideas from a range of security types including: CEFs, ETFs and mutual funds, BDCs as well as individual preferred stocks and baby bonds.

ADS Analytics runs the investing group Systematic Income which features 3 different portfolios for a range of yield targets as well interactive tools for investors, daily updates and a vibrant community.

Analyst’s Disclosure: I am/we are long FLC, JPI, JPT, FPE. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (14)

I own actively managed PSK, Wells Fargo Preferreds, in the thought that it would provide ballast in the correction. At its worst, it was down over 10%, now about -4%. Disappointed that preferreds didn't hold up, posting stock like drops. I'm not so sure about this asset class's value in this environment other than generating income? Might as well own stocks instead.
ADS Analytics profile picture
PSK looks like it's passive as it's managed against an index: "The SPDR® Wells Fargo® Preferred Stock ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the Wells Fargo® Hybrid and Preferred Securities Aggregate Index (the "Index")." Also looks like it went down to 31.08 at the trough vs, 44.50 in Feb - that's a 30% drop.

The performance of preferreds is definitely disappointing. That said, there is somewhat of a split with some sectors performing "ok" - CEF and utility preferreds. Also, some of the drop is due to fix/float securities suffering from lower short-term rates rather than anything else.
AlanS9 profile picture
Do you know of any ETFs that focus on utility preferreds...or CEF preferreds? Thanks
ADS Analytics profile picture
Those are fairly small parts of the market so not aware of any fund focusing on them exclusively. There is PFXF which is ex-Financials but it also has a lot of REITs. Best choice there is probably to go direct.
kleinbee profile picture
Excellent review, any thoughts on JPS ?
ADS Analytics profile picture
JPS has the highest-quality portfolio judging by credit ratings and the lowest leverage of perp funds. That should make it more resilient in the medium term but likely will also cap its performance if the rally keeps going. The discount (widest) and discount percentile (46% vs. 73% sector average) are pretty attractive within the sector.
AnthonyGiordano profile picture
Thank you. Interesting article and reasoning on distribution changes in the different family of CEFs. . I own some individual preferred shares but the bulk of my preferreds is in PFO which I remain long on, hoping to use that income in retirement which is about 5 years off. I also agree FPE can be a nice alternative if one is hesitant about CEFs.
Thanks, what do you think about PDT? Thanks
ADS Analytics profile picture
Hi, this fund appears to have very poor distribution coverage - on the order of 74% based on the last Section 19 disclosure and it has one of the highest premia in the sector. All in all this results in a covered yield a full point below that of the Flaherty or Nuveen funds. Plus its drawdown and volatility have been much worse so on a risk-adjusted basis the performance is less attractive.
I guess the author is not familiar with the preferred stock ETF with the symbol PFFD and its .23 % expense ratio.
ADS Analytics profile picture
Hi, it's in the list of preferreds ETFs that we follow. It doesn't have a long track record and it's passive - passive funds have historically underperformed active funds. For this reason we would tilt toward active management in the space.
EdT.cpa_Retired profile picture
@poclerk I guess the author IS familiar!!!
NV_GARY profile picture
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

Related Stocks

SymbolLast Price% Chg
Flaherty & CrumrineTotal Return Fund
First Trust Preferred Securities and Income ETF
Nuveen Preferred & Income Term Fund
Nuveen Preferred and Income Fund

Related Analysis

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.