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Bear Market Thoughts: Is Closed-End Fund Investing 'Chasing Yield?'

May 03, 2020 9:23 AM ETCLM, CRF, FPL, KMF, RFI, UTG34 Comments


  • It's really all about the assets which drives returns.
  • Managers can pay out anything they want.
  • Were we yield chasing with our MLP and CLO positions? I say no.
  • Remember CEF investors, don't just focus on the yield!
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Get started today »

Author's note: This article was initially released to CEF/ETF Income Laboratory members on April 6, 2020.

Closed-end funds have taken it on the chin the last two months. Not only are prices and NAVs of funds way down (but price more so than NAV, but that's a topic for another post), but also distribution cuts are likely coming too. Not surprisingly, this brings out the possibly well-meaning but also overly simplistic comments about how CEF investing is "chasing yield". The insinuation is that by only focusing on yield, CEF investors are forgetting about risk.

Are You Chasing Yield In Retirement? | Seeking Alpha

In this Bear Market Thoughts, I'd like to address the question, "Is Closed-End Fund Investing 'Chasing Yield'?"

Don't just focus on the yield!

It is an unfortunate fact that many CEF investors do in fact "chase yield" while ignoring risk. CEFs are dominated by retail ownership, and it is understandable that many such investors do strongly seek out the ability to receive a high income from their investments. This is, in my opinion, why certain CEFs get bid to massive +50%-plus premiums despite the fact that their performances aren't better compared to their peers at the portfolio level. This type of yield chasing invariably does not end well. When the inevitable distribution cut occurs, the premium (and share price) usually collapses, saddling the investor with capital losses equivalent to many years of distributions (see Why CEF Distribution Stability Is Overvalued).

On the other hand, at the CEF/ETF Income Laboratory, one of our favorite sayings is "remember CEF investors, don't just focus on the yield!"

Fun fact, how many times have I mentioned the yield of a fund in the title of an article over the last year? The answer is zero times! In fact, in the nearly four years since starting our newsletter service, and after nearly 1,000 of my own

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https://static.seekingalpha.com/uploads/2019/5/2/27546953-15567808556447084.png At the CEF/ETF Income Laboratory, we manage market-beating closed-end fund (CEF) and exchange-traded fund (ETF) portfolios targeting safe and reliable ~8% yields to make income investing easy for you. Check out what our members have to say about our service.

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This article was written by

Stanford Chemist profile picture

Stanford Chemist is a scientific researcher by training. For the past decade he has been providing analysis and evidence-based ways of generating profitable investments with CEFs and ETFs. He leads the investing group Learn more.

Analyst’s Disclosure: I am/we are long THE STOCKS IN OUR PREMIUM PORTFOLIOS. 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.

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Comments (34)

RichAbe profile picture
I give you credit for your honesty - not everybody would admit they owned MLPs.


Please tell us as per Seeking Alpha's policy which stocks in the article you own.

Stanford Chemist profile picture
Hi @RichAbe , sure, thanks for asking! Of the stocks mentioned our portfolios are long: ECC, FEI. And honesty is a big part of what we do at the Income Lab!
Good Morning....

When "ALL" CEF's go up, we get many new ecstatic investors and/or investors buying more shares. If/when the CEF's retreat, we lose some panic driven investors and those investors that are selling some of their existing shares. With that said....

I can't comment on all of the article points as that would take a while. So I will comment on CLM [which is currently a "better performing" CEF than CRF]....

…Current "abbreviated" analysis data on CLM [sole opinion]:

...Report Card Grade: 97 [0-100 rating system]
...Power Rating: 96 [must be higher than RptCard grade for any further buy consideration]

..Star Rating: Positive 9star [0-10star reference with 10 being the max]
...!3-wk Star Rating: Positive 9.71 stars
...MktPrc: 9.27 [COB Friday]
...Last average weeks market activity on MktPrc: +0.03 [investors have been buying]
...Distribution [not a dividend]: 24.12% [$0.1853/Month ... $2.2236/Yr]
Note: x-div's 5/13, 6/13 ... Pay 5/29, 6/30
...Insider buying: 3/27 30,000sh @ 8.25
...Rf [risk factor for holding in portfolio]: Positive +0.534 [0-1.500 range for analysis evaluation]

...NAV: 9.02 [COB Friday] ...
...Discount: slightly negative -0.97 [0.03 below norm] COB Friday

...Total analysis numb3rs: 1674/2548 [require 1600/2500 for buying activity]
Note: Normal trading range for CEF's are 1000/1400 ....

Bottom Line:
1... Remains a very good CEF for current "Income oriented" portfolio's if bought between 8.75 to 9.50 [and does not exceed 0-2% (for conservative income investors)] of total portfolio in the current timeframe....
2... Some very good CEF's exist currently and should be looked at and individually analyzed [>12% distributions with increasing MktPrc's for potential CapGains]....
3... Market remains "volatile" and a normal "buy/hold forever" is not in the cards currently as "computer traders" are in/out in microseconds. Add to this that CEF's trade with extremely low "Volume" and can move MktPrc's radically....

Disclosure: Some of us currently hold >6% currently [only 6% maximum for any one single CEF is allowable]....

Have a "GREAT" week....
Live Long and Prosper....
Best Regards/Eddie....
papaone profile picture
It seems that many funds were including NII and portfolio gains in their DCF. Great. However, this year gains have turned into losses on their financial statement. So, we'll see what they do now, align the payout to NII resulting in a big drop in the distribution? Who knows. I'm out of CEF's, at least for now.
Nick Ackerman profile picture
Many equity funds will have to adjust their distribution or risk eroding earnings potential going forward. Quite similar to what we had in 2008's GFC. seekingalpha.com/...
Thankyou for the article @Stanford Chemist and also @Nick Ackerman,
Your articles seem to be the ones I keep finding and reading on SA. I find them to be the most informative and make the most sense. I also appreciate the patience in your responses. You think twice before you respond and always provide a measured response even to the most irritating posts.
Nick Ackerman profile picture
The kind words are appreciated! Very glad you are finding them useful and making the most sense. No post is irritating, we are all here to learn! So definitely keep on reaching out, please.
Faithful Steward Investing profile picture
really appreciate what you have to say in this article. Good reminders to keep things on track even when times are too good to be true. There's no way we could have known to get out of the big losers in time - the nosedive was too swift to react, and usually when that happens, the recovery is just as swift anyway. What none of us could possibly foresee was the sudden and widespread catastrophe on the horizon last December. I see this time as an education in how to proceed with our long-term philosophies, and how me might need to modify our approach to mitigate the effects of black swans such as this. It's good to be reminded of the importance of not getting carried away with yield over everything else. Appreciate the chart comparisons too. Well done.
12 over profile picture
Thank you for this analysis. Most appreciated!
Balance sheet guru profile picture
At one point you reommended JRI. The price has collapsed after being up. After speaking to the fund company in depth, it seems that they are using mirrors fo fund the payouts.inh the form of "returnof capital" and besides they lowered the "payout". They also has been holding related debt. What were we chasing?
Nick Ackerman profile picture
I was very surprised at how JRI reacted with the selloff. They have considerable amounts of fixed income and preferred stock. I believe it was the energy and REIT exposure though is what ultimately drove the fund down so much. There are still a lot of preferred shares trading at below par too. This isn't necessarily a bad thing as they typically come with a fixed dividend payment. As far as "using mirrors" when describing return of capital. That isn't quite right as many funds use ROC, not all of it is destructive ROC though. In the case of JRI, they did cut the distribution and if they do use ROC, it very well could be technically destructive if the NAV is lower by the end of the year. There is a good chance of that too, no doubt there!
Great piece, so what are you going to do differently going forward to avoid the undesirable situation from happening again, you described as “remaining in sectors overlong?”
Stanford Chemist profile picture
Great question @12tb3 ! In hindsight one would have sold on anticipation of the damage that the virus would have done on American shoes. Hindsight is always 20/20 though!
Yes, and when the market is dropping so fast there’s no time to analyze the positions to determine what needs to be sold or held. So the analysis of the market price trigger for when we should be getting out of the position would need to be calculated at least daily so in the event of a drop it could be quickly acted upon. Maybe maintaining stop loss orders based on this calculated value for each position would work? The stop loss value would probably be much lower than what stop losses are typically used for which would reduce the times when we would get stopped out but it could still happen but maybe the benefit of getting out before getting overlong is worth that risk?
Stanford Chemist profile picture
That's one way of doing it. I personally find stop losses not that great for CEFs especially for the less liquid ones because they can often react due to a sudden large buy or sell order. Getting the timing right is very tricky, and almost impossible to do consistently. And once you get out, when do you get back in?
Always look forward to your reports, I wonder if you'll have a dedicated piece one day on gold and precious metals focused CEFs with your views on who is good, bad and downright ugly....
CLO prices reflecting just a fraction of likely defaults, UBS says https://t.co/NgmbDneeIn via @Markets
Stanford Chemist profile picture
Thanks for the link!
Now you back peddle.

Warren Buffett "We don't see anything attractive"
Nick Ackerman profile picture
Stanford Chemist provided the links for the warnings on the CLO space from Alpha Male. Also, he was trimming CLO exposure in the portfolios last year.
Just by saying you had a hold on CLO equity. Not very defensive seeing the highest corporate leverage and weakest docs and subordination in history. You are ok. It's guys like Pendragon who really doesn't understand credit that really get me. Now might be the last exit point for a while as Fed pump loses steam. Listen to Warren Buffet, Carl Icahn, Tepper and others. See my history over the last 12 months
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