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Bear Markets Are Great Closed-End Fund Premium Equalizers

Jun. 08, 2020 2:51 AM ETASG, BIMPX, DFP, ECC, FGB, IVW, MFV, OXLC, PFD, PSF6 Comments


  • Avoid overpriced funds if there is a less overvalued alternative available.
  • Bear markets are great closed-end fund premium equalizers.
  • Our recommendations from January had a 100% success rate, with alphas of +20% generated in two of those cases.
  • Looking for a portfolio of ideas like this one? Members of CEF/ETF Income Laboratory get exclusive access to our model portfolio. Get started today »

We don't practice market timing at the CEF/ETF Income Laboratory (and our portfolios did fall with the rest of the market in March) but there is a surefire way of increasing your margin of safety with your closed-end funds investments if/when a bear market does hit.

The simpler answer is: avoid overpriced funds! Especially if there is a less overvalued alternative available from the same sector. CEF premium/discounts can often vary wildly based on no discernible reason other than imbalanced supply and demand, and the nimble investor can rotate out of these to save money or increase their share count in our patented "compounding income on steroids" approach.

Here's three examples of how our CEF rotation strategy could have increased returns vs. buy-and-hold, based on our report "Weekly Closed-End Fund Roundup: Three Swap Opportunities" released to Income Lab members in mid-January. (Note that these actionable recommendations were redacted from the public repost).

These three swap recommendations were all picked out of our weekly premium/discount gainers list, a staple feature to help our members quickly scan for overvalued or undervalued CEFs for swing trading opportunities. We'll see how we scored 3 out of 3 on these trades, a restatement to the power of premium/discount mean reversion, as well as the fact that bear markets are great equalizers of overvalued closed-end funds!

1. Cohen & Steers Select Preferred and Income Fund (PSF)

Here's what we wrote to our members in January:

Cohen & Steers Select Preferred and Income Fund (PSF) gained +5.10% in premium last week and sits at premium of +15.20% with a 1-year z-score of +2.3, indicating significant relative overvaluation. The valuation is the highest since inception in 2010!

Therefore, PSF is an excellent sell candidate. It could be replaced by something like Flaherty & Crumrine Dynamic Preferred and Income Fund

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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 CEF/ETF Income Laboratory.

Features of the service include: managed income portfolios (targeting safe and reliable ~8% yields) making use of high-yield opportunities in the CEF and ETF fund space. These are geared toward both active and passive investors of all experience levels. The vast majority of {CEF/ETF Income Laboratory} holdings are also monthly-payers, for faster compounding and steady income streams. Other features include 24/7 chat, and trade alerts.

Analyst’s Disclosure: I am/we are long ECC. 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 (6)

chippos profile picture
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NV_GARY profile picture
This part is free- a problem?
I was ready to subscribe to Stanford Chemist but as I went thru signup process it became unclear whether I was signing up for Stanford Chemist or Seeking Alpha. Could someone please clarify?
davidrich77 profile picture
I signed up a short while ago, seems that Seeking Alpha provides a "gateway" through to SC. Persevere with it, i'm very happy with this service so far.
DeeringBanjo profile picture
I like strategies in which you do do good if you do nothing and do great if you do something. If I'm on vacation I wouldn't suffer from "missed trade anxiety." I may have to bite the bullet and start 'discount leveraging' my kids portfolios since I'm trying to keep mine more autopiloted.
most of Pimco suite of CEFs maintained significant premiums although they dropped a bit some more than others.
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