Preferred CEF Showdown - Update

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Some readers might remember a series I wrote on preferred stock closed end funds a couple months ago (original here, here, here and conclusion here) aimed at trying to determine the best manager of preferred closed end funds and then the best fund run by that manager. In the final round, I concluded:

Bottom line: Of the three, I have to give Hancock the top slot due to their conservative nature and their stable returns. While I would normally go with Flaherty, I would keep an eye on the premium and if it swings to a discount, I would reassess. As it stands, Hancock has the steadiest hand and their bullets find their marks - they walk away as the winner of the shootout.

Three months have passed since I wrote the series and I thought it was high time for an update to see if anything has changed. Lets begin.

If you recall, my final funds were:

  • Flaherty and Crumrine's Flaherty & Crumrine/Claymore Preferred Securities Income Fund (FFC),
  1. Spectrum Asset Management's Nuveen Quality Preferred Income Fund 2 (JPS), and
  2. John Hancock's Preferred Income Fund II (HPF).


Lets look at the funds overview:

Recall back at the time of the shootout the overview looked like the following:

As we can see, the premiums have risen on all three funds as preferred stock has become more popular with income investors. The Flaherty and Nuveen funds have seen the greatest increase in premiums while the Hancock fund has seen its premium rise the least.


Current performance is as follows:

And a look back to the April 5th performance table:

The first thing that jumps out is the come from behind outperformance of Spectrum's Nuveen Quality Preferred Income Fund 2. On a year-to-date basis, it has outperformed both the Flaherty fund and Hancock's fund.


FFC Chart

FFC data by YCharts

Talk about a sound butt kicking. The market price return (not the NAV) has outperformed this year by over 2x! Since the date of the shootout, we have seen the following price return:

FFC Chart

FFC data by YCharts

The outperformance we have seen by Spectrum has really occurred since June 21st.

Bottom Line: The tide seems to have turned for Spectrum's Nuveen Quality Preferred Income Fund 2, with the price outperforming its shootout peers by 2x. Does this change my opinion of the shootout results? As I am not a momentum investor, it does not. I still prefer Flaherty, but continue to be wary of the premium - which has increased (they all have to be fair, Nuveen increased nearly 500bps and Flaherty has increased nearly 200bps, while Hancock has increased approximately 40bps). Hancock, while not having the highest yield (that would be Flaherty) has not seen its premium increase to the degree of its peers and has kept income relatively stable. For income investors, I would stick with Hancock and perhaps mix in some Flaherty or Spectrum (depending whether you play momentum or yield) to tweak the exposure.

Disclosure: I am long FFC, HPF.

Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.