This basket strategy was last updated here: Update For CEF Basket Strategy As Of 1/29/16 - South Gent | Seeking Alpha
I view the closed end portfolio to be a balanced worldwide portfolio within a larger portfolio that includes individual stock and bond selections.
I place an emphasis on income generation and own a number of CEFs that pay monthly dividends.
I will change the weightings in the CEF portfolio based on my opinions about the balance between risks and rewards.
I have a lengthy discussion of bond CEF risks in the Appendix section to an earlier post:Update For Closed End Fund Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha(scroll to "General Risk Discussion for Leveraged Bond CEFs") I also discussed those risks here. I will not be repeating those discussions.
I discussed the factors impacting the dividend payout for leveraged closed end funds here:Update For CEF Basket Strategy As Of 10/14/15 - South Gent | Seeking Alpha (Scroll to APPENDIX: 1. Factors Impacting a Dividend Payout for Leveraged Closed End Bond Funds Using VKQ as an Example)
The CEF risk associated with a forced reduction in leverage at the most inopportune time, sort of like a margin call during a huge downdraft, is discussed in this post. Update For REIT Basket Strategy As Of 9/17/15 (scroll to RNP Presents a Good Historical Example of One Risk Inherent in Using Leverage)
For the remainder of this year, I will not make an open market purchase of a leveraged bond CEF that has less than 50% weighting in investment grade bonds. I have quit reinvesting the dividend in any CEF with a greater than 30% weighting in junk rated bonds except for GDO which had a 33.67% weighting in junk bonds as of 9/30/15. For that CEF, I am reinvesting the dividend in the position held in one taxable account while taking cash in two others including the Roth IRA.
The reasons underlying the sell transactions discussed below are the same:
1. I am in part trading leveraged bond CEFs to buy at higher than normal discounts to net asset value per share and to sell when the discount narrows after purchase as the net asset value per share unadjusted for monthly dividends increases (called the "Twofer" here at HQ) This is in part related to a dividend capture strategy for CEFs, particularly when the CEF is bought in a Roth IRA account where short term trading profits are not taxed.
2. I am increasing my total return on an annualized basis by selling shares profitably after harvesting one or more dividends.
3. It has been difficult to realize profits in leveraged bond CEFs since May 2013 due to (1) the interest rate spike starting in May 2013 and ending on 12/31/13; (2) the rise in the USD against foreign currencies that has acted as a headwind for USD priced funds that own foreign bonds; (3) the shellacking in junk bond and EM bonds due to credit risk fears and (4) the overall lackluster performance of investment grade bonds over the past three years as shown in the 1.98% annualized average total return for the iShares Investment Grade Corporate Bond ETF (NYSEARCA:LQD).
The 2013 interest spike, which caused bond CEFs to decline in price, has contributed to the discounts remaining at historically high levels along with the other factors discussed above.
I am concerned that short term borrowing costs will rise at a greater pace than the market is currently anticipating, which is less than a 50% chance of only one twenty-five basis point increase through February 2017. Countdown to FOMC - CME Group Increases in the FF rate will cause short term borrowing costs to rise and will narrow the spread between the cost of borrowings and the yields generated by longer term bonds bought with borrowed short term money.
I am concerned about duration and interest rate risk as well.
Core CPI has been rising and was last reported up 2.2% Y-O-Y. Consumer Price Index Summary As of last Friday, the bond bookies were predicting an average annual CPI rate of 1.41% over the next ten years. That is up from 1.21% as of 2/9/16. 10-Year Breakeven Inflation Rate-St. Louis Fed (1.39% as of 2/25/16)
The government reported that the price index for personal consumption expenditures almost doubled in January, rising from December's .7% Y--O-Y increase to a Y-O-Y 1.3% rise last month. The core PCE price index rose to a 1.7% annualized increase. "Wages and salaries increased $48.1 billion in January, compared with an increase of $18.3 billion in December." Personal Income and Outlays
So, I am taking profits in parts of my CEF bond portfolio when I can generate them quickly.
I did redeploy part of the proceeds into an unleveraged stock CEF that I eliminated in 2015.
Basket as of 2/26/16
1. Sold 100 BKK at $16.02:
Trade Snapshot ($1 Commission):
Update For CEF Basket Strategy As Of 12/18/15 - South Gent | Seeking Alpha (scroll to 1. Bought Back 100 BKK at $15.73)
Security Description: The Blackrock Municipal 2020 Term Trust (BKK:NYSE) is aleveraged closed end fund that owns tax free municipal bonds and is scheduled to liquidate on or about 12/31/2020. The fund owns a number of municipal bonds that mature in 2019-2021.
Sponsor's Website: Municipal 2020 Term Trust | BKK
The dividend yield is low and somewhat variable within a narrow range. The last monthly dividend was $.0469 per share or 3.51% at a total cost of $16.02 per share. It is difficult for me to maintain an interest in receiving that yield for more than a few months, and that difficulty grows when looking at my prior sells noted in the "Prior Trades" section above.
Data Day of Sell (2/10/16) and Day of Purchase:
Closing Net Asset Value Per Share: $16.37 (NAV per share at $16.14 day of purchase)
Market Price: $16.04
Discount: -1.95% (discount closed at -2.73% date of purchase)
2. Sold 100 PDT at $13.72 and Another 100 at $13.7-Roth IRA
Roth IRA History:
Update For CEF Basket Strategy As Of 9/9/15 - South Gent | Seeking Alpha (closing discount -12.68%/ scroll to 1. Bought Back 100 PDT at $12.75-Roth IRA Account)
I will receive one more $9 dividend (ex on 2/9/16)
Roth IRA Profit: +$80.97
Total Return=$125.97 or 9.83% (holding period 5+ months)
Taxable Account Profit= $64.22
Total Dividends: $45
2016 Trading Profits= $145.19 excluding dividends (200 Shares)
2015 Trading Profits= +$575.21 excluding dividends (300 shares); Item # 1 Pared Interest Rate Risk by Selling in a Taxable Account: 200 PDT at $14.26 (2/11/15 Post)(profit snapshot +$490.23)-Item # 1 Bought: 200 PDT at $11.73 (10/24/13 Post) and Update For CEF Basket Strategy As Of 10/30/15 -South Gent | Seeking Alpha (profit snapshot $84.98 scroll to 1. SOLD 100 OF 200 PDT)
Total PDT Trading Profits=+$720.4 (500 shares)
Security Description: The John Hancock Premium Dividend Fund (NYSE:PDT) is a leveraged balanced closed end fund. The common stock component includes electric utility and natural resource companies that pay decent dividends. Preferred securities would generally encompass more than equity preferred stocks or traditional preferred stocks, and would include trust preferred securities and European hybrids (in effect junior bonds). Some senior exchange traded bonds will generally be found in the portfolio mix.
I noticed several securities that are exchange traded bonds that pay interest including the following:
BGE Capital Trust (BGEPRB) 6.2% Trust Preferred (in effect a junior bond)
DTE Energy (DTQ) 5.25% Junior Subordinated Bond
DTE Energy (DTZ) 6.5% Junior Subordinated Bond
Duke Energy (DUKH) 5.125% Junior Subordinated Bond
Entergy Mississippi (EFM) 6.25% First Mortgage Bond
Heco Capital (HE.PU) Junior Bond
Next Energy Capital 5.125% (NEEPRI) Junior Bond
Next Energy Capital 5.7% (NEEPRC) Junior Bond
South ern Company 6.25% (SOJA) Junior Bond
Stanley Black & Decker (SWJ) Junior Subordinated Bond
Telephone and Data Systems (TDI) 6.625% Senior Bond
Telephone and Data Systems (TDE) 6.875% Senior Bond
United States Cellular (UZA) 6.95% Senior Bond
Verizon (VZA) 5.9% Senior Bond
The fund owned one Aegon hybrid security, AED. which is in effect a junior bond: Stocks, Bonds & Politics: Aegon Hybrids: Gateway Post; AED Prospectus
Sourced: SEC Filed Shareholder Report (period ending 10/31/15)
The foregoing is not a comprehensive list of non-equity preferred stocks owned by this fund.
The common stock positions are mostly utility, telecommunication and energy stocks
PDT Page at Morningstar (currently rated 5 stars; some recent ROC dividend support; leveraged at 34.26%)
Closing Prices Day of Trade (2/16/16):
Closing Net Asset Value Per Share: $15.01
Closing Market Price: $13.57
Discount: -9.59% (average five year at -7.16%/average 3 year at -10.06%)
Sourced: CEFConnect Page for PDT
A five year chart of PDT's discounts and premiums to NAV per share can be found under the Pricing Information tab. PDT was generally selling at less than a 5% discount with occasional spurts to premium prices to NAV pers share in the months prior to the 2013 interest rate spike. After the interest rate spike got underway in 2013, the discount expanded to over 10% and has remained near or above that level ever since even as interest rates have come back down.
If the investor expands the chart to "inception", there can be seen significant expansions in the discount during recessions where credit concerns, real and imagined, become more eleavated, as shown in 2000 and 2008.
Sponsor's Website: Premium Dividend Fund
3. Sold 50 NBB at $21.05: Roth IRA
Update For CEF Basket Strategy As Of 10/21/15 - South Gent | Seeking Alpha (scroll to 1. Bought 50 NBB at $19.51 Roth IRA)
Dividends: $22.4 (includes one monthly dividend that will be paid on 3/1/2016)
Total Return = $85.38 or 8.69% (holding period 4+ months)
Total Trading Profits NBB= $480.79
Snapshots of prior NBB trades and links to prior discussions can be found in the Appendix section to this Instablog: Item # 1 Update For CEF Basket Strategy As Of 10/14/15
Security Description: The Nuveen Build America Bond Fund (NYSE:NBB) owns Build America Bonds which are taxable municipal bonds. The fund will terminate on or about 6/30/2020 and will then distribute the fund's assets to its shareholders.
Closing Data From Day of Purchase 10/14/15
NAV Per Share: $ 21.31
Market Price: $ 19.5
Discount: -8.49 %
Closing Data on Day of Sell 2/23/16:
NAV Per Share: $21.91 (unadjusted for monthly dividend payments)
Market Price: $21
The fund is weighted in "A" or better rated bonds:
Average Leveraged Adjusted Effective Duration: 10.41 years (with that duration, a 2% rise in interest rates at that duration woulc cause almost a 21% in NBB's net asset value per share: Get to know your bond fund: Duration | Vanguard)
4. Sold 200 of 300 BHK: I kept the recently bought 100 share lot: Update For CEF Basket Strategy As Of 1/29/16 - South Gent | Seeking Alpha (scroll to 1. Added 100 BHK at $12.77)
Update For Closed End Fund Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha (Scroll to 1. Bought Back 200 BHK at $12.65)
I was then buying back the shares sold last April at $13.86. Pared Interest Rate Risk Exposure In Roth IRA: Sold 200 BHK At $13.86 - South Gent | Seeking Alpha.
The purchase of that 200 BHK share lot was discussed here: Closed End Bond Funds: Added 200 BHK At $13.31 - South Gent | Seeking Alpha (11/7/14 Post)
I had two flips in 2015 that netted $174.78 in share profits.
I had one earlier trade: Item # 2 Sold All of the Bond CEF BHK at $14.058 (2/21/12 Post)(snapshot of profit in that post/Total Return: $293.25 or 10.63%) There was a special distribution paid by this fund of $.17 per share in October 2014 that was related to its merger with another Blackrock CEF.
Security Description: The BlackRock Core Bond Trust (NYSE:BHK) is a leveraged bond CEF that is weighted in investment grade bonds, but has a significant exposure to junk rated securities. As noted by the sponsor, the fund will generally have at least 75% of its assets in investment grade bonds.
Data Day of Trade:
Duration: 9.25 years as of 1/29/16
Holdings: 741 as of 1/29/16
Last SEC Filed Shareholder Report: BLACKROCK CORE BOND TRUST (period ending 8/31/15)
Last SEC Filed Form N-Q: BLACKROCK CORE BOND TRUST (holdings as of 11/30/15)
Leveraged at 28.15% as of 1/29/16
Sourced: Core Bond Trust | BHK
5. Reintitated Position in Adams Express (NYSE:ADX): Bought 100 at $11.78+
Prior Trades: I have been buying and selling this CEF since at least 1984.
I last eliminated my position in 2014 and 2014.
The total profit realized in 2014 was $786.65: Item # 4 Sold 116 ADX at $13.61 (6/14/14 Post)(profit snapshot=$319.38); Item # 4 Pared ADX Again-Sold 143 Shares at $13.97 (8/9/14 Post)(profit snapshot=$427.9) I took the 2014 year end distribution in cash: ADX Year End Distribution (12/30/14 Post)
I harvested a +$1,983.24 gain in 2015: Update On Closed End Fund Basket Strategy As Of 7/28/15 - South Gent | Seeking Alpha (scroll to "Deletions/Reductions Since Last Update: Adams Diversified Equity (NYSE:ADX)(formerly known as Adams Express) Eliminated.
Security Description: The Adams Diversified Equity Fund (ADX) is an unleveraged stock CEF that was formed shortly before the 1929 crash. Many of the CEFs in existence prior to the 1929 crash used leverage and did not survive for long.
The debacles in leveraged CEF's after the 1929 crash are discussed in this scholarly article: "The Bubble of 1929: Evidence from Closed-End Funds".
John Kenneth Galbraith also discusses the manias in his seminal book The Great Crash 1929.
Top Ten Holdings as of 12/31/15:
Data Date of Trade (2/04/16)
Closing Market Price: $11.8
Closing Net Asset Value: $14.05
Traditionally, ADX has traded at a significant discount to its net asset value per share. As of 2/26/2016, the average discounts were -14.27% and -14.24% over the past three and five years respectively. A five year chart of the discount currently shows no narrowings below 12%
Last ADAMS DIVERSIFIED EQUITY FUND's SEC Filed Forn N-Q: Holdings as of 9/30/15 ( Cost $1,105,859,916 and 1,424,359,161 market value)
SEC Filed Shareholder Report: Period Ending 6/30/15
Sponsor's website: Adams Funds
Dividends: The fund is currently committed to an annual distribution rate of "at least 6%". Most of that dividend has consisted of a year end long term capital gain distribution.
Some Prior Purchase Discussions:
Bought 100 ADX at $10.14 (11/21/12 Post); Added 50 of the Stock CEF ADX at $9.77; Added 50 ADX at $10.95; Bough 200 ADX at $9.99; Added To CEF ADX at $9.98; Bought ADX at $8.34; Added 50 ADX at $10.95 (6/6/11 Post); Added 50 ADX at $9.7
Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics:ERROR CREEP and the INVESTING PROCESS. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.
Disclosure: I am/we are long BHK, ADX.