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Want Income? Closed-End Funds Offer Yield, But Beware Of The Risks
FYI: Looking for income? The yield on 10-year Treasury notes is paltry 1.75%. One-year certificates of deposit pay an anemic 1.11% on average, according to Bankrate.com.
Closed-end funds (CEFs) can be one solution, with yields averaging 6.73%.
Also, things have gotten to the point, IMO, where it is difficult to accurately take a measure of CEF valuations in the fixed income categories, as mentioned here: http://fmdcapital.com/no-formula-cef-overvaluation/
Last sentence of the IBD article:
A third holding is DoubleLine Income Solutions CEF (DSL), which is up 16% this year.
I haven't kept track of the DoubleLine CEFs for awhile, so I was surprised by what I found when I checked for an update. In contrast to the uniformly good performance of DoubleLine MFs since inception, it looks like we may have our first misstep. DSL may be up 16% YTD, but that is coming off a pretty deep bottom. Current NAV of 18.91 and market price of 17.88. At the February nadir, market price declined to 14.71. Wow. Considering the fund opened at its Apr 2013 inception at 25/share, that "suggests" to me the fund ain't doing a terrific job of holding its value. Buying at inception and selling on Friday, you'd have been looking at a 28.5% loss on those shares. For those who have been invested in DSL recently, has there been any attribution given by DoubleLine in conference calls for the drop in NAV over the 3 year history? Misplaced leverage at the wrong time in the wrong places, on numerous occasions, or what? http://www.morningstar.com/cefs/xnys/dsl/quote.html
Also, things have gotten to the point, IMO, where it is difficult to accurately take a measure of CEF valuations in the fixed income categories ...
Heezsafe, I don't think there's ever been, or ever will be, an exact way to pin down CEF valuations. You could look at adjusted price over time, absolute premium/discount to nav, relative (to history) p/d to nav, the recent direction of price vs. the recent direction of nav, on and on, some of the above or all of the above. A CEF investment is entirely subject to the whims of trading ... but then that's not all that different from straight equities.
I started out thinking people who invest in them must evaluate them primarily in terms of p/d relative to history (since some cef's tend to have relatively persistent premiums, others relatively persistent discounts) but learned that some? many? people who invest in cef's pretty much trade on absolute p/d, so you have to take that into account in your thinking, too.
On DSL, the 28.5% loss you quote is on price alone, not including div payouts. I didn't take the time to look at since-inception returns, but M* shows a 3y total return of -2% on price (and +1% on nav, FWIW) so the actual TR to an investor is close to flat over that time, with the divs making up for most of the price drop (the div amounts come out of the price when paid out) - same effect as occurs in some HY open-end funds, but magnified by leverage.
Edit: Just went to the spiffy new Db'line site, and the current fact sheet shows a since-inception total return of -7% (nav = -3%), with a little less than 20% in IG as of the end of Feb.
I'm not a fan of DSL, and probably would never own it. It's junky, of course leveraged, and you'd need to buy & sell at ~ the right times to make anything out of it. Munis and BBB-ish taxables (like the article says, there aren't many, maybe any, high-quality taxables out there) are easier to deal with. For junk FI, oef's are plenty adventurous for me.
I personally like bond CEF's. They recover quicker than the S&P in hard market selloffs and they provide great yields if timed correctly. I own DSL bought during the oil scare in 1Q16. I do not buy new CEF's. Most trade down over the first 2-3 years. See much heralded PCI. I also like CEF's that show a tendency to move to premiums from time to time. Buy good management and you don't get hit as hard with defaults. I believe in averaging down on CEF's when purchasing them. Many believe junk bond CEF's trade on interest rates but they are more closely related to the stock market. Historical relative valuation analysis is necessary when buying them IMHO. I only buy them with wide discounts in sell offs.
Comments
http://fmdcapital.com/no-formula-cef-overvaluation/
Last sentence of the IBD article: I haven't kept track of the DoubleLine CEFs for awhile, so I was surprised by what I found when I checked for an update. In contrast to the uniformly good performance of DoubleLine MFs since inception, it looks like we may have our first misstep. DSL may be up 16% YTD, but that is coming off a pretty deep bottom. Current NAV of 18.91 and market price of 17.88. At the February nadir, market price declined to 14.71. Wow. Considering the fund opened at its Apr 2013 inception at 25/share, that "suggests" to me the fund ain't doing a terrific job of holding its value. Buying at inception and selling on Friday, you'd have been looking at a 28.5% loss on those shares. For those who have been invested in DSL recently, has there been any attribution given by DoubleLine in conference calls for the drop in NAV over the 3 year history? Misplaced leverage at the wrong time in the wrong places, on numerous occasions, or what?
http://www.morningstar.com/cefs/xnys/dsl/quote.html
I started out thinking people who invest in them must evaluate them primarily in terms of p/d relative to history (since some cef's tend to have relatively persistent premiums, others relatively persistent discounts) but learned that some? many? people who invest in cef's pretty much trade on absolute p/d, so you have to take that into account in your thinking, too.
On DSL, the 28.5% loss you quote is on price alone, not including div payouts. I didn't take the time to look at since-inception returns, but M* shows a 3y total return of -2% on price (and +1% on nav, FWIW) so the actual TR to an investor is close to flat over that time, with the divs making up for most of the price drop (the div amounts come out of the price when paid out) - same effect as occurs in some HY open-end funds, but magnified by leverage.
Edit: Just went to the spiffy new Db'line site, and the current fact sheet shows a since-inception total return of -7% (nav = -3%), with a little less than 20% in IG as of the end of Feb.
I'm not a fan of DSL, and probably would never own it. It's junky, of course leveraged, and you'd need to buy & sell at ~ the right times to make anything out of it. Munis and BBB-ish taxables (like the article says, there aren't many, maybe any, high-quality taxables out there) are easier to deal with. For junk FI, oef's are plenty adventurous for me.