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Investing in CEFs - Tips & views from 3 different sources

hank
edited July 1 in Other Investing
I asked Bing’s pretty decent AI robot to tell me what the maximum % of a portfolio that should be committed to a single CEF might be. Instead, an M* article came up. The fact that a better answer didn’t surface suggests to me they are not much discussed. I’d say up to 10% of a portfolio might be reasonable for a single CEF - but suspect that’s on the high end.

Anybody have a good answer? 5%? 10%? 0?

From Fidelity

Morningstar Article (2018)

Opinion Piece / Forbes (updated June 2024)

Comments

  • CrashCrash
    Information overload.
  • hank
    edited June 30
    Thanks for the feedback @Crash. Agree somewhat. What I try to do with something like the lengthy M* piece is just skim it, selecting only certain parts to read. I’ve broadened out the theme a bit & added a couple additional sources after seeing your critique.

    Now you have 3 X as much to read.:)
  • CrashCrash
    thanks, man.
    ;)
  • ShostakovichShostakovich
    edited July 1
    I've looked at CEFs for a while, but they would seem to require more expertise than I have. I'd rather in vest in a mutual fund or ETF that invests in CEFs. Even those rather specialized types of funds seem to underperform their associated indices and peer groups.
  • PRESSmUPPRESSmUP
    edited July 7
    hank said:

    what the maximum % of a portfolio that should be committed to a single CEF might be.

    Anybody have a good answer? 5%? 10%? 0?

    Hank...personally, I'm not sure why the percentage would be different than another stock or fund holding simply because it's a CEF. I tend to limit "risk of ruin" to be a 4-5% allocation per account under normal circumstances. I've exceeded that, but with runaway stocks, not typically with a fund. CEFs predate the advent of mutual funds. I find it odd that folks shy away from a CEF but pile into JEPI with its black box of ELNs.

    With a CEF, you need to be aware of timing, as the RSI and discounts fluctuates with consumer demand. Seeking Alpha is a good resource...particularly if you follow an author who is somewhat discerning.

    The Forbes article mention a CEF worth considering, NEA...again, when the RSI levels out.
  • hank
    edited July 7
    PRESSmUP said:

    … personally, I'm not sure why the percentage would be different than another stock or fund holding simply because it's a CEF. I tend to limit "risk of ruin" to be a 4-5% allocation per account under normal circumstances …

    Yep. Thanks for the thoughts @PRESSmUP. Very limited experience here with CEFs and individual stocks. But I’ve already sensed the wisdom of what you suggest. I’ve recently backed off from a 10% allocation to a single CEF to 5% each in two different ones. And one of them is quite conservative as CEFs go, playing in the investment grade corporate bond sector.

    Appreciate your digging up the thread. I’d briefly forgotten posting it.:)

  • PRESSmUPPRESSmUP
    With the abundant discounts, this is high cotton…as the saying goes.
  • rforno
    edited July 7
    Discounts or not, be wary of the income generated by many CEFs use high degrees of leverage. That 7-12% yield might be great, but everything has a price --- interest rates/leverage costs, fund fees, etc. If a CEF has more than 20, 25% leverage, I would not be interested. And if the fund isn't generating enough income from its holdings and/or appreciated cap gains, it could be paying out 'destructive' return of capital, which means the dividend could be at risk longer term.

    (I only hold 1 equity CEF right now (ASGI) and have a few on watch lists, all of which are unlevered)
  • Low_TechLow_Tech
    FWIW: My 30/70 retirement portfolio has 4 CEFs which are 31.9% of the total PF. They run from 7 to 9% each.
  • WABACWABAC
    Shostakovich said:

    I've looked at CEFs for a while, but they would seem to require more expertise than I have. I'd rather in vest in a mutual fund or ETF that invests in CEFs. Even those rather specialized types of funds seem to underperform their associated indices and peer groups.

    It wasn't that long ago that M* covered them. I followed along. Dug into it a little bit. I don't know if it's expertise, or just the fact that some people put mustard on hamburgers and ketchup on hotdogs.

    If it helps them sleep well at night, great.

  • PRESSmUPPRESSmUP
    Fortunately, MFO includes them in its screening, as several are included as Great Owl designations.

    FYI, an earlier post cautioned against “destructive ROC”. Linked is a very informative article by Eaton Vance on the subject.

    https://funds.eatonvance.com/media/public/6348.pdf
  • FD1000
    Seriously? CEFs?
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