Solid Income Investments in Liquid Form: Managed Closed End Funds

5
Submitted by The Investment Shadow | RSS Feed | Add Comment | Bookmark Me!

A Closed End Fund (CEF) is a publicly traded investment company that invests in a variety of securities such as stocks, bonds, preferred stocks, real estate, mortgages, oil and gas royalties, etc. The variety of sectors, classifications, and geographical representation is every bit as confusing as it is with traditional funds, but the advantages are easy to understand.

Capital is raised by an Investment Company through an initial public offering (IPO) of common stock and the proceeds are invested according to the investment objectives of the fund. Like a traditional (open end) mutual fund, a Closed End Fund has a board of directors, appoints an investment advisor and employs a portfolio manager.

Unlike conventional mutual funds, CEFs do not issue and redeem shares directly with investors at net asset value. CEFs are listed on national securities exchanges, where shares of the Investment Company are purchased and sold in transactions with other investors, just like individual company stocks, and most often not at net asset value.

Many Brokerage Firm Statements will list these securities as Equities or Mutual Funds, not quite in sync with the purpose or nature of the securities contained within. You should keep this in mind when you analyze the asset allocation of your portfolio and adjust accordingly.

Although the number of outstanding shares of a CEF remain relatively constant, additional shares can be created through secondary offerings, rights offerings, and/or the issuance of shares for dividend reinvestment.

Existing owners always get the first shot at new shares, in proportion to their holdings, so they can choose to protect themselves from any dilution of interest. Again, vastly different from traditional mutual funds, where dilution is the very nature of the fund.

Many of the advantages of Closed End Funds are discussed below. It should be abundantly clear that this form of investment fund has eliminated nearly all of the drawbacks of conventional mutual funds. The two have very little in common.

Trading Liquidity - Flexibility - Cost: Closed End Fund shares may be bought or sold at any time during the trading day, just like common stocks, and share prices will fluctuate. They are excellent start up investment vehicles for smaller accounts where diversification would otherwise be difficult to achieve.

There are no penalties for leaving the CEF when the stock is sold. The only direct cost involved is the commission paid when buying or selling the shares.

Leverage IS an Advantage: Closed End Fund managements borrow money and issue Preferred Stock in an effort to increase the productivity of the investment portfolio.

As long as the short-term interest rates paid to the lenders and the dividends paid to preferred shareholders are lower than the net long-term rates earned by the portfolio, the common shareholders of the fund will earn higher rates than they would without the leverage. 

Rising interest rates aren't nearly as scary as critics would like you to believe. The manager can reduce the leverage, and new investments are made at higher yields. Leverage is not a four letter word. All debt is a from of leverage and, without it, you would probably be peddling to work instead of driving that Mercedes.

Efficient Portfolio Management: Unlike open-end mutual funds, the asset base for CEFs is relatively stable. Without the pressure of constantly investing or redeeming securities based on investor demands, CEF managers are in charge of the fund and use their own experienced judgment to make investment decisions --- uninfluenced by the fear and greed of "the mob".

Fund Expenses: Due to minimal marketing expenses  and typically lower turnover, CEFs have lower operating costs than traditional mutual funds. (Closed End Funds rarely advertise and don't pay distributors.) They trade like Common Stocks, with the normal variable expenses that trading involves.

CEFs do not impose annual 12b-1 fees, as mutual funds do, BUT they probably do pay the fund manager too much money. Still, if my Closed End Muni Bond fund is generating 6%, in monthly installments, she's earning it!

No Minimums:  Because Closed End Funds trade on secondary markets like other common stocks, there is no minimum purchase or sale requirement. Investors may purchase or sell as little as they like. And don't expect to receive a prospectus --- yet another benefit since such documents are written in unintelligible legalese anyway.

Distributions: CEFs make distributions according to a prescribed schedule, which allows investors to plan the timing of their cash flow. The actual amount of the distributions may vary with fund performance, interest rates, and general market conditions.

Still, a stable monthly cash flow is easier to create with CEFs than with individual bonds, mortgages, and preferred stocks --- and they are significantly less risky. Many funds make their Capital Gains Distributions early in the year following the actual transactions. This may cause some inconvenience for accountants, but think of the potential for income increasing management strategies! [Remember, it's your accountant's job to make you happy...not vice versa.]

Investment Risk:  All true investments involve similar types of  risk. Closed End Funds involve the same risks as common stocks: prices do  fluctuate; management skills vary from company to company; markets rise and fall; interest rates change. The rules of Investing (Quality, Diversification, and Income) and of Management (Planning, Organizing, Controlling, Decision Making) always apply.

CEFs are not miracle drugs, just another means to the end of creating a more manageable, safer, and more productive portfolio. They are the income security of choice used within the Market Cycle Investment Management Methodology.

 

CLICK HERE TO JOIN MY PRIVATE MAILING LIST


 
Market Cycle Investment Management
3912 Betsy Kerrison Pkwy
Johns Island, SC 29455
Phone (800) 245-0494 • Fax (843) 243-8509
Contact Steve directly for additional information: 800-245-0494

Please read this disclaimer:
Steve Selengut is registered as an investment adviser representative. His assessments and opinions are purely his own. None of the information presented here should be construed as an endorsement of any business entity; the information is only intended to be educational and thought provoking.


The Working Capital Model - Market Cycle Investment Management - FREE Mentoring Program

Professional Investor/Manager Steve Selengut, and an experienced panel of experts, walk you through the Market Cycle Investment Management (MCIM) portfolio management process. We'll hold your hand, answer your questions, and do everything we can short of security selection as you learn how to run your own (or your client's) portfolio.

The Mentoring Program is FREE, and includes:

  • The "Road To Success" Investment Training Program (minimum of 3 sessions)
  • The "Performance Investors Want & How to Get It" program (if applicable) 
  • The "Market Cycle Investment Management" program

The mentoring program is no longer private --- at least six people (all "Brainwashing" book owners) must attend each meeting.

Note:  Headsets will make the experience much more productive.

CLICK HERE TO JOIN MY PRIVATE MAILING LIST



Associated Content:
Money Magazine 401k Investment Article Directory - Market Cycle Investment Management is a unique, long-term trading approach that focuses on Investmen...
Seven Year IGVSI Performance Numbers Still 20% ahead of S & P 500 - The IGVSI is a barometer of a small but elite sector of the stock market called Investment Grade Val...
The Greatest Investment Story Never Told - An excellent strategy even in today's investing environment. The current buzz on the street is that ...
The Total Return Shell Game - Just what is this total return thing that income investment managers like to talk about, and that Wa...
Income Security Price Volatility IS a Good Thing - MCIM portfolios always include an income purpose element of at least 30% of Working Capital and neve...
What Are Market Cycle Investment Management Life Cycle Portfolios? - Steve Selengut developed the Market Cycle Investment Management (MCIM) methodology for managed asset...
New 401k Approach Focuses on Income Production and Correction Preparation - 401(k) Savings Plans are great opportunities to build wealth, but they are not guaranteed pension pr...
The Income Closed End Fund Marketplace - How could you not be interested in Tax Free Yields of roughly 7%? On programs that have been in oper...
Investment Fruitcake - Portfolio design, in its simplest form, is a fruitcake of apples, oranges, and dough. The recipe (as...
Create a Pension Plan Within Your 401(k) - 401(k) Savings Plans are great opportunities to build wealth, but they are not guaranteed pension pr...

Please read this disclaimer:
Steve Selengut is registered as an investment advisor representative. His assessments and opinions are purely his own and do not represent the views of any other entity. None of his commentary is or should be considered either investment advice or a solicitation of business. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be or should be construed as an endorsement of any entity or organization. The reader should not assume that any strategies, or investments mentioned are any more than illustrations --- they are never recommendations, and others will most certainly disagree with the thoughts presented in the article.