Hi Scott, Yes, you have it just about right. GSF trades on the NYSE just like a regular stock. It's a closed end fund that primarily buys very long term govt paper (not necessarily all US govt paper, however).
Just as you have surmised as interest rates climb, GSF falls in share price. If you are a Seller, that's bad. If you are a Buyer, it's very nice because the long paper in their portfolio hasn't gone away, it's just paying out as always. So, the static yield of $0.90/share in recent times went from being about 10% when the price was $9/share to being about 14+% when it hit about $6+/share.
It's a Good News, Bad News joke.
The biggest potential problem for owners like myself is if GSF has to lower its dividend because its Paper is maturing and can't be replaced with equal quality and yield. Because they manage their holdings well, the dividend has been relatively stabile. This risk is always there, however, and they have lowered interest rates in the past.
All things being relative, it has to be understood that the Long Bond rates have to be low for a Long Time for GSF's dividend to fall. Again, Good News, Bad News. If interest rates prevailing are falling long term, we're probably making money in our equities because of expanding P/E, if nothing else. (the Garzarelli Rule, just look at the '90s!)
Is this the sort of primer for which you were looking to understand GSF mechanism? Basically if Mr. Greenspan is raising rates, bonds and funds that hold them get trashed. (the longer the bond maturity, the worse it is) If Mr. G. is easing, bonds rally. As good AIMers, we like to buy the "trashed" bonds from all those that believe that interest rates will never again do anything but rise. Correspondingly we AIMers like to sell a few shares to those who, at other times, believe that interest rates can do nothing but decline.
Since I keep this holding for its income (paid monthly) I don't like to sell off a lot, but just enough to keep my interest. Then I keep the AIM Hold Zone fairly large to keep from buying back too soon. This is an extremely long cycle, so there's no hurry. The last "bottom" in GSF was during Mr. G's rate raising period in late '93 and early '94. So one full sine wave took about 5-6 years and might not yet be fully over. So, we can assume that we'd buy some and three years later we'd sell some, etc. Not exactly "Day Trading" but profitable from an income point of view and also from a long term cap. gain perspective. If Long Bonds are the "risky" end of the bond market, AIM tempers that risk by making periodic adjustments just when it should.
Hope this helps,
Tom |
