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Pastimes : The Justa and Lars Honors Bob Brinker Investment Club Thread
VTI 335.03-2.0%4:00 PM EST
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To: gronieel2 who wrote (7018)4/3/2012 7:56:15 PM
From: marc ultra  Read Replies (1) of 10065
 
I think I have a good fixed income option for those who don't mind a little credit risk. Once it became clear to me that the ECRI was wrong and the economy was doing OK, I went and looked over Floating rate note investments again for that fixed income money I'm handling for an elderly relative. As a reminder these are relatively short term bank loans to corporations and since they roll over frequently the interest rate tends to move up with other rates but the NAV stays stable or up a little so interest rate risk is pretty much off the table but credit risk is probably something like junk bonds. Last time I was using the two open-end mutual funds EABLX and FFRHX as the closed end funds were selling at a premium and it would be a true NAV with the open-end mutual funds..

Well I was looking at the closed end floating rate note funds a couple of days ago and saw they were mostly now selling for a small discount or now right about NAV at the moment instead of the large premiums they had reached the last time the economy started looking OK before Europe again was more of a major concern last year.

JQC is special situation. It was a Nuveen sort of multi-strategy fund with equities and fixed income stuff and carried a big discount to NAV. They've now just completed a changeover to be almost all floating rate notes. But instead of of selling near NAV like its floating rate note peers, it still sells at a discount of close to 8%. It is also now using a management team that deals with and has experience with floating rate loans. So this thing should be paying out a distribution of around 8% or 9% and if the big discount disappears as it moves toward other floating rate CEFs then it should have some capital gain while that process happens. Also with this conversion it won't have any return of capital component it previously had so it's a clean payout of interest.

Now the caveats. The expense ratio is about 1.7% which is actually on the modest side for this group. It uses about 28% leverage which is also about the mid to modest side for this group. Since it has that junk bond-like credit risk if we get into an ugly situation this will get hit like junk bonds or worse. So it's not for everyone but that anomaly of a big discount makes it look extremely attractive to me. You can check the details at cefconnect.com and there's a symbol XJQCX that also shows the actual NAV so you can compare it to the current quote for JQC to see the discount. Other closed-end floating rate note funds you can look at for comparison purposes are PHD (which I'm also using), BGT, JFR, and EFR.
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