Nadine, I don't know if you know about closed end funds in general, so I'll start with that definition. They are basically like mutual funds except that they sell on the exchanges rather than redeeming and issuing shares in house. So, you pay and receive whatever the market will bear. In general, most closed end funds, or, CEFs, as I prefer to call them, sell at discounts to their net asset values (the one I used to manage, American Capital Convertible Securities, sold at a premium when I managed it. <g>) This discount is compared to no-load funds, which sell at their net asset values, and load funds, which sell at net asset value plus a sales charge. Of course, there is a stock commission with CEFs, but the discounts are usually high enough to make the commish a small % relative to the savings over paying net asset value. Also, since CEFs do not have weak hands selling at the bottom and buying at the top, plus a discount, they tend to outperform load and no-load funds. The top diversified fund in the country for the past 10 years was Central Securities, CET, a CEF. General American (GAM) and MFS Special Value, were close behind. To be fair, Calamos Growth and Legg Mason Value were right in there, too, and they were not CEFs. Still, if you asked most folks, even those who are relatively sophisticated, they probably would guess that one of the Janus funds had done the best, as they get all the publicity. Meanwhile, CET was eating Janus's lunch.
O.K., that being said, some closed end funds like to use leverage. To get the extra money to invest, they borrow by issuing preferred shares. For some reason, this technique is especially prevalent among the value funds managed by Royce and Gabelli, though General American, a very savvy, large cap growth fund, also has a preferred issue.
These preferreds pay set rates, most of them over 7% at a $25 par price. You can find them under symbols on SI with a - behind them, for example: GAM-, GAB-, RVT-, RGL-, GCV-, etc.
Several neat things about them. One is, the full assets of the fund back the preferreds, which are usually less than 15% of total capitalization. In other words, most of the funds would have to lose 85% for the preferreds to have any capital risk. And there are forced buyouts if coverage drops. Remember, these are mostly value funds, so an 85% drop is not nearly as likely as in a run and gun tech fund or some other POS fund.
Another positive, in practice, most of the payout is long term capital gains, 60% in most cases. That provides a nice tax advantage over bonds. Of course, they don't guarantee that and it is possible that it will change.
The negative is that nearly all the preferreds have a $25 par price and most of them have gone over that price during the recent drop in rates. Though I no longer make any investing recommendations, I would be leery about buying something that can be called at a lower price. Unlikely for a call, but possible.
Anyway, to |
