On CEFs: Friends, Clients, Investors… Lend Me Your Ears

Profit taking and expectations of higher rates push their prices down

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]

Unfortunately, I am not permitted by regulation to make this announcement, so please disregard it. Big brother does not think you know that: (1) all investment securities can and will fluctuate in price for many reasons, and that other professionals (and non professionals) may disagree with either the data or the conclusions that follow.

Since the end of November, profit taking and the anticipation of higher interest rates ahead have forced the prices of tax free Closed End Funds (CEFs) to fall — pushing yields on the majority of the best 20-year old plus funds into the 6.5% (average of about 50 such funds) neighborhood.

Note that both my research and my personal experience confirm that mostly all (I can’t actually say all, even if I think it is true) of these funds routinely paid their monthly income dividends to shareholders in spite of past changes in interest rates AND the most severe financial crisis of our lifetimes.

You can check these assertions out in various places on line or by asking me for real live references you can correspond with.

Three Outstanding Opportunities For Higher Tax Free Income

Most seasoned income investors understand that lower corporate bond, preferred stock, and government security prices have zero impact on contractual payments. Those who invest in the individual securities pretty much just ignore the price fluctuations and buy higher yielding securities with new investment income --- thus increasing their portfolio average yield

Most seasoned income investors understand that lower corporate bond, preferred stock, and government security prices have zero impact on contractual payments. Those who invest in the individual securities pretty much just ignore the price fluctuations and buy higher yielding securities with new investment income — thus increasing their portfolio average yield.

Inexperienced investors get advised (Wall Street speak for “conned”) into taking losses on their uncooperative older paper and replacing it with new stuff that will never be cheap enough to make up for the losses they have incurred.

Wall Street never ever (clearly just my opinion) suggests profit taking on income purpose securities when they are selling for premiums — perhaps because the inflated prices on client portfolio statements can never actually be obtained…

While tax free bond CEF prices are retreating, you do have the opportunity to:

  1. increase portfolio and individual security yield by adding to existing positions;
  2. purchase a wide selection of “experienced” CEFs that are yielding well over 6% tax free (federally, of course, but you knew that); and perhaps most importantly
  3. reduce the cost basis per share of your current holdings, to be in a much better position to take “a-year’s-income-in-advance” profits sometime in the future.

Three Outstanding Opportunities For Higher Taxable Income, too, although it may be slightly more complicated, all of the above is generally true for taxable closed end funds, as well.

Action Plan For An Upward Interest Rate Expectation Environment

So, take that potential investment money out from whatever intellectual (or actual) mattress it is in and put it back to work at the highest rates we’ve been able to obtain in years.

Those of you who refused to take profits on your existing CEF portfolio (you know who you are) can now use income or cash to take advantage of lower prices — and remember the error of your ways the next time profit taking opportunities arise.

Clients who want to add to their portfolios… well you know what to do.