Interesante discusión sobre los CEFs ayer el blog de Chowder
Chowder Don’t expect huge capital gains with CEF’s. You may have steep temporary capital losses just as we do with some of the holdings we own now. And just like equities, quality counts.That leverage is used to insure a high and steady income during good times and bad. There’s always the risk that the leverage isn’t used correctly and there may be a distribution cut. We have the same risks with equities, dividends get cut.
Ron is right in my opinion, the quality of the companies that the fund invests in is important. If I were to buy JNJ on margin, and that’s what leverage is, I increase the risk for price volatility, but what effect does it have on the dividend? … None! … The dividend is even larger.
The problem with leverage/margin for most people is that they don’t know how to manage it and when they can’t cover the loss they get a margin call and have to lock in losses. So again, the quality of the fund is important, just as it is with equities.CEF’s are income vehicles. Get off this cap gain idea because they aren’t designed for that, although they do have gains over time.
It’s the income that most people want and it’s the income which is the only reason I invest in them.I’ve held ETO for 5 or 6 years, it’s showing a 3.22% gain over that time frame, not counting my distributions. The yield is 9.35% and I collect those distributions monthly for living expenses, so this asset has served me well. It wouldn’t serve you well because you have a different objective. You want more cap gains, I want more income.
Now this is important. What I gave you is a real return number of 3.22% in my personal portfolio. However, for about 4 years I was reinvesting the distributions back into ETO and adding to the position, and in doing so I raised my cost basis, and while raising that cost basis, I was buying when ETO was at a premium.If I had simply purchased the size position I have today 5 years ago and left it alone, it would be up 44.84% if I collected the distributions as opposed to reinvesting them. If I had reinvested them I would be up 57.61%.
I started off slow because CEF’s were knew to me. Started small, added small, kept adding small as time went on and I was getting more comfortable with them. I’m finally at the size position I want, but through all this time, I’ve been locking in 8% and 9% yields.Like anything else we do in the investment world, knowledge minimizes risk. Know what you are investing in.
Kolpin My concern with CEFs has nothing to do with cap gains, but everything to do with avoiding capital losses.
Take your holding ETO. it doesn’t worry me that it’s at the same price it was 5 years ago. what worries me is that it went from $36 to $10 during the Great Recession. that’s substantially worse than the S&P, and close to how GE performed.
So to reiterate, what worries me about CEFs is NOT the lack of capital appreciation. what worries me is the risk of substantial capital losses.
Chowder Loss of capital. … Hmmm!
One of the things I have learned over the years, especially going through 3 recessions, is that most of those perceived losses are simply temporary drawdowns. Those drawdowns only became permanent when I locked them in as I did the first two times I went through a recession. The third time I went through a recession I managed my positions as opposed to locking in losses.
I decided I would look at the underlying causes of the price drop offs and try to determine if they were temporary or permanent. This took a little work because now you have to read everything on what you own, especially if you ever had doubts to begin with, or developed along the way. I decided not to succumb to fear, did very little liquidating and came out way better than I did during the first two recessions. It did require some mental toughness, I’ll grant you that, but it also required patience.Those I deemed worthy, got added to.
So, the moral of the story is, capital losses are only losses when you determine to lock them in. Every now and then that is necessary of course, but it is surprising how low that number is in a well thought out portfolio. Temporary capital losses are just that, temporary. And that means they weren’t losses at all, merely a price drawdown.