Allium
Have you been following the Hawking Portfolio? If not, you may want to give a close looking to this unique approach to investing. If income is of interest then investing in Closed End Funds (CEFs) is definitely an option. Before launching into this management model I highly recommend investors first read Steven Bavaria’s book, The Income Factory.
If one is in a higher tax bracket this style portfolio is better suited to tax deferred accounts such a IRAs or Roth IRAs.
How might one go about selecting CEFs to include in a portfolio? Check the Hawking portfolio for examples. Then check out the CEF Connect website. For starters check these three factors.
- Distribution Rate. This is the interest percentage paid on an annual basis. Take care not to chase the highest percentages.
- Discount Premium. What is the value of the underlying securities? Look for CEFs with negative NAV or Discount Premiums.
- Effective Leverage. This is the most subjective of the three criteria. I tend to look for leverage values that are 25% or lower.
If one is interested in portfolio diversification the CEF portfolio provides another alternative to the basic ones I track here at ITA. To review, here are the options.
- Basic broad based Asset Allocation such as the Schrodinger. The Schrodinger also happens to be a Robo Advisor portfolio.
- Slimmed down Asset Allocation portfolios such as the Kepler, Gauss and several others.
- Equity only portfolios such as the Copernicus.
- Sector BPI management style such as the Franklin, Carson, and McClintock.
Of these diversified portfolio management models, the Schrodinger requires zero attention. All one needs to do is save an invest. Likewise, the Copernicus requires a minimum of attention. Once a CEF portfolio is set up, there is minimum attention required. Review the holdings perhaps once a year. Requiring the most attention are the Sector BPI portfolios.
If readers have additional information or advice in selecting CEFs for portfolio inclusion, please include your ideas in the Comment section provided below. If my three suggestions are in error, please include corrections.
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Regarding risk management (which I view as loss avoidance), yesterday, Seeking Alpha published the following article about dividend disaster avoidance. It summarized three loss drivers, but does not offer specific steps, as pointed out by several comments. Here is the link:
https://seekingalpha.com/article/4788550-avoid-these-dividend-disasters-before-too-late
All the best,
– Lee
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Lee,
Unfortunately the article is locked. Seeking Alpha is no longer free to read, even for authors or those who have published articles in the past.
Lowell
That is a disappointment. I have a subscription for about another year and will probably drop it afterwards, I feel the quality is slipping, especially for the price.
The Motley Fools also monetized their site. I assume their readership fell off when this change was made.
Lowell
Interesting, I’ll check for some articles. When did that happen?
On the CEF front, Schwab support directed me to the site below. I sorted their CEF listing by from high to low annualized dividends. Then, using an equal weighted portfolio for the top 13 (>10%) produced an “Income Factory-style” CEF portfolio projecting Average Yield (FWD) 12.35%. A better performance than an equal weighted Bavaria CEF portfolio at Average Yield (FWD) 11.32% for 16 funds — updated to the present from Bavaria’s Table 7.2, copyrighted 2020.
Here is the Schwab CEF screener:
https://client.schwab.com/secure/cc/research/etfs/etfs.html?path=/research/Client/ETFs/CEFs
Hope I am not restating the obvious. 🙂
– Lee
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Lee,
Thanks for the useful link. Some of the Expense Ratios are quite high or something to avoid. This screen shot combined with CEF will provide lots of information.
Lowel
I’ve been looking in to how best to Benchmark CEF funds and found the following, which I wanted to share. When it is convenient, I am looking forward to your reply.
CEF Benchmark Index (YLDA) & History
“. . . In times of elevated volatility, leverage can contribute to drastic swings in price, such as the sharp sell-off that occurred in early 2020 when YLDA fell over 45% between February 20, 2020, and March 18, 2020. This severe pullback was not caused by any single fund, fund issuer, or asset-class type in particular; all 30 closed-end funds within YLDA at the time fell at least 36% in less than a month with an average loss of -44.53%. The broader US equity market, using the S&P 500 Index as a proxy, fell by 28.9% over this timeframe as well. Although such drawdowns can be extreme, there have also been significant rebounds from these sorts of events. Between YLDA’s recent low on March 18, 2020, and the recent high on June 14, 2021, the ISE High Income Index posted a total return of 105.8%, outperforming the Bloomberg US Aggregate Bond Index and the S&P 500 Index benchmarks by 100.0% and 24.7%, respectively. . . .”
SOURCE: https://www.nasdaq.com/docs/tracking-us-listed-closed-end-funds-via-the-ise-high-income-index-tm#
YYY: ETF Indexed to YLDA (ISE High Income Index)
Morning Star Accuracy & Limits
The following link is a critical review on using Morning Star ratings.
https://www.investopedia.com/articles/investing/013016/are-morningstars-best-mutual-funds-really-best-morn.asp#:
All the best,
– Lee
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