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CapeCod: How Safe are CEF's?

I simply want to share what I consider a very significant post from the old forums.  The boldface below is mine, on words that I think more and more about.  As I increasingly recognize the significance of my age (75) now, I find increasing meaning and value in this post.  There is also useful info on CEF's in the CEF forum on this site, as well as at other sites such as CEFConnect, CEFAnalyzer, and Seeking Alpha.

Re: Capecod Posting on Fidelity Investor Community
04-04-2019, 3:59 PM | Post #4002054
 

HOW SAFE ARE CEF'S?? in Investing Ideas

supercab started the discussion 3 hours ago

I AM CURRENTLY INVESTED IN PIMCO  PHK  AND PDI....I AM THINKING OF USING THESE AS FIXED INCOME IN RETIREMENT...ARE THEY SAFE?   ARE THERE ANY OTHER IDEAS?

dickoncapecod (to supercab2 hours ago

CEFs are risky, just like stock and bond funds, individual stocks, preferreds, Treasury bonds and just about every asset available to you IF YOU PLAN ON SIMPLY BUYING AND HOLDING THEM FOREVER REGARDLESS OF CHANGES IN THE MACRO / MARKET ENVIRONMENTS.

Using more conventional measures of risk, most PIMCO CEFs compare to the S&P 500 (if bought and held):

The CEFs have a higher total return than SPY over 1, 3, 5, and 10 year periods.

The CEFs have had a much much lower standard deviation (price volatility).

Because of the high returns and lower standard deviations, the CEFs have higher Sharpe ratios.

Because of higher returns and also lower drawdowns, the CEFs have higher Sortino ratios.

All that said, you can't ignore the CONTENTS of the CEFs you select.  CEFs are not an asset class --- their structures  are just portfolio wrappers.  So if you own PHK, you are buying a junk bond portfolio.  If you are buying JPS, you are buying a preferred stock portfolio, and with PCI, PDI, PKO, PTY, PCN and others, you are buying highly discretionary multi-asset portfolios.

My portfolio has consisted of almost exclusively bond-ish CEFs since retirement about 10 years ago.  Since I can no longer make up for errors/losses with W-2 income, I will not chase lower returns by taking higher risks with stocks.

Regards, Dick

 

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Re: CapeCod: How Safe are CEF's?

       That’s been our experience. We’ve invested about 50% in CEF’s mostly in the 8% range for about 10 years, basically buy and hold, with in our opinion great results. We wouldn’t commit any more for now and may back off somewhat as we age when/if expenses decrease. Just don’t get greedy, be prepared for huge drops in principle value in times of stress and certainly expect no growth. The payouts will vary over time so we invested excess to needs and reinvest that into a junk bond fund. We don’t look at these as trading vehicles at all. Strictly cash cows. Remember the MLP fiasco and be prepared if the wall ever comes tumbling down due to leverage. This is why we hold a great deal in reserve for safety.

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Re: CapeCod: How Safe are CEF's?


@fpajerski wrote:

I simply want to share what I consider a very significant post from the old forums.  The boldface below is mine, on words that I think more and more about.  As I increasingly recognize the significance of my age (75) now, I find increasing meaning and value in this post.  There is also useful info on CEF's in the CEF forum on this site, as well as at other sites such as CEFConnect, CEFAnalyzer, and Seeking Alpha.

Re: Capecod Posting on Fidelity Investor Community
04-04-2019, 3:59 PM | Post #4002054
 

HOW SAFE ARE CEF'S?? in Investing Ideas

supercab started the discussion 3 hours ago

I AM CURRENTLY INVESTED IN PIMCO  PHK  AND PDI....I AM THINKING OF USING THESE AS FIXED INCOME IN RETIREMENT...ARE THEY SAFE?   ARE THERE ANY OTHER IDEAS?

dickoncapecod (to supercab2 hours ago

CEFs are risky, just like stock and bond funds, individual stocks, preferreds, Treasury bonds and just about every asset available to you IF YOU PLAN ON SIMPLY BUYING AND HOLDING THEM FOREVER REGARDLESS OF CHANGES IN THE MACRO / MARKET ENVIRONMENTS.

Using more conventional measures of risk, most PIMCO CEFs compare to the S&P 500 (if bought and held): [...]

The CEFs have had a much much lower standard deviation (price volatility). [...]

Regards, Dick

 

 


@fpajerski:  FYI, Dick has corrected himself with respect to the statement that "CEFs have had a much lower standard deviation (price volatility)." He now believes that "CEFs (per PV methodology) have moderately lower SDs than SPY, BUT NOT AS MUCH LOWER AS I INCORRECTLY POSTED ABOVE." See the comments below and others that appeared on the Fidelity Investor Community site:

 

fred495

Hi Fred.....I just pick my numbers up from Fidelity.  I've never looked at Portfolio Visualizer --- I believe (but can't swear) Fidelity uses daily returns, and since I picked them all up there, I presume they are okay for COMPARISON purposes.  And I'll admit I can't understand the notion: annualization of sd of monthly returns(?)....but I'm pretty certain THAT isn't what Fidelity computes and publishes.

Regards, Dick

EDIT WAIT WAIT WAIT......I just went back and saw the Fido number is some horse manure about SD VS. A MARKET BENCHMARK. AND that's some high yield bomd index for PCI ... so the whole thing is a bit nutty and IMO IMPROPERLY benchmarked anhow.   This deserves more research.  What does Anslyzer give you for SPY and IEF ---- NOT vs some bs benchmark.  D

 

Okay.....I have no solution to offfer, but my comparative SD chart is not merely inaccurate, it is nonsense.  Fidelity SDs provided involve the differences between the subject asset's returns and the returns of some assigned benchmarks.  IEF vs an AGG, PCI vs a high-yield benchmark, and SPY interestingly vs S&P 500.. Clearly, comparisons of these SDs are unrevealing apples, oranges and pears.  By using differences vs benchmarks, we are not getting any (IMO) useful measure of the dispersion of returns of the subject assets through identical periods.. 

    Anyhow, until (if ever) we can get a standard measure of dispersion of returns of assets, my assertions above about comparative volatilities are misleading bunk.  Anybody have a source of "standard: SD data on various assets?

Regards, Dick

 

dickoncapecod

 

Hi Dick,

Just came across a posting on M* by yogibearbull that may shed some light on the standard deviation issue. I took the liberty of re-posting it here:

 

M* had its origin in funds and it uses NAV for everything. This means that its MPT stats [alpha, beta, R, SD, Sharpe Ratio, Sortino Ratio] and Charts are for CEF NAVs. It rationalizes that by saying that the portfolio managers can only control NAVs and M* objective is to assess how the fund managers do. Many fund families use M* data.

Stockcharts and Portfolio Visualizer [PV] use prices. They say that investors/traders can only buy and sell at prices, not NAV. There is an additional differentiation at Stockcharts based on adjusted-prices [accounting for distributions] and actual-prices.

There is still an additional factor, whether daily, weekly or monthly data are used. M* and PV use monthly data and that leads to quite a bit of smoothing. Stockcharts data can be set to daily or weekly data. I wish everyone would switch to weekly data as a compromise.

Unfortunately, sources don't provide specifics with data and one must dig up some reference documents or FAQs to find out what they do.

YBB
 

absinthe1

Hi ab and others...thanks fir PV suggestion.  Just exploring fir the first time I set up 3 portfolios consisting of 100% each PCI and fir a longer 10yr look PTY, IEF, and SPY.  Based on a quick set (not really enough to generalize) of runs, it looks like those CEFs (per PV methodology) have moderately lower SDs than SPY, BUT NOT AS MUCH LOWER AS I INCORRECTLY POSTED ABOVE.  Of course, SPY and the CEFs both have far higher vol than IEF.

    I'm presuming PV SD data is valuable for COMPARISONS (at least) because it is consistently computed rather than the Fidelity "vol vs benchmark" that is useless for comparisons of risk.

Regards, Dick

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Re: CapeCod: How Safe are CEF's?

@fred495 ... appreciate your updating of the CEF SD information.  And obviously have appreciated your transfer of Capecod postings from the Fidelity forum to the CEF forum here.

@steelpony10 ... In retirement, I'm likewise trying to have long-enough-lasting investments without the effort to do so dominating my day.  There's much else of interest/need to do.  Your postings have been helpful.  Thank you.

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