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Post by archer on Jan 13, 2024 23:41:50 GMT
I haven’t experienced all of this yet but this is my understanding. Feel free to correct any misstatements. Another feature of CEF’s is ROC which seems to be used by most at times. If I held a CEF in a taxable account and already received all my investment back as a buy and holder this becomes a non taxable distribution to me. ROC is considered receiving your own money back and is non taxable.
Another benefit of investing at a discount is if a CEF liquidates you receive the NAV value not your share price, All bonds trade in a range. Our muni and PONAX ranges are narrower then our CEF’s because CEF’s use leverage to goose up distributions and have a fixed # of shares. Equity ranges are wider still with individual stocks the widest. This follows a lower risk to higher risk pattern to principle it seems. Unlike an OEF CEF cash holdings are small while OEF’s need cash reserves for redemptions. More money is working for the investor. . Questions about the above in blue: How does this work in real time? Are distributions not taxed as ordinary income from the beginning of purchase? If I understand correctly, you are saying that if you invest, say $10K if CEF in a taxable account, the distributions are not taxed until $10 in distributions has been received. ? If one invests in a CEF at a discount and the CEF liquidates, does it liquidate at the original NAV or the NAV at the time of liquidation? I ask because there are CEFs that have had a substantial decline in NAV. |
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Post by steelpony10 on Jan 14, 2024 1:56:48 GMT
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Post by Broozer on Jan 14, 2024 2:04:18 GMT
$$ are fungible. Total return matters, but not whether they come from an income producing security or from selling shares to take gains. What matters more, in my view, is having enough to meet your needs (and the flexibility to adjust to circumstances). While I respect FD1000 's conviction in his methods, steelpony10 points out that there is more than one way to get a reliable cash flow to meet retirement needs. Below I've rephrased a couple of earlier posts from other threads on how I use FI CEFs as part of an income based approach to managing retirement funding: I focus on growing the income stream. The key is underspending, and investing the excess to grow future income. Income in excess of needs is rolled over into new income producing assets. Steady growth of the income stream should accomplish the same thing as growth of equity value to cover future spending needs and acount for inflation. I decided to trial-run this while I was still working. Starting early, I felt free to experiment. If I didn't like the resuls, I could (a) try something else, (b) stay employed to 'fix' it. I didn't need plan B and was able to retire early. My income from invested capital has grown by more than 40% since I retired in 2017 and started living off the cash flow. As of now my portfolio is ~80% fixed income, of which 45% is in FI OEF and 35% in FI CEF (PIMCO features prominently in this mix). The remainder is 5% cash, 5% alternative & 10% equity. I view the FI CEFs as bearing equity-like risk, so my risk allocation is close to 50:50. I don't view this as a fixed target, just where I happen to be at the moment. I can dial the allocation to FI CEF up or down to adjust cash flow in response to my sense of market risk / opportunity. pros: - Steadily growing income stream, in excess of spending needs. - Portfolio continues to grow. No net drawdown so far. - income growth exceeds inflation (so far). - deciding where to invest excess cash suits my temperment better than deciding what to sell and when, in order to generate the cash I need to spend. cons: - not tax efficient. - Portfolio growth was keeping pace with the growth of the S&P500, but has lagged recently, mostly due to FI CEFs in 2022. While this has impacted total portfolio value, it has provided an opportunity to buy more of the same cash flow stream at lower prices This has markedly grown income. Meanwhile, CEF NAVs and mkt prices seem to be starting to recover. (none of my PIMCO CEFs had to cut distributions due to rising leverage costs during this rate hike cycle, and a few other CEFs have raised distributions). conclusion: - this approach survived the recent stress test of rapidly rising US rates - bruised but not broken. My situation, and thinking, is very close to yours. I posted this elsewhere, some time ago I think, but I'll go over it again because not everybody reads every post. Having no corporate or government pension awaiting, one takes investing with a whole different mindset (I do get SS).
In July 2019 I was still running my business in my backyard (toolmaker) with no end in sight. I enjoyed what I did and planned to work until I couldn't. I had been easing my PF from all stock funds into about 65/35 (OE bond funds) by 2007, at age 57. The bear came and I rode it out. I continued to slowly increase BF % holdings over the following years with just milktoast OE fnds. I started reading about CEFs in the Mstar forums at some point (from many of you guys here, although I don't recall any names) and read other sources including books. So in July 2019 I felt comfortable enough with CEFs to jump in with about 6%, so I bought PCI. Then March 2020 came and the bottom dropped out of everything, as we all remember. PCI dropped several percent more than the S&P. I knew how OE bond funds worked, but didn't know what to expect from PCI with the leverage and all. But the monthly payouts remained little changed. PCI (and my other 3 CEFs) were/are in my SEP-IRA. So, thinking ahead to a distant retirement, I thought this was all not too bad. As I've stated here numerous times, I don't obsess over asset prices at any particular point in history and this played out well in 2008. Owning the assets seemed more important to me than what their fickle prices happened to be at the moment. I held everything, and by the end of 2010 I was back to ground zero because I still held those assets, they went back to a more realistic price, and I even added to them during those down years.
So April 2021 comes along and I was forced to retire because of severe arthritis in my hands and wrists. That got better over time, but I was done working although I was not happy about that. So here I am, three years later with four CEFs making up 32% of my PF, having more income than I ever had while working, I've not had to sell anything, and the universe didn't explode. My PF value is still down about 6.6% from its January 2022 high, mostly because of the bond market. But rates are higher, and my income is higher.
Of course that could and may well change at some point. But I can't control the future, so I'll take it as it comes and adjust as necessary. I could put 100% of my PF in a MM and live just fine off the (current) interest.  As I noted in another thread, my biggest worry now is finding someone to manage all this when I become too demented to do it on my own.
Oh well, gotta go check what's going on at the TheVetteBarn.  |
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Post by keppelbay on Jan 14, 2024 8:49:34 GMT
Sounds as though you are in good shape (except perhaps your joints).
One reason folks like a significant equity allocation is the expectation that stocks will keep pace with inflation. Traditional FI OEFs probably won't do that over the course of a long retirement. There is a good discussion on modeling withdrawal rates in another thread. The uncertainty of future equity returns leads folks to very cautious drawdown rates. yogibearbull , has done interesting work on drawdown rate for model portfolios as a function of how much you want to have left at the end.
I've been interested in whether FI CEFs can usefully replace equity in providing cash flow and protecting the portfolio from inflation. My experience with FI CEFs since 2012 suggests that this may be possible if excess income is reinvested to grow the income stream at the rate of inflation (or faster).
You know this, but I think it is important to reiterate that CEFs are not an asset class. They are just a different kind of "wrapper' for holding assets. retiredat48 's recent post comparing PDI and PIMIX make this point nicely.
As steelpony10 noted - leverage is one reason FI CEFs are useful. A few thoughts on leverage:
Leverage boosts the CEF's yield, but also increases its risk relative to an OEF with a similar underlying asset mix. This is nice in stable or up markets, but can be devastating in down markets - especially if the fund is forced to delever to meet regulatory requirements. A sharp drop in underlying asset prices can push leverage over the allowed limit and the fund must respond within a short time to reduce leverage to comply with SEC rules. If they have to sell assets to do so, they risk permanent loss of capital. (I learned this lesson the hard way with a leveraged MLP CEF. Fortunately the position size was small).
Leverage can allow the fund to increase yield from less risky assets. To illustrate: HYI yields 9.5% based on a portfolio that is mostly below investment grade FI securities. 13% of FI holdings are investment grade. WDI (a multisector fund from the same manager) uses 30% leverage and yields 12% from a portfolio that is almost 30% investment grade. Better cash flow with less credit risk.
Put another way: you can get the same cash flow by taking a smaller position in the leveraged CEF and putting the rest of the capital into a bond OEF. Look at 10K in HYI vs 10K split between WDI and PIMIX.
price # shares cash allocated monthly distribution cash/month
HYI 12.02 831.947 $10,000.00 0.095 $79.00
WDI 14.28 400.000 $5,712.00 0.143 57.20
PIMIX 10.63 403.387 $4,288.00 0.055 + 22.19 = 79.39
opinion:
- I like leveraged CEFs for FI assets, with a preference for multisector funds that give the managers maximum flexibility to use the tools at thier disposal.
- Leveraged FI CEF bear equity-like risk, so I use them in place of equity. (they can produce equity-like returns, but not in every time period).
- Using leveraged FI CEF in moderation, allows me to meet my income goals with a greater allocation to less volatile FI assets.
- The additional layer of risk in using leveraged CEFs for equity assets is too great for my liking (for long term holds).
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Post by Chahta on Jan 14, 2024 12:15:42 GMT
www.fidelity.com/learning-center/investment-products/closed-end-funds/what-are-closed-end-funds We use CEF income to avoid spend down as long as possible, smooth over lulls or poor markets which would deplete a portfolio quicker and eliminate somewhat concern for values which fluctuate from the never ending daily factual and speculated bad news. When held long term eventually you get all your investment back to be dispersed somewhere else while these holdings keep right on distributing funds to you monthly or quarterly with little effort on your part until sale. I know equities can provide little for maybe years, regular bonds provide little protection of our purchasing power after taxes which goes for cash and CD’s also. It is our third investing rail to compensate for the other two. How do CEFs protect purchasing power? They simply yield more than most OEFs or ETFs. Protection is by increasing the yield to match or better inflation. I do not see CEFs generally raising dividends. |
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Post by steelpony10 on Jan 14, 2024 15:02:09 GMT
Chahta , My personal inflation rate on bills (needs) I have to pay is in the 2-3% range. My major CEF purchases were in 2009-10 (60%), 2020 and 2022 (about 20% each). The overall yield on our CEF’s is in the 11% range from investing during bad markets. The free money from the original investments and current excess to needs income is compounding at about 6% overall since I spread that around into equities, a muni, PONAX and cash while my personal inflation rate is compounding at 2-3%. The net result including some dividend reinvestment is no spend down yet, rising excess income (7% in 2023) and a rising portfolio value although like others not so much currently because I’m creating dead money in equities etc. whose reward apparently benefits my wife and her new boyfriend after I expire.* So like that. Plus it’s hard to spend a lot when you run out of wants. I know what I could buy and money mostly just means security to me. * I have to fight every day to NOT go all in with CEF’s at least doubling my cash flow at these values and walking away from any financial concerns ever including LTC. 😳
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Post by retiredat48 on Jan 14, 2024 16:20:16 GMT
To chahta who posted: "How do CEFs protect purchasing power? They simply yield more than most OEFs or ETFs. Protection is by increasing the yield to match or better inflation. I do not see CEFs generally raising dividends."
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You have lived your life mostly in a falling rate environment (since 1980's).
With rising rates expect bond funds to be increasing cash returns/dividend payouts. Albeit expect small reduction in fund prices along the way. For leveraged funds expect more when the yield curve gets normalized instead of inverted.
Consider posters who are now using treasury bond ladders, 1-5 years worth. As the older lower rate bond matures it is rolled over (principal paid at 100% face) into a higher rate bond, if rates are rising. Thus income is enhanced and grows.
R48
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Post by retiredat48 on Jan 14, 2024 16:38:24 GMT
retiredat48 , Please let me know if I am understanding correctly: Bond funds can benefit from both lowering and raising interest rates, but, there is a point where this falls apart, like <~5% due to convesity? And, the reason PDI has suffered over the past years (post covid)is due to rising rates in a sub 5% environment? R48 reply in bold: convexity comes into play at about 2% rates OR SMALLER. Price changes are magnified with rate changes. Havoc with negative rates like europe had. We are outside that zone so no need to dwell on convexity. In a way, PDI has not yet suffered as they have not reduced their dividend and ROC not excessive. But mark-to-market accounting has forced them (like some banks) to mark down their holdings even though they may all be paid off at 100% (think mortgages). Thus the built in cap gains.
I don't have a good grasp of convexity, but I can see how rates going from 0 to 5% can be more challenging than going from 5 to 10%. However, if inflation becomes extremely stubborn and interest rates were to go from 4 to 16% would the principles you site still hold true? R48: The impact of a 1% rate rise or fall is lessened at higher yields. But only once in history have rates gone to 16% or higher. And that took perhaps a half decade or more. Fed has learned to not let this happen...almost paranoid. So the change to get to 16% if ever should take years, if it occurs.Lastly, given how bond fund managers work in response to both raising and lowering interest rates, is there an optimum rate of change (speed) for rate changes such that rates increasing or decreasing to quickly or perhaps too slowly works against managers being able to make changes to their PFs? R48...excellent point. Bonds fluctuate in sine wave type chart patterns that go up in rates for perhaps 3-4 months, then down for 3-4 months. Like now... similar to stock price changes. This is where I expect the bond fund managers to shine. That is, they sell and rollover some bonds at low rate points on the sine wave (high nav's), and accumulate at rate high points (lower prices). Adding to alpha.
Consider now. I posted if you want 10 year treasuries at 5% yield, front run and buy at 4.95%. That is exactly what happened. Was at 5% for about ten minutes. That is where I expect fund managers could have bought up bonds. Ditto rates recently fell to under 4% and managers could have sold some. I want the pros doing this, not me. I am retired, not sitting at computer all day.Thanks for your thorough post above! R48 reply: Thanks...Glad to have helped. |
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Post by Broozer on Jan 14, 2024 18:15:10 GMT
Sounds as though you are in good shape (except perhaps your joints).
One reason folks like a significant equity allocation is the expectation that stocks will keep pace with inflation. Traditional FI OEFs probably won't do that over the course of a long retirement. There is a good discussion on modeling withdrawal rates in another thread. The uncertainty of future equity returns leads folks to very cautious drawdown rates. yogibearbull , has done interesting work on drawdown rate for model portfolios as a function of how much you want to have left at the end. opinion:
- I like leveraged CEFs for FI assets, with a preference for multisector funds that give the managers maximum flexibility to use the tools at thier disposal.
- Leveraged FI CEF bear equity-like risk, so I use them in place of equity. (they can produce equity-like returns, but not in every time period).
- Using leveraged FI CEF in moderation, allows me to meet my income goals with a greater allocation to less volatile FI assets.
- The additional layer of risk in using leveraged CEFs for equity assets is too great for my liking (for long term holds).
keppelbay, My AA is currently at 37% equity, 63% bond/MM. I've been moving gradually from VWIAX to SPY for several months now, still not done so the 37% will go up another point or two eventually.
My largest holdings:
Schwab Divvy SCHD 17.4% Janus Balanced JABAX 16.6% (Limo was right about balanced funds. RIP ) Janus multi-bond JMUTX 10.6%
I have no kids so I don't care if I die broke. Going by my parents' ages at passing, and how I've lived my life (pretty rough and wild, unlike them) I'm not expecting to live more than 10 years.
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As I noted in another thread, my biggest worry now is finding someone to manage all this when I become too demented to do it on my own. 
