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Financial Planning - Financial planning in general. (Moderated)
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Posted by on June 11, 2008, 9:10 am
Just an interesting share class that I was reading about
and was wondering if anyone had any further thoughts on
the matter (and if anyone knew of a list of such shares).
I was reading the first quarter report for a closed end
equity fund (which is currently trading at about a 10%
discount to NAV) and was noting that in addition to the
common shares, the fund has class B cumulative preferred
shares outstanding to the amount of about 16% of NAV.
The preferred shares pay 5.95% yield and when issued were
non-callable for 5 years (which will be up in a few
months). They are trading at a slight discount right now
pushing their nominal yield to about 6.3%.
So I was thinking that, compared to more typical corporate
bonds, these are pretty secure - the equity portfolio would
have to lose over 80% of its value before the preferred
would have trouble paying coupons.
Under 1940, funds need to maintain 200% asset coverage
for preferred shares and in the event of a failure to
maintain that coverage, the fund may be required to
redeem the preferred at par - including being required
to sell of portfolio securities and eliminate dividends
on common to do so. ie. that 200% constitutes a mandated
buffer to protect the preferred.
So anyway, the bottom line is that preferred on a
diversified mutual fund looks very secure, perhaps more
secure than preferred from any single company or even
most corporate bonds. If one buys both the preferred
and the common of the same fund, one is simply deleveraging
the original fund, of course. But as a fixed-income
component of a portfolio such shares sound like a pretty
good deal.
Downsides: low trading volume - may be wide spreads or hard
to sell
no maturity date - if interest rates rise, one
can't just wait until maturity and take
back principal
Upsides: relatively high yield
lots of principal protection
perhaps more liquid than individual bonds since
they are traded on NYSE
voting rights (for what little they're worth)
I'd be especially interested in a list of such shares
that are available out there.
--
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