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Category: Ideas

Nothing Wrong With a Small Allocation to Fixed to Floating Preferreds

I have a couple mREIT fixed to floating rate preferreds in the portfolio–in limited quantity that have performed very well in the current environment.

Looking at the reduced potential for interest rate cuts from the FOMC this year these issues have good potential (at least relative to fixed rate preferreds). Markets are likely to be ‘dicey’ all year long so one just as well be paid for their invested dollars at the maximum available rate.

As a pretty conservative investor I don’t buy mREIT common shares—EVER, but the fixed to floating preferreds have the right risk/reward for me. I never go ‘all in’ to anything, but a modest allocation is quite comfortable.

I have a fixed to floating list with potential coupons on it which can be found here. Of course one never knows the exact coupon until the dividend determination date (the date that SOFR is observed for the coupon).

Gabelli Funds Asset Coverages Remain Solid As a Rock

I’ve been doing some ‘due diligence’ on the Gabelli family of closed end funds and thought I would remind those looking for an ultra safe dividend that is in some cases right close to 6%,

CEFs have to have a minimum asset coverage ratio of 200% on their ‘senior securities (preferreds) and the Gabelli family of funds, which includes the Bancroft Fund (BCV) and Ellsworth Growth and Income Fund (ECF) always provide very nice coverage ratios–in some cases up to 876% (GAMCO Global Gold–GGN).

But like all lower coupon, high quality issues the share price will move in the opposite direction of interest rates, so if you are sensitive to share price movement these probably aren’t for you. On the other hand if you want a solid dividend–ultra solid actually, one should be in some of the Gabelli Family preferreds.

I have a page devoted to CEF preferreds with the coverage ratios posted on it which can be seen here.

Also Gabelli posts their coverage ratios each month and one can watch the changes on the page linked below.

Click here is see the coverages.

Did You Know? General American Investors

I have held shares in the 5.95% General American Investors (GAM-B) for a long time–I think it has been years–certainly off and on for years.

GAM is a solid closed end fund with $1.6 billion in assets and the only leverage they use is this issue of preferred shares—they have a asset coverage ratio of 837% as of 6/30/2024.

The interesting item of note is that the Board of Directors has a buyback in place for the preferred shares anytime they are under $25/share. They have authorized up to 2 million shares being bought (original issue was 8 million shares)–thus far to date they have bought just shy of 400,000 leaving lots of dry powder for further purchases.

Does this buyback authorization help to keep this high quality modest coupon price above $25? Not positive of the answer, but I do know that it doesn’t hurt.

Looking at a 10% Total Return on This Insurer

I continue on the ‘hunt’ for some decent total returns with good levels of safety and have found one that I believe could return 10-17% with decent safety.

Aspen Insurance Holdings which is now owned by Apollo Global (APO) has 3 preferred outstanding at this moment–2 of them are 5.625% issues trading just over $20/share for current yields in the 7% area–the AHL-D issue is here and AHL-E issue is here. This one is favorable for a 10-17% return in the next year–predicated by a continuation in 10 year treasuries moving lower somewhat. While I have said I think rates move higher in the fall–for now they are moving lower and the economy is finally showing some signs of softening and my predications are certainly no better than a ‘coin toss’.

NOTE that the company has a 5.95% fixed to floating issue (AHL-C) now trading at $25.60. Because of the change from Libor to SOFR the company fixed this coupon at 9.59%–this is able to be bought, although there is ‘call risk’ and one shouldn’t pay over $25.60. It just went ex-dividend and can only be redeemed on a dividend payment date (1/1, 4/1, 7/1, 10/1). So if one believes this will remain outstanding for the next year this is a nice return. Little chance for a capital gain with this issue.

To achieve my target we need to see a $2/share move higher in the next year–of course by then we will have a clearer vision of rates ahead of us.

I have reviewed the recent earnings from Aspen and they are solid, although slightly lower than a year ago. These insurance companies have lots of moving parts–underwriting income and investment income and have dealt with lots of adversary in the couple years with the rising interest rates–but now they are seeing increased underwriting income and gains on portfolio holdings. These positive forces should continue as/if rates move lower.

While Aspen is owned by APO they continue to post their financials as if independent on their website. The latest data is here.

Since I have cash in my pocket I will buy one of the 5.625% issues on Monday–which one I am not certain.

These issues are rated BB+ by S&P (reaffirmed 4/12/2024) and Ba1 by Moodys–both a notch below investment grade.