CEF Preferred Stock Updates

We have updated most of the leverage ratios for the preferred stock issues of closed end funds. There are some that have not released recent data on their leverage.

As most of you are aware preferred stock issued by closed end funds must maintain at least a asset coverage ratio of 200%. This is extremely important to some of us conservative investors.

Virtually all preferred stock issues outstanding are the named Gabelli issues or are from Ellsworth or Bancroft, both of which are Gabelli managed funds. Most Gabelli issues are extremely highly rated (although there are a couple issues which are unrated).

The coverage ratios for all CEF preferred issues fell in the period ending 12/31/2018 as would be expected given the equity selloff in December, but most remain in very good condition.

NOTE that I personally am not a fan of most of the closed end fund issues (common shares)–but you don’t have to be a fan of the CEF to buy their preferred shares.

The most conservative of income investors should give plenty of consideration to owning some of these issues. We should disclose we own a number of these issues and while the coupons and/or current yields are fairly modest the peace of mind is always most welcome. Most of the Gabelli issues are superior in quality to any utility issue that is out there.

Since most of these issues are perpetual preferreds the shares price may move around a fair amount as interest rates rise and fall the safety of the dividend is unmatched by other preferred issues.

You can peruse the list here.

We prefer to own preferreds shares from the closed end funds that own level 1 securities (level 1 means that the price of the holding–i.e. common stocks is observable and known everyday as they trade on security exchanges).

The following preferreds may be just fine, but their assets are level 3 in many cases and thus the asset coverage ratios are in the “just trust me” category as they are not traded on exchanges where the prices can be observed.

  • Eagle Point Credit Company
  • Oxford Lane Capital
  • Priority Income Fund
  • RiverNorth Marketplace

We note that Priority Income Fund and RiverNorth Marketplace are not publicly traded CEF’s. This means they own level 3 assets and 1 can’t even observe the issuers share price as this is no regularly published share price.

Disclosure–we own the following issues-

  • Gabelli Utility Trust (NYSE:GUT-C)
  • Ellsworth Growth and Income (AMEX:EGF:A)
  • AllianzGI Convertible (NYSE:NCV-A)
  • AllianzGI Convertible II (NYSE:NCZ-A)
  • Kayne Anderson MLP (NYSE:KYN-F)
  • Tricontinental Fund (NYSE:TY-P)

37 thoughts on “CEF Preferred Stock Updates”

  1. Perils of an apparent ‘market order’ in KTBA just now. Somebody paid almost $30/share. Ouch!

    1. Affinity, you will love this one…Below is the trading of old illiquid PPWLO. A 6%, $100 par preferred…Look at these small lot trades the past 2 days. Somebody is getting smoked in the wallet here.

      11:42:02 175.00 31 OTO
      03/20 250.00 3 OTO
      03/20 123.00 49 OTO
      03/20 250.00 5 OTO
      03/20 250.00 5 OTO
      03/20 250.00 3 OTO
      03/20 250.00 5 OTO
      03/20 250.00 5 OTO
      03/20 250.00 3 OTO
      03/20 250.00 5 OTO
      03/20 250.00 5 OTO
      03/20 250.00 3 OTO
      03/20 749.98 5 OTO
      03/20 749.89 5 OTO
      03/20 749.89 5 OTO
      03/20 749.89 5 OTO
      03/20 749.89 5 OTO
      03/20 749.89 5 OTO
      03/20 749.91 3 OTO
      03/20 749.97 3 OTO
      03/20 749.93 3 OTO
      03/20 250.00 9 OTO
      03/20 250.00 1 OTO
      03/20 399.98 3 OTO
      03/20 399.98 3 OTO
      03/20 399.98 3 OTO
      01/16 102.85 4 OTO
      01/16 102.65 4 OTO

      1. Grid – That’s pretty amazing… It also raises a general question I’ve had for awhile. I see these 1, 2 and 5 share type trades happening frequently on many low volume issues. The question is WHY? I can’t believe there are that many people actually in the market looking to buy $75 worth of shares of a stock for example, so what is the source of these shares? Getting hit with these 1 share type trades on an round lot order is a real pain, especially when adding in commission. Why are there so many of these odd, very odd lot trades?

        1. Its hard to tell, 2WR. Aarod and I were discussing and there are several plausible reasons both legal and maybe illegal. But the very tiny lots seem like a programmed computer bot got caught up in momentum price chase, and there were very few shares to chase. But it could be many reasons and Aarod brought up some good ones, too.

          1. Could it be originating from the sell side? A seller may want to through some cold water on a certain buy price and offer one or two shares to slow things down? I don’t know if that even makes sense though.

            1. Variations of that was one theory I came up with too, mikeo. Could be either a buyer or seller testing the validity of a given bid or offer, to see if an odd lot transaction changes the listing. Then the other idea I had was based on managed money. I have some money managed at Transamerica and HAD even less at TDA (dumped TDA managed as a bad idea – Transamerica = mediocre idea). In both, managed according to given investment theories offered by the managers but run as individual accountss, not as a fund, the portfolios are littered with odd lot amounts like this. I had always figured these were never bought or sold as odd lots but as round lots which were then divvied up internally among the individual portfolios. Maybe that’s wrong…. Maybe they’re actually bought and sold as odd lots? That seems way too inefficient to be true, but maybe it is…

    2. A4I, I own a slug of these and of course noticed the same thing earlier today. I’ve copied the Time and Sales to support a call to FIDO tomorrow to ask why my sell order at $27.75 did not execute. Like Grid’s below the indicated market is “OTO”. One never knows with some of these what the heck is going on with the trading desks. I’m sure the buyers of the last 700 shares that traded from 28.40 through 29.90 would have appreciated a chance to acquire the shares at my 27.75. The order has been in place for two months. If anyone has experienced this would appreciate your intel.

      1. Alpha, is your order by chance ‘All-Or-None”? Seems to me AON orders just don’t get executed as smoothly as straight limit orders, at least in my account on Schwab.

  2. Thanks for the CEF list and explanations. Honestly, I think I had put all Gabellis (despite the ratings) in a different mental pot more akin to some of the other lesser quality companies with multiple issues. Looks like some investments that I will be interested in pursuing.

    1. I have owned several Gabelli Preferreds for a while now , GDV-D, GCV-B, and ECF-A, and am satisfied with the yield and prie performance.

      They do come under occasional dumping and can be volatile, so be prepared for some excitement, if you decide to buy them. But for a safe income investment, they are very SWAN-like.

      1. Thanks Inspbudget – I can stand the bumps (I keep telling myself that anyway) and am looking for stable safe income (newly retired) that will stand through a downturn. I am trying to be patient and am looking for decent entry points while trying not do anything too stupid.

        1. Couple things that could help reassure you, Pete.

          1. Gabelli preferreds have a 200% coverage ratio mandated as part of their charter. I know that some other companies have elected to reduce this down to 150%, but I do not think Gabelli is among them.

          2. The common dividend has been stable, which gives the cushion before the Preferred Dividends can be touched.

        2. Pete, I can see where you might have some level of worry, due to the tone of a lot of the discussion here which is led by a few folks who very actively trade preferreds and have made it a hobby of sorts.

          But let me share my experience. I started buying preferreds in about 2012 after reading Tim’s articles on SA. (Which were very rare.) Then I discovered his old site. And now this site, which has attracted the active traders whom I feel are the exception, not the rule. I think many people who buy preferreds do so to lock in some income. The CEF preferreds are about as safe as you can get, due to the 1940 Act protections. I have seen that protection cause a redemption once, when the preferreds of TYG (Tortoise Energy Infrastructure Fund) were redeemed back in 2016. The asset coverage had been dropping and the last published monthly number was about 225% when they announced a redemption at par, or maybe par + 1%.

          I don’t concern myself at all with trading these preferreds, and I don’t watch the prices, except during major (and very very rare) events such as last December when I loaded up on some more. I can’t be bothered to watch for any minor volatility in these issues because there really isn’t any. That’s my attitude.

          1. Thanks Larry – It’s all good and I’ve learned quite a bit from reading all sides of each discussion. I hope people will continue to post and discuss with contrarian views because I think it is beneficial to all and may cause each of us think through a situation in a different manner.

            1. I agree Pete. I dont get the “group think” or “I am right you are wrong” mentality. I appreciate contrarian viewpoints to specific issues concerning price entry point, safety of payment, individual risk tolerance level, etc…

              1. Gridbird, there is absolutely no “I am right you are wrong mentality” on this site. But a newcomer would clearly watch the bulk of the discussion and get the impression that everyone is trading and flipping preferreds on a daily bases. When the truth is really that only a very very few people do this.

                1. Larry, I think most people who do flip some, frequently state they dont roll their portfolios over. Perhaps those that do a bit need to constantly post and repost all they issues they own and are not trading everytime when mentioning a trade to help give you a more accurate perspective of what really is going on?

                2. Larry, Thing is – there’s a lot value in this shared information. Last year, flipping and options on fixed-income-like equities added about 4% to my TR. Without that, I’d have had a dismal 2% TR year. A newcomer would surely like to be alerted to the nuances of holding an every day 5.75% IG issue the yield on which temporarily dropped to 4.80% (CNLPL comes to mind). I just rolled over NI-B at a 10%+ gain post ex-date in 90 days. A newcomer would want to know that is an actionable and reasonable alternative. And as evidenced by the other 32 positions most of which just sit there keeping me company – I’m not wearing an IHOP hat. Here’s another – if NEE-N moves to an expected mid 26s, will probably roll-over part of the 1,000 shares we have in that issue. As a former newcomer, I’ve found this intel to be enlightening and actually a bit fun.

                  1. Alpha 8, Pete said he was concerned about risk and volatility of CEF preferreds. I was trying to show him that these are non-issues. I will try to d find Tim’s old SA articles that explained their guaranteed safety and protection of principal. They were among the most useful articles I’ve ever read.

                    1. Larry I completely agree. Tim’s CEF articles are excellent. I’m sure you’ll agree key takeaways for newcomers are:
                      1) be sure to distinguish CEF pfds from CEF equity stock
                      2) increase safety by avoiding Level 3 assets including BDCs or issues such as PRIF
                      3) understand while the CEF pfd distribution is among the safest available, the share price is highly vulnerable to interest rate fluctuations.
                      Looked up the recent articles for you:
                      1) https://innovativeincomeinvestor.com/cef/
                      2) https://innovativeincomeinvestor.com/reviewing-leverage-rules-of-cefs-closed-end-funds/
                      3) https://innovativeincomeinvestor.com/cef-preferred-stock-updates/

                    2. I believe that the original writing that turned me on to CEF preferreds was this 2012 comment on SA which fortunately, has not vanished behind their stupid pay wall.

                      Also this article:

                      This one by Tim in 2011:

                      There were others but they have been paywalled, probably because the SA geniuses deemed them as being “about” their ticker symbols, unlike the above which just “mention” various symbols.

                    3. Thanks for your time Alpha 8 and Larry. These are some great articles that you referenced. To me (not speaking for others) it is helpful and entertaining to read all the back and forth banter. I am not a flipper ( I was broken on that on some big losses on Lucent Technologies many years ago). I consider flipping to be purchases/sales made for the sole intent of very short term gains, however, I do believe that there is a time to sell that each investor must determine for themselves. I am building a long term portfolio of dividend growth commons, preferreds, and baby bonds which started (for the commons) on December 24, 2018. I was lucky and hit the timing just right, but now I am considering breaking my long term hold rule and taking my gains (commons only). As I become more knowledgeable about the baby bonds and preferreds, it seems that these investments (if purchased correctly) are far safer and provide more stable income.

                    4. Pete- I have recently, within the pst six months, sold my last common stocks and now own preferred, bonds, baby bonds, and CDs for cash I will need in the next two years. I have some funds managed in equities but no longer do that on my own. I agree the info and sharing here is great. At this stage of my life less risk is good and being able to manage that risk with every resource, like III, is invaluable

  3. Thanks for the update, Tim. I have looked at NCV-A and NCZ-A and didn’t see any significant difference. I don’t really understand why they would issue two which are almost identical. Do you see any value in one versus the other?

    1. Alan, NCV and NCZ are two different funds, thus the two issues.

      Please note that the distributions on these in 2018 were only partially qualified dividends. The remainder being ordinary income. This may make them less attractive if you contemplate holding them in a taxable account.

  4. Tim,
    i am confused regarding your view of Rivernorth Marketplace’s preferred stock. This article says you don’t like it because “their assets are level 3 in many cases” but you have it in your Medium Duration Income Portfolio, which
    is securities you recommend, right?. Can you clarify ?

    1. Hi Andrew–no—I never recommend any securities for anyone–never have.

      Model portfolios I have had for 13 years now are simply educational tools–kind of like ‘what if’. I do use them to test long term prospects of various portfolio construction–and many times they are very much like what I own.

      I guess I will put a note on the portfolios relative to not being recommendations.

      1. I’m still confused. Why would you put something you don’t like in one of your model portfolios?

        1. Andrew. If you are a data scientist, you create mathematical models to test theories. If you are an engineer, you create proto-types to test new/altered designs. If you are a baker, you create test recipes. As an investor, you can create model portfolios.

          Does a mathematical model mean that every mathematician should use it? No
          Does an engineer with a proto type mean that it is ready to sell a billion gadgets and Walmart? No
          As a baker, are you ready with a test recipe to sell to Mrs Smiths for a trillion pies? No
          If you create an investment model portfolio, should you put your nest egg in it? No

          As an investor, you keep these portfolio’s around to test it against interest rate hikes, or industry downturns, … You then can adjust investment theories, actual investment portfolios etc, based on your model portfolio learnings.

          Again. These are ideas. This site does not tell you how you should invest your nest egg and how to plan for the future.

  5. xwords:
    You have answered your own question. Have you been to their site and read every word of their posted information including the disclosures in the prospectus? Each term can be further studied with general Google-searches too. The terms you used in your posting must be thoroughly understood personally, since it may or may not meet your risk tolerance. This is the meat of self-directed investing.
    Happy Study! JA

    1. Joel – I have skimmed the prospectus. I plan to do more due diligence as time permits . I was just asking for what other people thought.

      1. X-man, Sorry if I was short, not meant. I know that it is an ETF and the fee drags may not help maximizing versus a self-directed portfolio. Most managers mix some low rated issues into their portfolios because the averaging on a large diversification can be muted even if one is a total washout with one holding. There is another I use as an ‘index indicator’ EPFR that may be worth a look too.
        I’ve noticed pref CEFs that are supposedly IG have about a third in below IG. If you have a percentage of a larger diversified portfolio in prefs an ETF like this may work.
        Like many others here, I have veered into a full portfolio of prefs and BBs so I can get a pretty good spread into a diversification.
        Very best pursuits! JA

  6. speaking of funds, does anyone have an opinion of PFFA? I just ran into it this AM. It yields about 9%. It invests in many of the preferreds that readers of this website typically discuss, but they enhance the yields through leverage and buying and selling options.

    1. Personally, I’m very Leary of funds using leverage. Read Tim’s article above about visibility of what management does with that leverage. Risk and reward, along with what stage of life one is in, have a lot of bearing on what we feel comfortable owning. That is what makes a market.

      1. I was unaware of the categorization of securities as level 1, level 3, etc. These are very important considerations. I own GAB-G and sleep very well at night. I had put several of the Priority Income Funds preferreds on my ‘consider’ list, but after reading this I have removed them.

        1. Be Here Now–bingo–love the Gabelli’s. I really would like to know exactly what they own–and have the marketplace value the assets.

          That is not to say that the level 3 portfolios are bad–but more trust n management is required.

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