3 Unrelated Closed-End Funds Bucking The Trend

investMichael Fabian:  For many closed-end funds, the realization that borrowing costs could potentially rise in the near future hasn’t been met with a smooth transition.  In fact, the majority of funds on my watch list have suffered a great deal as individual investors fret over the unknown, and choose to “de-risk” instead of hanging in there to see what ultimately happens.

I’m reminded of the 2013 taper tantrum as the next closest example to fiscal tightening.  In that particular instance, rates shot higher unexpectedly once the announcement was made, but after quantitative easing eventually began to tail off, it was a positive result for bond holders.  I’m inclined to believe we are headed for a similar outcome for CEFs and other risk assets, since the bottom line is that the Federal Reserve’s confidence in the economy isn’t unfounded.  Naturally employment statistics are a key driver, but the economy has gotten undeniably stronger; the tough part now is following along closely to ensure that strength endures.

With all of the recent volatility stemming from the August-September equity correction, there have been several bright spots, or funds that have largely bucked the herd’s trend and stayed relatively buoyant.  I want to highlight these funds because it’s important to own contradictory assets to bolster stability within a relatively volatile portfolio of CEFs.  Owning a mix of funds that are dominated by one particular theme will be doomed to languish in an unfavorable environment.

The three funds include the Flaherty and Crumrine Dynamic Preferred and Income Fund (DFP), the PIMCO Dynamic Income Fund (PDI), and lastly the DoubleLine Opportunistic Credit Fund (DBL).  Each fund has managed to tread water despite a tough equity market, fundamental headwinds, and belonging to a much larger constituency of under performing CEFs.

The most surprising observation about this trio of funds is that they share very little in common with each others portfolio strategy, management style, or leverage characteristics.

For example, DFP has been able to hold its own as a result of asset class appreciation; where preferred stocks have large led the pack in comparison to other high income assets.  This is likely a result of the improving fundamental backdrop of our nation’s banks and insurance companies, of which most preferred stocks are issues by.

Conversely, PDI is a “go anywhere” fixed-income fund that has been able to sidestep the credit slowdown by investing primarily in emerging market bonds to solidify its strong underlying portfolio cash flow. Yet you can also attribute much of the low day-to-day NAV fluctuation to the derivative overlay PIMCO implements to control credit, currency, and interest rate risk.  Furthermore, PDI continues to be one of the best performing CEFs year-over-year, and as a result has earned a permanent place within many investor’s portfolios.

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