Friday, April 30, 2010

CEF FUNDS OF FUNDS-Continuation of Prior Post

I mentioned in a post today an ETF that owns an assortment of Closed End Funds : PowerShares CEF Income Composite Portfolio (PCEF). I do not own that fund. This article in Seeking Alpha contains a good discussion of the advantages and disadvantage of this ETF.

The reason for this post is just to mention to anyone interested the existence of a CEF that invests in other CEFs. The Cohen & Steers Closed-End Opportunity Fund (FOF) is a Closed End Fund that owns other CEFs. While the fund expense ratio is higher than PCEF, this CEF does trade at a discount to its NAV. As of the close of trading yesterday (4/29/2010), the discount to NAV was 8.24%. Distributions are paid quarterly. The distribution yield was around 7.33% annually based on yesterday's closing price and the current dividend rate of 23 cents per quarter.

FOF is a more balanced fund than PCEF in my opinion, and is less bond heavy. This is apparent looking at FOF's portfolio: 2009 Annual Report Filed With the SEC I do not own it, but would consider buying it just to see if it outperforms my personalize collection of CEFs. If I own something, I pay more attention.

One reader pointed out in a comment that I do incur brokerage fees in trading a large number of CEFs. Once I incur a brokerage fee, however, I no longer have an ongoing "management" fee. I may hold a CEF like GDO until 2024 when it is scheduled to liquidate. I would have been better off just buying the entire position at once. Many of the positions are static in my portfolio. I am not heavy in domestic bond funds like PCEF due to my concerns about interest rate risks. I assume less interest rate risk in a bond fund that has a term date compared to one that is open-ended with no "maturity" date. (see discussion of interest rate risk in bond funds at Item # 2 /Interest Rate Risks- Bonds and a similar discussion as it pertains to GDO and IGI at Item # 4 More on GDO; ITEM # 1 Bought 100 of the CEF GDO at 18.6, and Item # 2 /Added 100 of the CEF IGI at 19.78)

PCEF and FOF will end up holding CEFs that trade at a premium to NAV. I will not buy a CEF trading at a premium. Instead, my strategy for CEFs is to buy mostly at large discounts and to pare when the CEF trades near its NAV or at a premium. I also prefer CEFs with lower expense ratios and frequent dividend payment schedules.

This is a link to the CEFA - Closed-End Fund Association- page on FOF. Morningstar rates it 4 stars.

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