Just How Risky Are CEFs When Building A 8%-10% Balanced Portfolio Yield?

Seeking AlphaRetirementJust How Risky Are CEFs When Building A 8%-10% Balanced Portfolio Yield?Jul. 17, 2020 7:00 AM ET|| Includes: FEPIX, LQD, PCI, PDBAX, PONAX, PTY, YYYby: Alpha Gen CapitalAlpha Gen Capital Yield Hunting: Alt Inc OppsSafe 8+% Income Stream using CEFs, ETFs, Munis, Preferreds, and REITs.SummaryIn the last few months, we saw the first degree of significant volatility in the closed-end fund space in quite some time. These downturns occur every so often.
What's the true measure of risk for a CEF? Is it the movement in price or the movement in NAV?
For most investors in the last 30 years, the 6% they earned on average in their bond portfolios with lower volatility was great, but unlikely to be repeated.
I'm noticing so many more investors move into the space and then become "surprised" when the market hiccups and they see a sharp decline on price.
(This report was first published to members of Yield Hunting on June 22, 2020.)
In the last few months, we saw the first degree of significant volatility in the closed-end fund ("CEF") space in quite some time. These downturns occur every so often. The nature of the CEF market is one that tends to lead to exacerbated moves on both sides. Let me explain.
The CEF market can be characterized as being largely retail investors and financial advisors. Very few institutional players operate as the daily volume is just too small to trade their large sums of capital. This means that the CEF market tends to trade more on sentiment- more so than virtually any other asset class. When investors are trading their own capital, they tend to make mistakes as biases creep into their thought process.
When discounts to NAV are tight, the sentiment is euphoric and investors have forgotten the risks inherent in the funds. When discounts are very wide, investors are severely pessimistic with little willing to commit their own capital.
The fact that the price deviates from NAV, unlike in an... Read more