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

Seeking AlphaClosed End FundsJust How Risky Are CEFs When Building A 8% -10% Portfolio Yield? Part IIJul. 27, 2020 7:00 AM ET|| Includes: PHYS, PTY, SPYby: Alpha Gen CapitalAlpha Gen Capital Yield Hunting: Alt Inc OppsSafe 8+% Income Stream using CEFs, ETFs, Munis, Preferreds, and REITs.SummaryIn part I, we discussed the overall riskiness of CEFs using standard deviation as a measuring stick.
In part II we look at a few other risks like liquidity risk - both at the fund level and the underlying holdings.
We also use "max draw down" as another way to assess the overall riskiness of a fund.
Lastly, we look at corporate action risk like rights offerings and changing the fund structure from a term to perpetual.

In part I of this series of reports on the riskiness of CEFs, we discussed how we used standard deviation or the variability of prices and NAVs. To rehash, if the spectrum of risk is between 2% for a very low-risk Treasury fund, 4% for a typical fixed income mutual fund, and 15% for the S&P 500, then CEFs will fit right in between mutual funds and the equity index. The standard deviation on price is 9.8% placing it nearly equidistant from a bond mutual fund and the large cap equity index in terms of risk. The NAVs of the CEFs, which I believe is the true measure of risk of a CEF, is about 5.5%-6.5% on bond CEFs, far closer to mutual funds than equities.
The problem for individual investors is that they have a hard time looking past the price volatility. After all, when they pull up their account and see the change on the day, it's the price movement off which that's calculated. If an investor wants to liquidate their bond CEFs, it's at price, not NAV, upon which the sale is based on.
This is why the pension or the concept of the income annuity is so appealing to many people.
In part II, we will look at a few different measures and other risks that need to be considered. Those include liquidity risks, draw down risks, underlying... Read more