Here is the list from the article. There are some interesting concepts in this mix.
Gross disclosed that he owns 35 different closed end muni funds and the article concluded that he is really putting his money where his mouth is.
What if 35 different CEFs is only 3% of his portfolio? I'm not saying 3% is right, in fact I have no idea because the article didn't say.
Mr. Gross, if you or any one who works for you reads this site and can clarify what percentage those 35 funds make up that would give a much better idea of where you stand on these.
The article did do a good job of explaining the risk in these funds. As a matter of philosophy I believe in spreading fixed income exposure across many different types of products. Too much of anything, whether it is leveraged muni funds or MLPs or anything else can radically alter the risk profile of your portfolio. It is very difficult to make people understand that low risk vehicles sometimes aren't.
What sort of havoc might be caused in the muni market if there were a hurricane ravaged state that had problems making payments? While it would be no Orange County it would cause dislocations that would be felt worse in the CEF market than with the actual bonds. A little bit of exposure in the face of a crisis would be a bummer but a huge weighting in these funds might set your fixed income portfolio back a couple of years.
I had an email in my Street.com email account from someone bullish on energy who, as I took the email, has a lot of his portfolio and he thinks I am wrong that crude oil could go down another 10%. Oil may not go down at all but the risk taken does not change.
My inability to make understand this type of risk amuses me to no end. Hopefully I can get through to a couple of people.
3 comments:
Be very careful taking things too seriously from someone who has different financial needs than you do. If I had 500 millions dollars, I would be putting at least 50 % into muni-funds that pays 6% tax-free(that will be 15 million a year. I probably would also put the other 50% into a host of well run hybrid, hedge and REIT funds of relatively low risk. Therefore, my goal would be preserving my asset. Having 15 million tax-free money each year for spending would not be bad at all.
But if I had only $500,000 for investing, I would like to see it grow to a couple of millions some day. I would like to maximize my returns even it means taking more risk. However, using closed-end muni for your bond portion of your portfolio is a pretty shrewed choice. These funds are somewhat less sensitive to the increase in bond interest rate than typical corporate bonds.
I have some experience in trading closed-end muni funds(MVT,MUH,MHD,PML have pretty good records). Typically, CEF's are thinly traded with low total assets. Just imaging the effect of buy/sell a couple thousand shares of a fund when the total trading volume could be just 20000 a day.
I am guessing that a large part of Bill Gross's wealth is tied up in his partial ownership of PIMCO.
One good thing about owning muni CEFs is that an individual investor can get relatively low-cost leverage in his bond holdings. Usually the only way to increase risk for an individual investor is to buy riskier assets (i.e. stocks, high yield, etc.) These CEFs allow the investor to increase risk by leveraging a lower risk asset.
So if you would normally buy $150 of muni bonds, you could buy $100 of a 1.5 times levered CEF and have $50 left over to invest in other assets. This maintains the same exposure to muni bonds and allows you to take more risk, if you so desire. Of course, there is a cost to this leverage (fees, interest).
One thing I don't understand about muni closed end funds is why some of them pay large distributions end of year but others pay nothing year after year. It substantially alters their net returns over the long term and is hard to take into account.
Also, strangely, it sort of seems like it's the insured & high quality muni funds that tend to have large cap gains and of year, eg browsing through this:
Recent Capital Gains
many of those funds on the first page are insured / high quality.
Another thing I don't like is how many funds are dropping dividends lately:
Dividend Dropped
206 of the 274 funds there dropped their dividends in the past year. As interest rates go up, muni yields ought to eventually go up? But I uess the funds that have leverage (nearly all of them) are affected by flattening yield curve ...
Post a Comment