Closed-End Funds
What is a closed-end fund? A closed-end fund is a mutual fund (or unit investment trust) that trades on a stock exchange (such as NYSE, NASDAQ, or AMEX) at a premium or discount to its NAV (net asset value).
Because a closed-end fund shares trade in the stock market based on investor demand, the fund may trade at a price higher than its NAV. In addition, due to less than favorable demand for its shares (for various reasons)…a fund may trade at a price lower than its NAV.
There are two types of closed-end funds; one is a closed-end stock fund, and two is a closed-end bond fund. You can view the listings for closed-end funds on Mondays in The Wall Street Journal. It will disclose market prices, discounts or premiums, and the stock exchange which it’s traded.
The average yield of a closed-end fund is 8.5%. And if you focus on closed-end funds that trade at discount (producing a high yield)…you can find yourself a very comfortable income investment.
Simply evaluate the underlying portfolio for risk, your income requirements, evaluate the discount and yield, analyze any borrowings (leverage), and of coarse the fund managers track record. Once you have found several funds that you have an interest in…call your stock broker up and determine your allocation strategy to invest in this sector.
Sincerely,
John Bagwell
The Truth About Financial Products.com - Blog
www.thetruthaboutfinancialproducts.com
Oil
I have been talking about oil for years. Years ago, I came across an article on the worlds oil supply versus demand, the conclusion is the world will reach the “halfway-to empty mark” around 2015 to 2020…driving prices higher and higher for oil. The United States, China, India, Russia, and Brazil are the known gas “guzzlers” of the world. Russia is already trying to plant flags at the bottom of the ocean (under the North Pole)…to try to claim whatever oil it possibly can for its citizens in the future. The United States should start getting on the ball and do whatever we can to plant flags all over the oceans floor, before all the real estate is gone! The world courts are going to favor the strong…just to avoid a world war. The next world war is going to either be about energy, or about energy & religion.
Ask yourself; “Do you think the price of oil is going up or down? If you just look at the demand versus supply…oil is not going down. If it does go down…it will only be for a very short time. In addition, oil companies are making a great deal of money by artificially manipulating the price of oil at the world’s commodities exchanges…they do not want the price to go down (for the long-term). You have to start thinking like an oil company…invest in energy and you will make money (even in a bear market).
The “natural resource mutual funds” sector has returned over 30% annually for the past 5 years. The overall category has a low P/E ratio versus other stock fund categories. You want a fund with a high percentage of oil (40% to 60%), and the rest of the portfolio in coal and gas (with some service related companies doing business in oil). Make sure the fund does not borrow from the bank and re-invest (often called leverage). You want to analyze funds which have exceptional returns each year for the past three years. It does not matter if the energy related stocks within the portfolio are well known or not…you just want prior positive consecutive returns. If you want to beat this bear market…this is a sector you should be in. Call your stock broker or financial planner and analyze the natural resource funds together.
The Truth About Financial Products.com
Hedge Funds
What is a hedge fund? A hedge fund is really not a mutual fund, but a “private placement” under the Securities Act of 1933…since its exempt from the Securities Act of 1940 (regulating mutual funds). In theory, a hedge fund offsets losses from its equities holdings by “hedging” these losses…by predominantly short-selling. But, in today’s world of well over 6,000 hedge funds, short-selling is used not to hedge, but used as an investment strategy to increase return (only).
A hedge fund can only exist from exemption from the Securities Act of 1940, if the hedge fund follows one of two rulings of exemption under the Securities Act of 1940:
Since 1949, hedge funds have caused serious losses (with few profits) to accredited investors. In 1998 a hedge fund was the predominate cause of an 18% loss in the general securities market. In June of 2007, a hedge fund (which primarily invested in mortgage back securities – sub-prime mortgages) was the likely cause of our mortgage crises (and was one of the factors that led to a national recession). And worst of all the government wants or has bailed these hedge funds out…at our expense! In addition, congress has in acted a law to distribute 150 billion in tax credits (I mean handouts) to the general public to help bring us out of the recession…which leads to even a larger national debt (which will take decades of higher taxes to pay-off). Where is the logic in their thinking? Hedge funds should be outlawed! Where is the SEC, when you really need them???
Hedge funds are the virus that needs to be wiped out before it gets bigger. Hedge funds account for $2.68 trillion in trading activity. That’s accounts for 30% of all fixed income security transactions, 55% of all derivatives trading, 55% of all emerging market bond trades, and 30% of all equity trades. This means the market is not free, but pushed higher or lower based on institutions trying to maintain capital levels in their portfolios, and not the true value which a security is worth or should be traded at. What if your pension owned an S&P 500 stock, that company invested in derivatives and lost 30 billion, and your pension value took a nose dive? Would you be happy? I believe in a free market, but at whose expense?
Let’s go over some other problems with hedge funds:
Since most hedge funds are established in offshore tax havens, the hedge fund does not pay taxes on gains within the hedge fund. And since most hedge funds are “limited partnerships”…the rich receive favorable tax treatment, while the general public invests in traditional mutual funds and gets “hammered” by the IRS. Why doesn’t congress do something about this problem?
Hedge funds should be against the law. It does not follow the guidelines of the Securities Act of 1940 to protect U.S. citizens from un-lawful investment acts by fund managers & fund companies.
Retirement Income Mutual Funds
There are 78 million “baby boomers” about to reach age 62 and wanting to covert assets to cash. Many people are investing in retirement income funds to help pay their monthly retirement liabilities. The question of the day; “should retirees invest in retirement income funds in retirement?” The short answer is…yes (for some people). Are they the best answer for all retirees? The short answer is…no.
These types of funds will give a specific target (monthly payout) for the year. Let’s say the payout for each month is $428 for 2008 (based on an investment of $100,000). These funds pay the target payout rates in excess of inflation…but there are no guarantees. The guarantee is the problem…and if that’s a problem with you, I would look elsewhere (such as fixed annuities).
The retirement income fund often has a choice between fund “A” for a 3% payout, fund “B” for a 5% payout, and fund “C” for a 7% payout. The fund manager computes each year a mathematical “back-testing” formula based on the last 3 years of performance to determine monthly payouts. The bottom line, a fund target payout of 7% is unlikely to meet its future monthly payouts…due to market volatility. Stick to conservative payout options, if you’re going to purchase a retirement income fund.
I ran a test on traditional fixed annuity equation (using a recovery planning solution) to find out a conservative payout average over 10 years…and it came out much higher than a retirement income fund (for $100,000). Everyone has there likes and dislikes for financial instruments, and only you, the purchaser should determine what’s best for you.