Buying closed-end funds that have premiums

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Is it a bad idea to buy great (4-5 stars) closed-end funds with premiums such as PHK (45%) or DMO (9%)?

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traderranger said:   Is it a bad idea to buy great (4-5 stars) closed-end funds with premiums such as PHK (45%) or DMO (9%)?
  Why are you buying the funds?

stanolshefski said:   
traderranger said:   Is it a bad idea to buy great (4-5 stars) closed-end funds with premiums such as PHK (45%) or DMO (9%)?
  Why are you buying the funds?

  Purely for income. PHK and DMO are just 2 examples for my question.

I don't look at stars but I do look at premium/discount. Check the trend on the premium, if it usually sells for a premium then I'm ok buying it. If the premium has spiked I avoid. Small premiums don't bother me but 45% would scare me.

Maybe, If there's some structural reason for the premium that exists and is perpetual. But if the premium collapses you're going to get screwed.

It's not something I would do.

Buy/selling based on discounts or premiums alone is foolish. A fund can close its discount by having the NAV fall and the price fall slightly slower. Conversely, a fund can see its discount widen with the NAV increase faster than the price.
http://seekingalpha.com/article/3983276-western-asset-mortgage-d...

I might pay a 9% premium if I loved the manager or it had some deferred tax liability or something that made the NAV look understated (like some older MLP funds, depending on their structure).  No way I'm paying 45% premium for anything - stuff like that is playing with fire and one day the manager will underperform and cut the dividend, and then look out below.

xerty said:   I might pay a 9% premium if I loved the manager or it had some deferred tax liability or something that made the NAV look understated (like some older MLP funds, depending on their structure).  No way I'm paying 45% premium for anything - stuff like that is playing with fire and one day the manager will underperform and cut the dividend, and then look out below.
  xerty, I highly value you opinion. DMO is a term trust that liquidates in 2022. I look at it like a premium bond with a variable yield. Is it good or bad if it is not perpetual?

traderranger said:     xerty, I highly value you opinion. DMO is a term trust that liquidates in 2022. I look at it like a premium bond with a variable yield. Is it good or bad if it is not perpetual?
  It's bad when it's at a premium - you lose 1.5% of premium per year on average if you hold to liquidation (on top of the 1.6% annual expenses, plus leverage costs).  Yes, I know they've done better and taken more risks on their junky RMBS mortgage portfolio and pay a higher distribution rate than their peers, but it was trading at a discount a year ago and I'd have a hard time paying up for it now.  Have you considered the Nuveen mortgage term trusts?  Those are at a small discount and end in 2019 and 2020.  Lower income (but you should care about total return, not income), and higher quality portfolios.

http://www.cefconnect.com/Screener/FundReview.aspx?keys=67074R10...

There is no data, at all, anywhere, to indicate that funds with premiums outperform funds with no premiums over time.  None.  In fact, there's lots of data to indicate that no-load, non-premium, market-indexed funds perform at least as well as loaded, with-premium funds over time. 

Purveyors of loaded, premiumed funds will feed you a line about how the premium keeps out the riff-raff and the churners, and the load pays for great management and blah blah blah.  It's all a lie.  The premiums and loads and closed funds are designed to separate you from your money.  Period.

kenblakely said:   There is no data, at all, anywhere, to indicate that funds with premiums outperform funds with no premiums over time.  None.  In fact, there's lots of data to indicate that no-load, non-premium, market-indexed funds perform at least as well as loaded, with-premium funds over time. 

Purveyors of loaded, premiumed funds will feed you a line about how the premium keeps out the riff-raff and the churners, and the load pays for great management and blah blah blah.  It's all a lie.  The premiums and loads and closed funds are designed to separate you from your money.  Period.

  You might be confusing load mutual funds with closed end funds.  Buying a close end fund at a discount can be a good thing, even if it wasn't the best idea to buy it at par or a premium (but that was someone else's problem and hopefully your opportunity now). 



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