Marty Fridson is a leading expert on income investing — particularly known for his expertise in more complex areas of the market. Here, the editor of Forbes/Fridson Income Securities Investor looks at a pair of recommendations among closed-end funds that hold convertible and preferred shares.
Calamos Strategic Total Return Fund (CSQ) is a leveraged fund with a five-star Morningstar rating. CSQ’s investment objective is to provide total return through capital appreciation and current income.
The fund’s strategy under normal market conditions is to invest primarily in common and preferred stocks, convertible securities, and debt issues.
Market volatility did not compromise returns in 2020, reflecting CSQ’s portfolio mix. The fund invests at least 50% of its managed assets in equity securities, including convertible issues.
As of 02/28/21, portfolio asset allocation consisted largely of Common Stocks (57.3%), Convertible Securities (23.6%), and Corporate Bonds (11.8%). The fund’s sector weightings were dominated by Information Technology (22.3%), Consumer Discretionary (14.0%), Health Care (11.9%), Communication Services (11.3%), and Financials (10.7%).
On 02/28/21, CSQ’s top five holdings were all common stocks, namely, Apple (4.3%), Microsoft (3.8%), Amazon (2.8%), Alphabet A (2.0%), and Facebook A (1.3%).
Fund performance has been solid historically, including the full-year 2020 period, despite the pandemic and weak economy. CSQ posted a +26.63% market price total return in 2020, while the fund’s 1Q 2021 total return was likewise positive at 10.45%.
Dividend distributions are taxed on a variable basis, based on qualified income, interest income, and capital gains. This fund is suitable for all risk portfolios. Buy at $20.00 or lower for an annualized yield of 6.15%.
Global X U.S. Preferred ETF (PFFD) invests in a broad basket of U.S. preferred stocks that provides benchmark exposure to the U.S. preferred stock asset class.
The fund is relatively young, with an inception date of 09/11/17, yet enjoys a four-star rating from Morningstar. PFFD seeks to deliver investment results that generally correspond to the price and yield performance (adjusted for fees and expenses) of the ICE BofAML Diversified Core U.S. Preferred Securities Index.
This index typically includes cumulative and non-cumulative preferred stock categories, comprising fixed-rate, variable-rate (fixed-to-floating), floating-rate, and trust preferred security structures.
Qualifying preferred securities in the portfolio must be listed on a U.S. exchange, denominated in USD, and have a minimum outstanding amount of $100 million.
As of 03/12/21, the portfolio’s top five holdings and their respective percentages of net assets were AVGO 8.00% Mandatory Convertible Preferred (3.06%), Wells Fargo 7.50% Convertible Preferred (2.96%), Bank of America 7.25% Convertible Preferred (2.32%), ALLY 5.98263% due 02/15/40 (1.48%) and NextEra Energy 5.279% Mandatory Convertible Preferred (1.32%).
Market price total return for full-year 2020 was +8.88%. However, the fund’s market price total return was -0.27% for the YTD period ended 03/31/21, pressured by rising interest rates, in particular, the 10-year Treasury.
PFFD’s distributions are for the most part qualified and may also include capital gains, largely taxed at the 15%-20% rate. This preferred fund is suitable for low- to medium-risk taxable portfolios. Buy at $27.00 or lower for a 4.84% annualized yield.