This week, I want to talk about Closed End Funds (CEF). They're a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for their initial investments. The shares can then be bought and sold on a stock exchange, but no new shares will be created and no new money will flow into the fund.
- Warning: Business Development Companies Just Got Doubly Risky
- Beat Ben Bernanke with These Juicy Double-Digit Yields
- Mortgage Investments Offer Both Opportunity and Risk: Making Sense of Conflicting Reports
At this point of the credit cycle, a lot of securities look cheap.
Business Development Companies (BDCs) are looking exceptionally cheap right now - trading at 82.7% of their net asset value and kicking off very high income of 10% to 17% at the same time.
Due to their structure as closed-end funds that pay high dividends, BDCs are designed to appeal to retail investors.
The problem is that investors often forget that high dividends come with a price - and that price is usually that the loans made by these companies are illiquid and high risk.
With the economy beginning to stall, Ben Bernanke's war on the nation's savers rolls on.
From his promise to keep the Fed funds rate near zero through late 2014 to his efforts to push ten-year note yields even lower, the Fed Chairman is a saver's worst nightmare.
After months of studying and more than one false start, Paulson eventually determined that the best strategy was to buy protection on mortgage securities. I'll spare you the tedious details, but the concept of mortgage securities is very interesting (and potentially very lucrative). Essentially, many of the loan originators - the companies actually lending money for home purchases - didn't want to keep these loans on their books. Instead, they bundled the loans together in a pool and sold these "securitized" loans to investors.
Over time, the process got very complicated, with the pools being sliced up into different categories - some with more risk and potentially greater returns, and some with much lower risk and consequently lower profits. Leading up to 2007, there was so much investor demand for these securities that the loan originators couldn't keep up with all the buyers. Eventually, new derivative markets emerged, allowing more investors to bet on these pools of mortgages.