Friday, January 28, 2011

Investing Solo – Floating-Rate Debt - GFY

I’ve been writing about my search for suitable floating-rate debt securities to which I can allocate a part of my debt portfolio. I’ve previously posted some thoughts about floating-rate (FR) equity preferred stocks (link), particularly MET-A and HBA-D, and exchange-traded debt securities (link), particularly the exchange-traded bond PFK and the trust preferred issue UBS-D.

I’ve come to like the closed end fund GFY run by Legg Mason. It invests, with a pledge of at least 80% of assets, in variable rate debt, such as mortgage-backed securities, IG and high yield corporate bonds, senior loans, and emerging market debt, and derivatives related to these securities; no FR equity preferred stock, however. Much of this portfolio, about 45% as of last fall, is as expected below investment grade. I like the picture from the last annual report (link), dated September 30, 2010: portfolio earned interest and dividends well in excess of the CEF’s distributions, specifically an impressive 134%; solid positive capital gains and net from derivatives; a very decent amount of undistributed net investment income on the books; and no return of capital. To my read, about 82% of its net realized gain came from portfolio interest and dividends, which I like, with only the remaining 18% from net capital gains and derivative, swap, and currency transactions.  The Legg Mason GFY "Fact Card" (link) lists a security weighted average life of 5.6 years.  As of yesterday it pays a monthly distribution at an annualized rate of 4.1% and trades at a very attractive 8.4% discount to net asset value. Interestingly it does not employ leverage, despite being the kind of fund -- one with a variable rate portfolio that could maintain an interest rate spread over borrowed capital as interest rates rise -- where one might expect it and like to see it. One limitation – it’s a fairly small fund with relatively low trading volume. What I see as the risk/reward ratio is attractive for a modest investment, and I’ve begun accumulating some shares on dips.

I’m an individual investor with no background in finance or securities, writing things down to help organize and clarify my thinking. Of course, nothing I say constitutes investment advice of any kind – merely an account of my personal observations and decisions; I do not vouch for the accuracy of any representation -- every investor must do his/her own due diligence. My core portfolio is a conservative and diversified mix of equity and debt mutual funds, ETFs, and some closed-end funds (CEFs) across investment styles, management firms, and accounts, and I invest a relatively small amount somewhat more aggressively in the perhaps ultimately futile personal pursuit of alpha.

Mike Parenti

Related Posts:
Investing Solo – Floating-Rate Debt
Investing Solo in Floating-Rate Preferred Stocks

No comments:

Post a Comment