The Worst Year For Investors Since the Financial Crisis... Not At All

I'm sure you've heard the buzz about negative returns in 2022. What a terrible year. Most retirees, and/or professionally managed account holders, were forced to sell securities to meet current expenses, possibly selling at a loss in the process.
So let's look below the surface at a different approach to the downward portion of the market cycle.
· When retirement, and the income it requires, is what you are thinking about, a "negative return" year simply means one of lower prices and higher yields on income purpose securities. In 2022, in spite of harmlessly negative market value numbers, mixed Closed End Fund (CEF) portfolios produced more than 10% in realized spending money, exclusive of any profit taking.
The three different types of CEFs had three different sets of results in 2022, but all three investor groups are smiling about being able to take advantage of low prices for such an extended period of time, and about the income they continued to receive.
Keep in mind, that all marketable securities move lower in market value during corrections... no exceptions. But when a portfolio produces more money than the investor needs to withdraw, she or he can take advantage of the lower prices to reduce cost basis on securities held and increase yield throughout the portfolio... buy new positions at bargain prices, even, just from the income.
Tax Free CEFs were the worst of the lot. There were extensive distribution cuts in November and December, mostly by Blackrock and Nuveen. But in December, there were also three special distributions, and the end result is a selection universe of diversified high quality funds yielding in excess of 5.5% tax free.
5.5 % is nearly 40% more than the amount of income most professionals would tell you is the magic disbursement number for a retirement portfolio.... and that 4% is taxable from most retirement vehicles. A 5.5% tax free yield is, I think, a major smile producer.
The 102 issue Taxable CEF selection universe fared somewhat better, having just 8 distribution cuts, more than offset by 19 increases and 18 special distributions. There have already been 4 increased distributions and two specials declared for January.
At current prices, this universe is yielding over 11% from funds that have been around an average of 18 years and which contain an average of over 460 positions. This distribution level is nearly three times the 4% withdrawal level bogey, keeping this group of investors smiling broadly while they take advantage of today's low priced opportunities.
So the first two groups, price wise, were mostly victims of higher interest rates, but the Equity group felt the full brunt of the nearly 20% correction in the S & P 500 and a 34% decline of the NASDAQ. Without the incredible gains of 2021, this 100 member universe of CEFs experienced 20 distribution reductions...but only in 5 of 36 management firms; half were in Eaton Vance alone.
But the 20 distribution reductions were more than offset by 21 payment increases and sixteen special distributions. These funds, with averages of nearly 20 years in operation and 250 positions, are currently yielding just over 10%, or 2.5 times the normal distribution target set by financial advisors.
So clearly, in a year without a whole lot of profit taking to brag about, CEF investors benefited from an environment that provided a prolonged opportunity to improve their income growth and capital building disciplines... as they prepared for the rally that will eventually replace the current downturn.
· On average, 90 portfolios averaging roughly $450,000 grew their realized base income by 15% during 2022. Additionally, they were able to grow their working capital by more than 7% after all fees, expenses, forced losses, etc.
For research, education, and discussion on CEFs, join the Facebook Closed End Fund Groups. To get your retirement program into income production mode join the Achieving Retirement Income Readiness group.

Steve Selengut
Author of: "The Brainwashing of the American Investor"
Join the private Facebook group: "CEFs For Equity Trading and Retirement Income". 


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