HPS - FFC: Portfolio Assets Appear Overpriced Some Profit-Taking Could Be Smart

2024-02-02 03:12:36 ET

Summary

• Flaherty & Crumrine Preferred and Income Securities Fund has suffered losses over the past two years due to high leverage and cuts in distribution.
• The fund's yield is not attractive compared to its peers, including the iShares Preferred and Income Securities ETF.
• The fund has been underperforming its peers, despite its recent run-up. This suggests that investors interested in preferred stocks may be better off elsewhere.
• The market's expectations of 2024 rate cuts seem very unlikely to play out based on the FOMC statements from the January meeting.
• It could be a good idea to take some profits now before fixed-income prices correct in the absence of near-term rate cuts.

The Flaherty & Crumrine Preferred and Income Securities Fund ( FFC ) is a closed-end fund that has long been a fairly popular choice among investors who are seeking to earn a high level of income from the assets in their portfolios. Unfortunately, this fund suffered severely over the past two years as its high level of leverage resulted in fairly significant losses as the Federal Reserve scaled back on quantitative easing and money printing in favor of a tighter monetary environment. As a result, the fund was forced to cut its distribution multiple times. Right now, the Flaherty & Crumrine Preferred and Income Securities Fund has a 6.75% yield, which is not much better than the 6.67% current yield of the iShares Preferred and Income Securities ETF ( PFF ). This is disappointing, as the exchange-traded fund does not use leverage to artificially boost the yield from the securities in its portfolio. It almost goes without saying that the fund’s distribution yield is substantially lower than the yield currently offered by other preferred stock closed-end funds:

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