- Flaherty & Crumrine Preferred and Income Securities Fund Incorporated and Flaherty & Crumrine/Claymore Total Return Fund are among the best in the fixed income space.
- We update our macro outlook on preferred shares.
- We also dive into these two to see if we have a relatively better bet at hand.
The investment objective of both Flaherty & Crumrine Preferred and Income Securities Fund Incorporated ( FFC ) and Flaherty & Crumrine/Claymore Total Return Fund ( FLC ) are identical in terms of their primary objective, that is to provide a high current income to their shareholders. Where they differ is that FFC aims to preserve capital in the course of their endeavor whereas the FLC tries to get some capital appreciation in along the way.
Notwithstanding the difference , these two track each other quite closely in performance.
FFC - CEF Connect FLC - CEF Connect
Although we are not too fond of leveraged closed end funds, we chose FLC the last time we wrote on these , as it was cheap compared to the rest of the crowd. Lets take a look at it alongside FFC today and see if the minor differences between the two result in a clear choice going forward.
Holdings
The two funds have tracked each other so closely over the years and it would be easy to mistake one's holdings for the others. FLC's top 10 holdings (based on Feb 28, 2022) show familiar preferred names including New York Community Bancorp ( NYCB ), Citigroup's ( C ) and those of MetLife Inc. ( MET )
CEF Connect-FLC
You will find the same names in FFC's top holdings, although they are at different weights.
CEF Connect-FFC
Subtle differences creep in over time as the funds likely get better bid-ask spreads on different securities when rebalancing. But the goal appears to be for these funds to track one another. Their total holdings (212 for FLC vs 220 for FFC) also reiterate this idea.
Leverage
The two funds also track each other's leverage and in this case it is almost down to the decimal point. FLC was running 37.91% leverage.
CEF Connect-FLC
While FFC was running a shade lower.
CEF Connect-FFC
Again, not much difference to choose between these two based on their leverage.
Distributions
Unlike funds that try their hardest to maintain distributions, these two funds, like the others in their family, focus on maintaining NAV. So they are both very comfortable adjusting the distributions up or down as needed. The one thing you can be sure about, is that they will pay what they earn. That factor came into play recently as both funds took the distributions down a tad. FLC delivered a 10% distribution cut in August and this follows two smaller cuts earlier this year.
The patterns was again very similar in the case of FFC.
Macro Outlook
Preferred shares have likely taken the bulk of their designated hit from the hostile Federal Reserve. The US High Yield CCC or Below Option-Adjusted Spread is a great measure of stress in fixed income space including bonds, CLOs and preferred shares. This indicator is in the "moderately stressed" camp.
Yes, in both 2016 and certainly in the COVID-19 crash, it got far higher. That remains a possibility even now. Probabilistically though, your odds of making money by buying today and holding for five years, are far higher than what they were at the end of 2021.
One other factor to consider beyond credit stress, is the impact of inflation. We hold the now popular view, that inflation is likely peaking. Unlike consensus though, we don't see a very rapid return to low inflation. In other words we see the likelihood of persistent 4%+ inflation as quite high. This will also mean that while the Federal Reserve may not hike as vociferously as they did in the first half of the year, they are also unlikely to cut rates as the market expects. Preferred shares should provide modest returns in this environment. But don't expect recovery of your losses (if you bought at the highs).
Verdict
There is not much to choose between the two funds that track each other almost perfectly. FLC has a slight edge in pricing today, but it is not something you can get really excited about.
FFC is the larger fund among the two and also trades 6x the daily volume, so some might prefer the larger liquidity in lieu of the small pricing difference. But these discounts and premiums are worth keeping an eye on as sometimes they present unusual opportunities. Flaherty & Crumrine Preferred Income Fund ( PFD ) a third fund from the same family, offered a great opportunity at the beginning of the year. It spiked to a 20% premium, while the rest of the funds remained grounded.
We highlighted that opportunity and anyone who sold that and moved into either FLC or FFC saved a lot of money.
Currently the setups offer no real advantage, but volatility can change that in a flash. We rate both funds a buy currently, but we have got our preferred exposure via individual picks that we think are less risky than these funds.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
For further details see:
FFC And FLC: Preferred Funds That Hit The Spot