E You Don't Get 10% Yields Without Risk

The New Yorker in its current issue suggests that we all join in applauding a performance of Beethoven's Fidelio at the Met with its stirring Liberty march:

“Nicht laenger knieet schlavisch nieder / Tyrannenstrenge sey mir fern”.

In English (by me): We've stopped slavishly kneeling / so the tyrant's strength is reeling.”

The magazine's target is Pres. Trump but I personally think it should be internet service providers using your data for gain without consideration of your privacy.

Markets are broody and depressed, suffering from a what may have been a terrorist attack in St. Peterburg, Russia, which killed people on the subway system (metro) there. On past form this may have been a fake attack to boost the position of Putin and his buddies against the anti-corruption demos of the past 2 weekends. The haven currency, the US$, is up, resulting in a drop for all non-US stocks we own, because the US conversion of the local price has dropped. This can be a buy opportunity but the situation with Russia and with China, makes me cautious.


Activist fund of fund investors City of London have invested another 2.84% in closed-end Mexican Equity and Income Fund, taking their stake to 40.77% of the shares outstanding. The UK CoL outfit run by Barry Olliff, invests on behalf of US pension plans and institutional investors, and therefore reports to the US SEC. When funds buy chunks of closed-end funds their impact tends to reduce the discount from NAV, in part because of the hefty volumes they buy, and in part because other investors (funds and folks) follow in their wake. Activists like Olliff also something agitate for fund managers to undertake buy backs or other measures to cut the discount. So while they are looking after their own interests they also help us, particularly old-timers like Olliff who is a savvy long-term CEF investor from Britain. MXE is up 1.23% on the news.

Activists Saba of Grand Cayman bought another $992,000 in shares of closed-end Advent Claymore Global Convertible Fund (CEF) in which it now owns ~11.5%. AGC pays most of its dividend in the form of return on capital but it pays out well over 10%, making it a good pick for income.

It trades at a juicy 13%+ discount from the positions in its portfolio, the NAV. That means you get $1.13 working for you for every dollar you invest in AGC. The fund is managed by an analyst team specializing in valuing convertible stocks and bonds, common stocks, and straight (non-convertible bonds) assembled by the man Bloomberg called “the king of convertibles” F. Barry Nelson, formerly with Value Line Convertible newsletter who still is on its board but has now retired from active management. The fund chief is F. Barrie Martland IV who with staff have been trying to match Saba buys, but who are not as flush.

The team can quickly work out valuations and premiums between different instruments from the same company: convertible bonds or shares, common stock, and straight bonds. They do it in-house rather than waiting for rating agencies. That means they can cover smaller issues outside the US which often are unrated.

They arbitrage by buying and selling different instruments to cut risks. The better performance and foreign convertible arbitrage pays off better than domestic.

In a period when interest rates are rising, convertibles appeal as their eventual value goes up with the common shares they convert into. That keeps them from losing value the way straight bonds do in a higher-yield environment. On the other hand, when stocks are selling off, the yield part of a convertible offers some protection on the downside.

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Disclosure: None.

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