Summary
DFP is a Flaherty & Crumrine fund; F&C has shown to be the top performing preferred fund sponsor historically.
This fund is currently traded at a slight premium, but is down from premiums it had reached earlier this year.
Net investment income came in light in their last report, but relatively speaking was still on the higher end compared to peers.
This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »
marchmeena29/iStock via Getty Images Written by Nick Ackerman, co-produced by Stanford Chemist
Flaherty & Crumrine Dynamic Preferred and Income Fund ( DFP ) came across my screening lately. The fund is sporting one of the deepest 1-year z-scores in the CEF space. Though still at a premium, this fund has fallen from the heights it was trading at earlier this year. As Flaherty & Crumrine consistently leads the preferred fund space, a small premium might not be the worst thing to pay.
In my portfolio, I hold Flaherty & Crumrine Preferred Income Opportunity Fund ( PFO ). It is a similar fund, and on an absolute premium basis, is trading quite similarly. PFO at a 3.21% premium and DFP at 3.60%. I covered PFO more recently. It has been a while since taking a dive into DFP, but it remains an attractive preferred fund option just as its sister funds. The Basics
1-Year Z-score: -0.99
Premium: 4.57%
Distribution Yield: 6.83%
Expense Ratio: 1.04%
Leverage: 33.20%
DFP’s investment objective is “to seek total return, with an emphasis on high current income.” To achieve this, they will; “under normal market conditions, the Fund invests at least 80% of its Managed Assets (defined below) in a portfolio of preferred and other income-producing securities issued by U.S. and non-U.S. companies. Preferred and other income producing securities may include, among other things, traditional preferred stock, trust preferred securities, hybrid securities that have characteristics of both equity and debt securities, contingent capital securities (“CoCos”), subordinated debt and senior debt.”
This leaves them quite flexible to invest mostly however they see fit in the preferred space or hybrid securities. They have no restraints on investing in the U.S. or elsewhere in the world. They traditionally have favored U.S. exposure, with the portfolio overweight there geographically. Additionally, they aren’t limited to the sector that they invest in. Though in practice, the portfolio is overweight banks, insurance companies and other financial institutions. This is because financials are the largest issuer of preferreds.
The fund is fairly large, with almost $833.3 million in total managed assets. A large part of that is thanks to the aggressive use of leverage. At an effective leverage ratio of 33.2%, they are certainly on the aggressive end. This can mean they are more volatile during downturns but can also return strong performance when times are good. They have shown to be good stewards of their employment of leverage. Thanks to their generally more stable preferred underlying holdings, this typically isn’t a problem.
The fund’s expense ratio is relatively low at just 1.04%. When including leverage, the expense comes up to 1.50%. At this time, their borrowings have been quite cheap, as is the case with debt everywhere else. They currently pay one-month LIBOR plus 0.80%. Since this is a floating rate, they could face some pressure when rates rise over the next few years. However, this had also played to the fund’s benefit when they raised their distribution through 2020 as well. Performance – Strong Results
The whole suite of F&C funds has delivered solid results in the preferred space. All have been quite similar results as their portfolios carry significant overlap. That’s what makes them such great candidates for swap trades in the first place. That being said, over the last 10 years, DFP has pulled away from PFO in terms of performance. That is despite the similarity between the funds. Over shorter periods, this is less noticeable. Additionally, I included the iShares Preferred and Income Securities ETF ( PFF ) for comparison as well. It is a non-leveraged ETF, so we see precisely what F&C has been able to accomplish through its utilization. Data by YCharts Where DFP is also a bit exciting is the fact that it carries a negative 1-year z-score. A lot of CEFs have been trading at quite lofty levels, though it has come back some. This z-score has come about as the fund’s premium has declined from prior levels it reached earlier this year. At one point, […]
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