John Hancock Financial Opportunities Fund (NYSE:BTO) is a CEF that focuses on stocks in the financial industry. The fund currently holds 177 stocks most of which can be considered regional banks. Due to its focus on regional banks, the fund had a pretty bad year overall but I think the worst of the selling is done and long term holders of this fund will likely to get rewarded in the long run.
This fund has been around for about 30 years and it had a very solid track record of strong performance until regional bank crisis started happening. As a matter of fact, if you invested $10k in the fund in January of 2002 and reinvested dividends, your money would have turned into $72k by January 2022, exactly 20 years later. Also, your annual income would have reached $3,300 per year which would have been a 33% yield on your original investment of $10k.
This fund has a current dividend yield of 10%. When I am examining ETFs, CEFs or other funds with super high yields, I usually look at a few things. First, I look at how the NAV is holding up over the years. There are many funds that pay rich dividends but their NAV erodes year after year, making investors poorer and not richer. We typically call them yield traps. I don't expect a super high yielding fund to rise in NAV too much over time but it should at least keep its value from eroding too much. Investors won't benefit from a dividend yield of 10% if it is coupled with NAV erosion of -12%. When we look at BTO's NAV history we see it fluctuating up and down over the years mostly up when the overall market is up and down when the overall market is down. In general, the fund's NAV stayed pretty stable around $30 per share (give or take $5) over the many years it's been around. This is a plus in CEF world.
Once I establish that a fund's NAV is at least stable and not eroding, the next thing I look at is a fund's dividend history. You will be surprised to find out that many super high yielding funds keep cutting their dividends as a result of their NAV erosion. BTO has an interesting dividend history. The first 10-15 years of the fund saw very erratic dividend trends. During this period the fund mostly paid annual dividends which were highly volatile. One year the dividend would get doubled just to be cut into half the next year. After 2009, the fund's dividends became not only stable but started to rise slowly year after year in a predictable fashion which is what you want to see.
Below you will see a trending of BTO's dividends for the last 10 years. Notice that it's been rising slowly but surely every year and looks a lot less erratic than what we saw in the early days of the fund.
Now that we talked about the fund's past, let us take a look at what the fund looks like today. Currently one thing I would hold against this fund is that it is trading at a 11% premium versus it's NAV which is on the higher end of the fund's historical range. This is one of the reasons I said it is a good time to start accumulating because you don't want to buy all at once. You want to start a small position and keep adding to that position over time while also reinvesting some or all of your dividends. It's very rare for this fund's premium to drop below 0% unless we are in the midst of a market crash but investors should be prepared for all cases and possibilities.
Another word of caution on this fund is that it currently has an exposure of $584 million against its total net assets of $459 million which means it uses some leverage. The fund's leverage rate usually ranges from 20-22% which mostly serves to boost its dividend yield without taking on an excessive amount of unnecessary risk. If funds with leverage bother you, maybe this fund isn't the best for you. For an actively managed CEF, a leverage rate of 20-22% is considered pretty typical and nothing to be alarmed about. Currently the average rate of leverage for CEFs is about 33%.
The fund has a turnover rate of 10% which means it rarely changes its holdings. The fund has been holding most of its stocks for more than a decade. Of course this doesn't mean that the fund never makes any changes at all. While the stocks that make up the fund are almost the same, their total weighting shifts constantly as the fund adds to some positions and reduces from other positions.
Currently the fund holds many banks and financial companies. Some of these holdings are regional banks but others are bigger banks such as JP Morgan (3rd largest holding of the fund) and Bank of America (5th largest holding of the fund). Of the regional banks, some of fund's largest holdings include Huntington, Fifth Third Bancorp, Citizens Financial Group and Regions Financial Corporation.
Lately there has been a scare about regional banks after a few of them collapsed. The interesting thing is that these banks did not collapse because they made bad loans but because they were overweight in US treasury bonds which are seen as one of the safest investments one can make. The problem is that you have to hold it till maturity and if you are holding too many bonds with maturity dates decades away, you will have liquidity issues especially if those bonds lost value and you can't afford to sell them at discount.
We couldn't say for sure that regional bank failures are over, especially with a looming recession many economists expect to happen later this year. There could be definitely more pain ahead but historically these are the best times to start accumulating shares. Earlier I mentioned that the fund is trading at a premium of 11% but I should also add that many of the fund's holdings actually trade discount valuations compared to their historical valuations. Below are a few examples of the fund's largest holdings and their price to book value trending.
My plan for this fund would be to start initiating a small position and slowly adding to that position. You don't need to buy your full position at once and there is no reason to hurry. In the long run the market tends to reward bold and courageous risk takers but it tends to reward patient investors even more so. It takes a lot of time to build wealth and one must be patient both while holding their assets as well as while adding new assets (i.e., buying new stocks and funds). Initially you want to allocate quarter of a full position and slowly grow your way to 50%, 75% and 100% of a full position in a period of a couple years and hopefully hold it for a very long time while harvesting dividends.
On a side note, if you would like to start investing into regional banks but don't want to invest into a slightly leveraged CEF, I can also suggest another alternative for you. SPDR S&P Regional Banking ETF (KRE) offers exposure to 144 regional banks without any leverage and pays you a dividend yield of 3.7% while you wait for the sector to recover.
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I own separate portfolios for separate goals. I have one portfolio where I have nothing but income plays, another portfolio where I have nothing but growth stocks. I also have another portfolio where I run my options plays. I try not to mix different portfolios because they all have different goals and purposes. Sometimes one of my portfolios outperform other times other do. I am a big believer of diversification of not only assets but also methods and investment philosophies. Diversification is not simply buying 20 different stocks, it is applying different methods to different goals that fit to serve an investor's short term and long term targets.I am a "long only" investor and stay away from shorting companies. I will also do a lot of delta-neutral options plays where I will try to benefit from a stock or funds lack of movement. Also a huge fan of options plays and strategies including but not limited to covered calls, iron condors, butterflies, calendar spreads, call-put spreads. I've probably tried every options play there is, sometimes with success, sometimes with failure.At Seeking Alpha, I mostly analyze and write about stocks and funds that I own or I plan on owning. I rarely ever write about a stock or fund I at least don't have intention of owning some day.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BTO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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