Cash Machine’s “Enroll in the Next 24 Hours” pitch for 8.53% Income Fund

by Travis Johnson, Stock Gumshoe | December 4, 2019 1:51 pm

Bryan Perry hints at an investment... "you’ll not only be getting over three times more money than a one-year CD, you’ll also know that your money will be equally as safe" -- so what is it?

I haven’t written about Bryan Perry[1]’s Cash Machine[2] newsletter in several years, and I know that a lot of Gumshoe readers are interested in income investments and dividends[3]… so I thought this would be a good one to sniff out for you.

The ad is for a subscription to his newsletter, of course (currently $49.95/yr, “on sale”), and though he dropped the “25%” from the name many years ago (when I first covered this one, it was called “25% Cash Machine“), he does still say that he aims for 25% annual returns from his model portfolios — including 10% income yields. Which is very ambitious for a dividend or income-focused newsletter, of course, but, well, it’s good to have goals.

Aiming for 10 percent dividend yields and 25% total returns means you’re probably going to be pushing the envelope a bit, so what is Perry hinting at today as his next favorite investment? Here’s the headline from the ad email I received:

“Safe 8.53% Income Fund Goes Ex-Dividend December 11: Buy Now

“Enroll In the Next 24 Hours and Grab the Next Payday!”

We’re told that this is also a monthly payer (as opposed to quarterly, like most investments)… but what other clues do we get?

“… my high net-worth readers who put $1 million in this fund will grab a $7,400 payout in less than 30 days.

“Those who invested in this little-known security when I recommended it March of last year have not only collected twelve $7,400 paydays for a total of $88,800, they are smiling all the way to the bank.”

OK, so it’s at least been paying this yield for well over a year — and that wording makes it seem that this ad was first written back in March of 2019.

We also get a few specific clues that will help the Thinkolator…

“Advisors Asset Management Owns 566,872 Shares…

“And they’ll be collecting their own $951,912 payday along with Wells Fargo & Company, Bank of America, Morgan Stanley, and the Royal Bank of Canada[4].”

And he throws what looks to me to be a wild pitch in assuring readers that this is as safe as a CD…

“Once You Grab Your First Payday,

“You’ll Never Put Your Money in a CD Again

“That’s because you’ll not only be getting over three times more money than a one-year CD, you’ll also know that your money will be equally as safe.

“This is why Wall Street’s biggest insiders are already in on this deal!

“Once you see how this fund can pay you this kind of high dividend safely, I know you’ll never put your money in a CD, Treasury bill, or low-paying dividend stock again.”

The numbers track just fine, the best one-year CDs currently pay about 2.25%, but that “your money will be equally safe” is a HUGE promise to make. CDs NEVER lose value, the return of your principal is guaranteed and insured after that year is up… if you tell me you’ve got a publicly traded investment that is that safe and also yields more than 8%, I have no choice but to think you’re delusional. Or lying.

But we’ll let that pass for the moment and focus on what the actual investment is… so let me feed those clues into the maw of the Mighty, Mighty Thinkolator.

Need an extra minute here, there’s a lot of snow to brush off.

OK, fine chugging along nicely… starting to get an answer…. and THERE! This is AllianzGI Diversified Income & Convertibles (ACV), a leveraged closed-end mutual fund.

So no, it is nowhere near as safe as a CD. It both owns investments that could fall in value, and it borrows money to leverage the returns on those investments — leverage goes both ways, amplifying both good and bad returns, so they do get to build a larger portfolio and therefore pay out higher dividends from that portfolio… but if they choose poorly or are unfortunately and their portfolio falls in value, that drop will be larger than it would have been if they weren’t borrowing money.

And yes, Advisors Asset Management did own 566,872 shares… but that was back in February, since then they’ve sold more than half of those shares (they own 257,911 shares as of the September quarter). So if that’s who you were counting on for an endorsement, well, you might want to look elsewhere.

A closed-end fund, if you’re unfamiliar with the notion, usually trades like a stock (so putting “ACV” in your brokerage or research website will get you trading info and let you place orders), but it is a mutual fund that owns a diversified portfolio of stuff. It’s also different than an ETF or a regular mutual fund, though, because mutual fund shares are created or destroyed (redeemed) every day to keep the share price in tight correlation with the value of its underlying investments… a closed-end fund is, well, closed — they do not create or redeem shares every day, they issue a set number of shares in an IPO[5] and that’s all they have (unless they do another offering someday, or decide to buy back shares), so the price is set not by the net asset value (NAV) of the underlying portfolio (as with an ETF, usually, or with a regular mutual fund all the time), but by what traders are willing to pay for that portfolio.

So closed-end funds[6] usually don’t trade at exactly their net asset value, most of them typically trade at a discount to the value of their holdings… but they can also trade at a premium. They also typically don’t look very appealing when you compare them to regular open-ended mutual funds[7], mostly because the cost (and risk) of their leverage, and the fact that the management company is not incentivized to cut management costs (they’ve raised the money already, and the money can’t easily leave), mean that they typically have quite high expense ratios compared to ETFs or mutual funds (ACV’s reported expense ratio is 3.4%). They’re also quite popular investments for fixed-income investors, largely because a lot of these funds invest in bonds and other higher-yield investments and use leverage to generate high and regular dividend/distribution income for shareholders.

This particular closed-end fund, managed by Allianz, looks pretty reasonable at my first glance. It trades at a small premium to the NAV, right around 2% at the moment, which is not ideal (but that fluctuates, and it’s likely to be available at a small discount before too long). It carries both preferred shares and debt for total leverage of about 30% (the debt portion is about 20%), and it has an expiration date — the fund will be liquidated on the 15th anniversary, which is in about 10-1/2 years, unless shareholders elect to extend it (doesn’t mean much now, but as that date gets closer it should tend to keep the premium or discount the shares trade at relatively limited — since the fund would presumably be liquidated and funds returned to shareholders at net asset value).

The fund had its IPO in the spring of 2015, and it collapsed immediately — probably because most closed-end funds trade at a discount but the IPO was at NAV… it looks like the shares collapsed right around the time they announced their first monthly dividend, so it was probably also partly just a reset to put the dividend yield in a similar neighborhood to competing investments.

Since then, it has done just fine and has continued to pay out that exact same 16.7 cents per month as a dividend distribution for more than four years now. And the market has been strong for the investments they own, thanks largely to falling interest rates, so they have had plenty of returns to support that dividend and also allow their net asset value to rise a bit.

Here’s how the fund describes itself:

Investment Focus: Provide total return through a combination of current income and capital appreciation, while seeking to provide downside protection against capital loss.

Why Invest:

• Designed to dynamically allocate across convertibles, equities and income-producing securities.
• Normally invests at least 50% of total managed assets in convertibles; can also write covered call options[8] on the stocks held in the equity portion.
• Attempts to dampen volatility relative to an equity-only portfolio due to the asymmetric risk/return features historically exhibited by convertible securities.
• Managed by an experienced investment team that has a long track record in closed-end fund management.
• 15-year limited term structure from the effective date of the Fund’s registration statement, which may be extended by 1 year based on market conditions.

The fund is not at all concentrated, their latest update[9] says that it holds 300+ stocks, preferred stocks and bonds, and some hedging short positions, and the only positions above 1% (and just barely above that) are convertible preferreds in Bank of America, Wells Fargo and Broadcom, and some Microchip Technology convertible bonds[10]. Their equity investments look at lot like the S&P 500, with stakes in the biggest stocks whether they pay dividends or not (Microsoft, Apple, Visa, Alphabet, Amazon and Facebook are the only common stocks in their top 20 holdings).

And, yes, the shares have done quite well over time… particularly if you did not make the mistake of buying at the IPO (NEVER buy a closed end fund at the IPO, they can almost always be bought at a discount later). Here’s what the total return performance has looked like over the past three years compared to some other income-focused investments (ACV is in blue, iShares Dividend Growth DGRO in green, the S&P 500 in purple, iShares Convertible Bond ETF ICVT in red and Invesco[11] Preferred ETF PGX in orange):

[12]

The part that might be catching your attention, I imagine, is the fourth quarter of 2018 — so in order to reinforce the “no, this isn’t as safe as a CD” notion, let me highlight that quarter for you with those same five investments:

[13]

So sure, ACV is a reasonable closed-end fund if you want exposure to convertible debt and a high current income… but don’t forget what happened the last time investors were freaking out about stocks and the Federal Reserve and interest rates (the rate was at zero when ACV went public, rising gradually in 2017 and 2018 until the last Fed rate hike, in December of 2018 when the market also crashed for a little while).

The distributions for ACV haven’t changed since they started paying them in 2015, so if you had bought in that panic about a year ago you would have been buying with a dividend yield of over 11%. The yield right now is about 8.2%, with most of it being covered not by coupon payments and dividends but by the investment gains on the portfolio — with a lot of those gains having been generated by the fact that interest rates have fallen pretty sharply over the past four years. Rising interest rates or a falling stock market would both be negatives for them, but they would likely still be willing and able to keep paying the dividend (by selling investments) as long as any negative market trends like that are relatively short-term in nature.

And yes, they do go ex-dividend for the December distribution on December 11, meaning that if you want this month’s 16.7 cents (payable January 2) you would need to buy the shares by December 10. The shares regularly move more than 17 cents up or down in a day (that’s less than one percent), so I wouldn’t rush just to get one month’s dividend — you’ve got time to think it over.

You don’t get 8.2% yields without taking risk, and with this fund you’re taking both interest rate risk and stock market risk… but you’re also riding down the middle of the road a bit with the heavy emphasis on convertible bonds, so as long as stocks and bonds don’t collapse at the same time there’s a decent chance that the fund could perform better than bonds in a rising rate environment, or better than stocks in a market crash.

That’s all I know about this one, and there are a lot of other income-focused closed-end funds out there — if you have any favorites to share, or any input on ACV, please do let us know with a comment below.

And, as always, we’d like to know what investors think about any newsletters they’ve subscribed to — we don’t have many recent reviews of Perry’s Cash Machine newsletter[14], so if you’ve tried it out or are currently subscribed please do click here to share your experience[15] with your fellow investors (has he consistently hit that 25% return goal? Inquiring minds wanna know.) Thank you!

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