FHO is Worth Watching

Reader Dennis has asked my opinion of First Trust Strategic High Income Fund III (ticker: FHO). It is trading at about a 10% NAV discount so I thought I would check it out.

The primary objective of FHO is to seek a high level of current income. Capital growth is a secondary objective. The fund owns a diversified portfolio of Corporates (63%), Govermnment/agencies (25%), and mortgage bonds (12%). The credit quality covers a wide range from AAA (28%) down to CCC and below (15%). The fund is allowed to invest up to 100% of its managed assets in junk bonds, but the asset managers have not selected this option now.

FHO was originally issued in March, 2007 at a price of $20 (NAV 19.10). It then fell precipitately below $4. The disasterous performance was produced by Valhalla Capital partners, LLC who resigned in May 2009. They were replaced by Hyperion Brookfield in June 2009. Performance since then has been better but still somewhat below its peers (75th percentile). They needed to reposition the portfolio which added additional trading expenses and may explain much of this underperformance.

Overall, I think FHO is worth watching for a future potential purchase if the discount widens more or some other catalyst (like an activist investor) enters the picture.

Here are some stats on FHO:

Ticker: FHO   First Trust Strategic High Income III       pays monthly

  • Total Assets= 42.3MM
  • Annual Distribution (Market) Rate= 8.65%    (based on latest payment)
  • Fund Expense ratio= 1.66%              Discount to NAV= -10.0%
  • Portfolio Turnover rate= not meaningful because of repositioning
  • Weighted Average Credit Rating= BBB-
  • Weighted Average Efective maturity= 9.87 years
  • No leverage

Full Disclosure: Currently I am not invested in FHO.


One response to “FHO is Worth Watching

  1. George, are any of these leveraged CEFs with high distribution rates suitable as part of an income portfolio with a target payout of 6% to 8%— or is the risk to the principal too great once again after the huge runup in share price and NAV we’ve seen? Like your thoughts.
    Jeff Kosnett, Kiplinger.com and Kiplinger’s Personal Finance
    202-887-6682 or jkosnett@kiplinger.com

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