[quote=bearishgurl]
It appears the month(s) it lost 80% of value correlates with the time frame of the highest amount of foreclosures all over the nation.
Could it be that the fund invested in subprime mortgages and/or residential mortgage-backed securities that were worthless? If so, does it still invest in residential mortgages today?
[/quote]
This fund invests in preferred stocks (http://en.wikipedia.org/wiki/Preferred_stock) which is a somewhat different animal from normally what people refer to as (common) stocks. The attraction of investing in a preferred stock is usually that the dividend yield is higher than one can achieve in normal stock. Unfortunately, preferred stock usually does not appreciate as much as common stock either …
In theory the preferred is somewhat protected on the downside than regular stock because of its dividend. Unfortunately that is only true as long as the issuer company does not go bankrupt. In bankruptcy both can fall to 0. This is what happened in 2008 because most common issuers of preferred stock were banks (think Lehman, Merrill, Bear Sterns). When they went bankrupt their preferred fell close to 0.
There are additional complexities in investing in a “closed end fund” (CEF) like JHP above and beyond the fact that they invest in preferreds. These CEFs often employ leverage with borrowed money. And the money they borrow for investing is often borrowed on very short term facilities. So when $hit hits the fan like in 2008, their assets fall in value, loans come due and they may have to sell assets at the bottom of the market to delever their portfolio. (Did I say that the market for preferred stock is very small and thinly traded?)
Then there is a third level of complexity because this is an closed ended fund that trades on stock exchange. Depending on its popularity, it can trade above or bellow its net asset value (NAV). I have seens popular CEFs trade 10-20% over NAV when markets are booming and trade 10-20% bellow NAV when times are bad. That is pure loss for the investor if his timing is bad.
So that is how one can fall 80% in one year. Hopefully they learnt something from that period …
