A recent article from Morningstar claims that in the preferred stock category, both the open-end and closed-end actively-managed mutual funds beat their ETF counterparts. The problem is that all four open-end mutual funds cited in the article (CPXAX, DPIAX, FPEAX, and NPSAX) are classified in the US OE Long-Term Bond category by… Morningstar itself. According to Morningstar the funds have the following 3-year best-fit indices:
|Mutual Fund||Best-Fit Index||R-Squared|
|NPSAX||BofAML US HY Master II TR USD||76.68|
The reason that the best-fit index is not available for the first three funds is that they are currently not star-rated. The fourth fund is predominantly matched by a high-yield bond index.
The Alpholio™ analysis of these funds yields the following ETFs with the highest average weights in the reference portfolio:
|Mutual Fund||ETF||Average Weight|
A further proof from the 2012 year-end shareholder report for CPXAX:
|Type of Security||Percentage of Investments|
|PREFERRED SECURITIES—$25 PAR VALUE||37.8%|
|PREFERRED SECURITIES—CAPITAL SECURITIES||58.1%|
|OTHER ASSETS IN EXCESS OF LIABILITIES||1.5%|
So, it is predominantly a bond fund. In fact, 50% of its own benchmark is the BofA Merrill Lynch US Capital Securities Index (a subset of the BofA Merrill Lynch US Corporate Index that covers US corporate debt). Therefore, it is inappropriate to compare the fund’s performance solely to the “pure-play” preferred stock ETFs.