Flaherty & Crumrine Total Return Fund: Attractively Discounted in a Favorable Environment

Flaherty & Crumrine Total Return Fund (NYSE:FLC) is a preferred focused fund that was a strong performer in its category for years. However, it has experienced higher volatility due to rising interest rates and a decline in its discount. The fund is now trading at an attractive discount, and the market environment has become friendlier for preferred funds. As a result, investors may consider FLC as a potential investment opportunity.

The Flaherty & Crumrine Total Return Fund (NYSE: FLC), a preferred-focused fund, has weathered a challenging period due to higher interest rates and a decline in its discount. However, the fund's performance has shown signs of improvement, making it an attractive consideration for long-term income investors.

Historical Performance and Challenges

FLC was once a strong performer in its category, benefiting from a zero-rate environment. However, the aggressive Fed hiking cycle in 2022/2023 negatively impacted the fund due to its high interest rate sensitivity and unhedged borrowings. This led to a significant widening of the fund's discount, with shares trading at premium levels regularly changing to a substantial discount in 2022 and 2023 [1].

Current Market Environment and Fund Performance

The market environment has shifted, with the Fed cutting rates and projecting further cuts. This has led to a narrowing of the fund's discount, making it more appealing to investors. FLC's performance since the prior update has been solid, with total NAV returns of 4% in the first half of 2025, despite not outpacing the S&P 500 Index [1].

Fund Basics and Investment Objectives

FLC aims to provide its common shareholders with high current income and has a secondary objective of capital appreciation. The fund invests at least 80% of its assets in preferred securities and other income-producing securities, with at least 50% in preferred securities. The fund's latest expense ratio is 1.34%, but including leverage costs, it rises to 4.65% [1].

Portfolio and Risk Factors

FLC's portfolio is heavily tilted toward the financial sector, with banks being the largest sector. The fund's credit quality is primarily investment-grade, with a significant allocation to BBB-rated securities. The fund's high utilization of borrowings (37.9%) and lack of hedges for interest rate exposure pose risks, but its diversified portfolio provides some safety [1].

Distribution and Future Prospects

The fund's distribution has been negatively impacted by higher rates, but with rate cuts expected, the distribution could increase. The latest semi-annual report shows a nearly 13.5% increase in NII for the six-month period ended May 31, 2025 [1]. With further rate cuts anticipated, FLC's performance and distribution could improve, making it a potential investment opportunity for long-term income investors.

Conclusion

Flaherty & Crumrine Total Return Fund (FLC) has faced challenges due to higher interest rates and a decline in its discount. However, the fund's performance has shown signs of improvement, and the market environment has become friendlier for preferred funds. With further rate cuts expected, FLC could provide attractive returns for long-term income investors.

References
[1] https://seekingalpha.com/article/4813159-flc-attractively-discounted-in-a-friendlier-environment-for-the-fund