A Guide To Investing In Closed

A Guide To Investing In Closed

I took my software profits and started investing in dividend-paying stocks. Today, it’s almost impossible to find good stocks that pay a quality yield. So I employ a contrarian approach to locate high payouts that are available thanks to some sort of broader misjudgment. Renowned billionaire investor Howard Marks called this “second-level thinking.” It’s looking past the consensus belief about an investment to map out a range of probabilities to locate value. It is possible to find secure yields of 6% or more in today’s market – it just requires a second-level mindset. For example, one of our favorite pastimes is purchasing closed-end funds when they trade for ninety cents or so on the dollar.

One of the largest closed-end funds is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund . Founded in 2007, it has a market cap of US$2.23 billion as of March 2020. You can acquire most of the information above by reading through the fund’s prospectus or distribution announcements.

Western Asset Corporate Loan Fund

AIO has a surprisingly diversified and value-driven investment strategy. While highflying tech companies like NXP Semiconductors and Roku are top holdings, the company’s third and fourth biggest positions – Microsoft and Deere – are much more value-driven. In low interest rate environments, closed-end funds will typically make an increased use of leverage. This leverage can be used in the form ofpreferred stock, reverse purchase agreements, dollar rolls, commercial paper, bank loans andnotes, to name a few. Leverage is more common in funds that are invested in debt securities although several funds invested in equity securities are also using leverage.

  • Tekla Healthcare Opportunities (THQ, $17.35), which is managed by the same team that runs HQH, is more in line with what you’d expect out of a broad-based health-care fund.
  • Yields are distribution yields, which can be a combination of capital gains, investment income and return of capital.
  • “Any time you can purchase a worthwhile closed-end fund at twice its discount, it is worthwhile since eventually, the discount will likely narrow to its long-term average,” he says.
  • As previously mentioned, distributions can be very sensitive to movements in the stock market.
  • The activist agitation helped to close NHS’s valuation gap, from a 16% discount in January 2019 to just around 4% presently.
  • That makes it quite risky, especially this far into the market cycle after such a long streak of outperformance.

“This is a little bit of a head scratcher,” Roseen said of the comparatively solid showing by closed-end funds focused on real estate, noting rate increases are typically no friend of real estate funds. “A rise in interest rates usually knocks these guys out of contention.” The relative success of closed-end real estate funds is somewhat counterintuitive given how sensitive the real estate market is to rising interest rates, Roseen notes. But don’t dismiss the others; if you’re looking for a high monthly income stream, they’re still worth considering. Even better if you put them on your watch list and wait for wider discounts . And because of their large dividends (the CEF Insider portfolio boasts an 8% average yield today), CEFs deliver most of their returns in cash.

Better still, Adams Diversified Equity – which broadly invests in high-quality, large-cap companies – is trading at a 13% discount to its net asset value. That’s a bargain, especially for a fund that has beaten the S&P 500’s total return over the trailing one-, three-, five- and 15-year periods.

Blackrock Science And Technology Trust

The Pimco Municipal Income Fund (PMF, $14.25) yields a similar 4.6%, but it certainly does not trade at a discount at the moment. PMF has traded at a premium to NAV for most of its history, and the only consolation is that its current 6% premium is less than its five-year average of about 9%. Whatever will happen, it seems pretty clear that a lot of real estate holders are set for bankruptcy – which is why real estate investment trusts were one of the worst sectors of 2020, and one of the slowest to recovering. That does mean less price upside for investors – performance falls somewhere in between the Nasdaq-100 and the S&P 500 since inception in late 2009.

This fund has a diverse collection of bonds, and the focus is on high-yield corporate credit and mortgage debt. That makes it quite risky, especially this far into the market cycle after such a long streak of outperformance.

Perhaps the biggest advantage is the simple fact that they are closed to new investment. This means that managers do not have to hold cash for shareholder redemptions.

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The other three funds have delivered an impressive 9.2% annualized return between them over a decade. Calamos Strategic Total Return holds mostly U.S.-based stocks, convertible securities and high-yield corporate bonds. Returned 9% over 12 months and averaged 10% annually over three years, 8.9% yield.

Both also charge an annual expense ratio and can make income and capital gain distributions to shareholders. Part of it is that distributions include capital gains, not just dividends. But CEFs also are able to use a few dividend-enhancing tricks that other types of funds can’t or don’t.

BlackRock MuniYield PA Quality Fund (MPA, $14.49) is the kind of CEF that outsiders rarely know about, and that rarely falls onto the experts’ radar, but that its investors love nonetheless. At only a little more than $200 million in assets, it’s a fraction of the popular municipal-bond funds that investors rely on for tax-free income. Health care is more of an “all-weather” sector that can provide upside in good times and bad. Health-care spending in the U.S. and worldwide grows each year, and it’s an expense that’s difficult to cut back on when the economy slows down. Moreover, health care was tied for utilities for the highest rate of earnings growth through the first three quarters of 2019, and it was first in revenue growth. The sector appears to be underappreciated; election-cycle fears might be holding it back. Tekla Healthcare Investors (HQH, $21.02) is a classic contrarian bet.

Fund Family

The EOI tends to “trade barbs” with the S&P 500, outperforming some years while underperforming others. What makes the fund so attractive right now is that it’s trading at a 3.6% discount to its net asset value, whereas on average it has traded at a slight premium. In essence, you can get all of EOI’s high-value quality holdings for less than if you bought those shares on your own – about 97 cents to the dollar, to be more specific. These 10 CEFs boast a number of perks, including deep value, high distribution rates and strong track records. Well, TY’s total return has beaten its category average over the trailing one-, three-, five- and 10-year periods, and it has even topped the S&P 500 in the three- and 10-year timetables. Management has proven itself savvy enough to give investors just enough bond exposure at the right times to boost returns.

PCI, on the hand, trades at a roughly 10% premium — high for most funds, but relatively low for a Pimco product. Instead of being rewarded with a premium for its historical strength and reliable payouts, RNP trades at a 4% discount to NAV. If real estate recovers quickly, the discount on this CEF should disappear.

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These forces include supply and demand, as well as the changing values of the securities in the fund’s holdings. There is no assurance that a fund’s leveraging strategy will be successful.

This fund has fallen out of favor as the health-care sector has lagged the broader market, but it’s still run by one of the best pharma and biotechnology asset managers out there. However, Macquarie Global Infrastructure is a lot more than just utilities. It’s an “infrastructure” CEF that invests in numerous utility-esque industries, including pipelines and toll roads. Pimco’s closed-end funds almost always trade at a premium, and those premiums can be very high. For instance, Pimco Corporate & Income Opportunities Fund traded at a monstrous premium of between 20% and 30% for most of 2019.

We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters. With interest rates at near record lows and general market uncertainty, an increasing number of investors are turning to income-generating investments. Closed-end funds are often superior to more traditional open-end funds when it comes to income generation potential. The iShares Floating Rate Bond ETF , an index fund that invests in floating-rate debt, delivered a 4% total return in 2019. Meanwhile, Legg Mason’s Western Asset Corporate Loan Fund (TLI, $9.97), by Legg Mason, gained a whopping 18.8%. The BlackRock Taxable Municipal Bond Trust (BBN, $24.87), and its 5.4% yield, is worth a serious look right now. It had a strong 2019, at 22.8% total returns, and it has pumped out 10.6% annual returns since inception in August 2010.

This adds volatility and complexity, but it also allows these funds to be much more active and sophisticated investment vehicles. Particularly if you’re looking for high-yield investments, these seven closed-end funds with big dividends may prove interesting alternatives to vanilla ETF index funds. The Voya Emerging Markets High Dividend Equity Fund predominantly owns dividend-producing securities of emerging markets. IHD also sells call options to boost income, and the underlying value of the call options represents approximately 15% to 50% of the total value of the fund. The fund uses an investment technique to achieve its desired dividend yield, weighing the portfolio by region and sector to select emerging market stocks with an appealing risk/reward profile. This CEF holds many recognizable names, such as Alibaba Group , Tencent Holdings , Taiwan Semiconductor Manufacturing Co. and Samsung Electronics. The fund is heavily weighted in the financial and information technology sectors, with 17% and 21% allocations, respectively.