My last post focused on 9 Best Stock Ideas for 2016 according to four investment experts presenting at AAII's biennial investment conference in Las Vegas, Nevada. However, fixed income expert Richard Lehmann also told the audience at Bally's Hotel that he was finding some of his best bargains among closed end funds (CEFs), which typically sell at a discount to net asset value, but now are more depressed than ever and are gushing very high current yields. You may remember that closed end funds are similar to ETFs in that they are baskets of securities, however likes stocks they trade on exchanges. However unlike most ETFs closed end funds tend to be actively managed, and thus have higher expenses. Their share prices tend to fluctuate above and below net asset value ( NAV) depending on the value of the underlying assets and the demand for the CEF.
During Lehmann's Best Ideas discussion, he instructed the audience to mine his latest newsletter Forbes ISA Closed End & ETF Report for specific CEF ideas. That is exactly what I have done and below you will find an excerpt from his November newsletter, containing three of his top picks. You will note that some of these CEFs are trading at even bigger discounts than when he published his newsletter in early November. Voya's Natural Resources and AGIC Convertible & Income Fund both have current yields now more than 13%. Brookfield Global's Listed Infrastructure fund has a current yield of 10.5%. As always investors should consider the risks here. If rates rise these yield instruments could take a hit, plus some of these funds employ leverage and part of your yield is often a return of capital.
Excerpted from the November 2015 issue.
Featured Sector Pick
The oil and energy sector has been down for quite a while. It has taken awhile for the stocks of oil companies to react to the low prices. They are now reacting and dropping in price. The closed end funds that invest in oil companies are also showing the effects. The difference is that in addition to the funds dropping in price because of the drop in price of their holdings, they are also increasing their discounts. Investors shy away from sectors that are declining in price and sell the funds that hold them. The discounts become appealing even if the underlying stocks are no longer popular.
Voya Natural Resources Equity (IRR) invests in stocks of energy, natural resources and basic material industry companies. It uses a covered call and options strategy to increase total return. The fund is currently trading at $6.35 and has a net asset value of $7.44 giving the fund a discount of -12.63%. The funds average discount over the last 52 weeks was -7.81%. It recently cut its quarterly payout to $0.20 per share, but this still gives the fund a yield of 12.59%. It invests in Oil & Gas Exploration & Production at 25.38% of assets, Integrated Oil & Gas at 23.28% and Oil & Gas Equipment & Services at 15.39%. The fund is unleveraged and has an expense ratio of 1.18%. It currently writes index options on 51.45% of its holdings with an average maturity of 18 days. Its largest holding is in
Fund: Voya Natural Resources Equity Income Fund
Equity Symbol: IRR
CUSIP: 92913C106
Fund Type: CEF
Current Price: $6.35
Net Asset Value: $7.44
Current Discount: -12.63%
52-Week Average Discount: -7.81%
Expense Ratio: 1.18%
Optionable: No
One Month Change: -.62%
Three Month Change: -11.19%
One Year Change: -32.72%
Current Yield: 12.59%
P/E Ratio: 37.81
Top Holdings:
Featured U.S. Market Pick
Last month we noted that buying closed end funds right after a dividend cut was usually a good idea since investors often overreact and sell off their holdings, regardless of fundamentals. In addition, during turbulent markets, convertible securities moderate market swings because the yield helps support stock prices. Last month we recommended the AGIC Convertible & Income Fund (NCV), a closed end fund that invests in income producing securities that still have exposure to the stock market. This month we are recommending its sister fund, the AGIC Convertible & Income Fund II (NCZ). On September 1, 2015 the fund announced a dividend cut from $0.085 per share to its current $.0575. The announcement caused the fund to drop in price and for its discount to widen to its current -11.74% from it 52-week average premium of 7.47%. The fund currently trades at $5.54 and yields 12.45% and has a net asset value of $6.22. It pays a monthly dividend and is leveraged at 32.87%. It has a relatively low expense ratio of 1.19%. The fund is made up of convertible securities at 57% of assets, followed by corporate high yield securities at 41% of assets.
Fund: AGIC Convertible & Income Fund II
Symbol: NCZ
CUSIP: 018825109
Fund Type: Closed End Fund
Current Price: $5.54
Net Asset Value: $6.22
Current Discount: -11.74%
52-Week Average Premium: 7.47%
Expense Ratio: 1.19%
Optionable: No
One Month Change: -2.29%
Three Month Change: -22.95%
One Year Change: -38.31%
Current Yield: 12.45%
Top Holdings: Cash (2.36%) Felcor Lodging Tr Cv (2.05%)
Featured International Pick
Despite the impending interest rate rise that has been imminently impending for several years, nothing has happened yet except for ever lower rates. We might as well take advantage of high income funds, since interest rates are threatening to actually go negative and already have in some instances.
The Brookfield Global Listed Infrastructure CEF (INF) invests globally in companies that are involved in infrastructure. It is currently trading at $14.27 has a net asset value of $16.98 giving the fund a discount of -16.96%. Its 52-week average discount is -11.12%, a variance of -5.84 from its current discount. The fund pays a monthly dividend of $0.1167 per share giving the fund a yield of 9.81%. It invests in LongHaul Pipelines at 18.9% of assets, Master Limited Partnership (MLPs) at 15.4% and Electric Utilities & Generation at 15.1%. Its largest holding is in Snam SpA at 5.9% followed by Sydney Airport at 5.8% and
Fund: Brookfield Global Listed Infrastructure
Symbol: INF
CUSIP: 11273Q109
Fund Type: CEF
Current Price: $14.27
Net Asset Value: $16.98
Current Discount: -16.96%
52-Week Average Discount: -11.12%
Expense Ratio: 1.71%
Optionable: No
One Month Change: 7.86%
Three Month Change: -7.76%
One Year Change: -6.91%
Current Yield: 9.81%%
P/E Ratio: 24.11
Top Holdings: Snam SpA (5.9%) Sydney Airport (5.8%) Enbridge Energy Management LLC (5.3%) EDP - Energias de Portugal S.A (4.9%) Energy Transfer Partners LP (4.6%) Red Electrica Corporacion S.A (4.5%)
