Summary
For income investors, closed-end funds remain an attractive investment class that covers a variety of asset classes and promise high distributions and reasonable total returns.
Closed-end funds are generally characterized by higher volatility and deeper drawdowns than the broad market. For these reasons, they are not suited for everyone.
In this monthly series, we highlight five CEFs that have solid track records, pay high distributions, and are offering “excess” discounts. We try to separate the wheat from the chaff using our filtering process to select just five CEFs every month from around 500 closed-end funds.
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Olivier Le Moal/iStock via Getty Images In this monthly article, we try to identify five closed-end funds ((CEFs)) that have a solid past history, pay high-enough distribution and offer reasonable valuations. If you liked CEFs at the end of 2021, you are sure to like them now. The market took a hit during January 2022, and CEFs are no exception. Sure, some funds like tech-heavy or growth funds took a bigger hit, but most are trading at lower prices and better discounts than just 45 days ago. However, in spite of the recent volatility and some modest declines, the prices of many funds are still a bit elevated, and it is best to buy in multiple lots.
Obviously, the CEFs do not exist in a vacuum. For the most part, they move along with the broader market. This is especially true for equity funds. However, there are many funds with underlying asset classes that are known to provide divergence from the market. So, it is of utmost importance that we make our CEF portfolio a diversified one in terms of underlying asset classes.
All that said, we can’t stand still in fear of market uncertainties, as they would always be there with us. We should rather think in terms of long-term investing. It’s best to keep the focus on our long-term goals and strategies that have proven to work in good times and bad. If you are a new investor and/or starting a brand new CEF portfolio, our recommendation would be to start small and build the positions over time. We believe, for most investors (but not all), a 20%-25% allocation to closed-end and high-income funds should be enough. In that spirit, we keep looking for good investment opportunities and try to separate the wheat from the chaff on a regular basis. Why Invest In CEFs?
For income-focused investors, closed-end funds remain an attractive investment class that offers high income (generally in the range of 6%-10%, often 8% plus), broad diversification (in terms of variety of asset classes), and market-matching total returns in the long term, if selected carefully and acquired at reasonable price points. A $500K CEF portfolio can generate nearly $40,000 a year, compared to a paltry $6,500 from the S&P 500. Now, if you were a retiree and needed to use all of that income, the portfolio probably might not grow as much, but it may still grow enough to beat the rate of inflation. That certainly beats investment vehicles like annuities. However, if you are in a position to withdraw 5% (or under 6%), the rest of the yield can be reinvested in the original fund or a new fund to ensure reasonable growth of the capital. In our view, if managed with some due diligence and care, a CEF portfolio could deliver 10% (or better) long-term total returns.
All that said, it’s important to be aware of the risks and challenges that come with investing in CEFs. We list various risk factors at the end of this article. They are not suitable for everyone, so please consider your goals, income needs, and risk tolerance carefully before you invest in CEFs.
With that in view, one should buy selectively and in small and multiple lots. No one can predict the future direction of the market with any degree of certainty. So, we continue to be on the lookout for good investment candidates that have a solid track record, offer good yields, and are offering great discounts. Five Best CEFs To Consider Every Month
This series of articles attempts to separate the wheat from the chaff by applying a broad-based screening process to 500 CEF funds followed by an eight-criteria weighting system. In the end, we’re presented with about 30-40 of the most attractive funds in […]
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