3 new funds with a yield of up to 7.4% (buy, hold or sell?)

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There is no doubt that inflation is eating away at our wealth, but luckily we have a solution: Closed Funds (CEF)!

These unannounced income and growth games are the answer to the wave of inflation we’re all living in, with over 6.9% of payments outstripping soaring consumer prices and also crushing the paltry 1.3% return on typical stocks.

Members of my CEF insider service know it well: this figure of 6.9% is exactly what our portfolio of 17 funds is reporting today, the biggest payer in the group offering an outsized 8.1% payout as of this writing.

And that’s before even talking about earnings! The investors who have been with us since the launch in early 2017 have benefited from a good annualized return of 11.9% (with reinvested dividends), a gain that systematically leaves inflation in the dust.

We did this by laser-focusing on two essential things:

  • Dividends! But we don’t just stop at the current returns that everyone sees in fund filters – we look at each CEF’s history and dividend policies to ensure our payouts are predictable.
  • Discounts! This is the real key to a successful CEF investment, because grabbing a CEF trading at a discount to the net asset value (NAV, or the value of its underlying portfolio) and tracking it as it hits the par – and a premium – is one of the most exciting things about buying these funds. These discounts alone exist with CEFs, and you can find the discount on NAV on any CEF screener worthy of the name.

The problem with # 2, of course, is that these days it’s hard to find cheap – or cheap CEFs. anything, Besides. This means that we have to dig into the deepest recesses of the already small CEF market to find funds with a steep rise.

One place worth looking for is among the newly issued CEFs. This is because the CEF market is so poorly covered that new funds receive only a fraction of the attention as, say, stock IPOs. Additionally, new CEFs may underperform in the first few months after launch as they find their pace. But if they have strong management teams, we can use this underperformance to our advantage and enter new CEFs at a discount.

With that in mind, let’s dive into three of CEF-land’s most recent funds and see if they are worth our attention and investment.

New CEF # 1: A dividend of 6.4% for a 9% reduction

The Neuberger Berman Next Generation Connectivity Fund (NBXG) has a good dividend yield of 6.4% and an even more attractive discount of 9.3% compared to the net asset value. This discount exists in part because the fund has lagged slightly behind the S&P 500 since its IPO.

We don’t mind that, however, as this fund launched in May 2021, and five months is simply not enough to establish a reliable track record of performance.

Meanwhile, its holdings are an interesting mix of tech companies that are well positioned to take advantage of our ever-growing reliance on mobile technology – companies like Thoughtworks (TWKS), Monolithic Power Systems (MPWR), Marvell Technology

MRVL
(MRVL)
and Hub Spot

HUBS
(HUBS).

Makes an interesting mix of tech companies you can buy at a 9% discount now and collect a good stream of income while you wait for this discount to end. Note that almost every other tech-focused CEF is trading at a premium these days, so that big discount will likely go away too, setting up a good buying window now.

New CEF # 2: A diversified bond game with a payout of 7.4%

Franklin Templeton’s Western Asset funds are a conservative bunch, and the latest addition, launched in June 2021, is no exception. The Western Diversified Asset Income Fund (WDI) has a mix of municipal bonds, corporate bonds and other debt securities that offer fund investors a 7.4% dividend that looks sustainable for the foreseeable future.

But then again, other investors have missed this dividend opportunity and mostly ignore this fund, giving it a totally unjustified discount of 4.1% to net asset value.

With stable performance since its launch in mid-June, WDI has beaten the SPDR Bloomberg Barclays High Yield Bond ETF (JNK)

JNK
.
While some investors may dismiss the WDI because of its slow start, the gap is narrow and four months is too short a time to base any expectations.

Additionally, the fund’s holdings of municipal bonds, which it holds to provide additional stability, are responsible for some of this underperformance. But this is a big advantage for income investors: this ultra-stable bond fund allows them to enjoy their dividends of 7.4% with complete peace of mind. This makes WDI a good hedge against any volatility in the stock market.

New CEF # 3: an equities / bonds hybrid that gives management carte blanche

The Thornburg Income Builder Opportunities Trust (TBLD) pays a dividend of 6.3%, admittedly a little low compared to those of WDI and NBXG. But this fund, which just came out in July, remains interesting because of its portfolio and its mandate.

While TBLD buys stocks and bonds, it has the freedom to go between the two as its management team sees fit. That’s a big advantage over a lot of funds, which limit the talent they hire by limiting them to one area – tech stocks, for example, or utilities.

Right now, TBLD is geared towards equities, which allows it to rise higher in the current stock market boom. It is also slanted towards two of the fastest growing market sectors, with healthcare names like AstraZeneca SA (AZN) and AbbVie

ABBV
(ABBV)
and technology plays like Microsoft

MSFT
(MSFT)
among its main holdings.

TBLD is trading at a narrow 1.5% discount as of this writing. But that doesn’t mean it’s not worth considering: its portfolio and flexible mandate are very appealing to CEF investors, so it’s not hard to imagine this fund tipping over. towards a short-term bonus.

Michael Foster is the Senior Research Analyst for Contrary perspectives. For more great income ideas, click here for our latest report “Indestructible Income: 5 windfall funds with secure 7.3% dividends.

Disclosure: none


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