FOF is now earning 9.6% with rebate discounts (NYSE: FOF)


ayo888/iStock via Getty Images

[This article was first published for Inside the Income Factory members and trial subscribers on April 21. Now it’s an even better buy!]

Cohen & Steers Closed-End Opportunity (NYSE:FOF), a fund of funds that primarily holds funds with a handful of ETFs as well, recently declared its distribution for the months of April, May and June. No surprise, since that’s the same $0.087 a month the fund has been paying for over a decade.

Given that the fund has maintained its current distribution so consistently through thick and thin for so many years, I’m inclined to expect it to continue to do so, barring any major financial surprises. Plus, the cast’s recent coverage seems more than adequate. Given that FOF owns many equity funds and ETFs, which generate their own returns largely through capital gains, it’s no surprise that FOF does the same. Therefore, its interest and dividend distribution coverage (i.e. its net investment income, or “NII”, which is interest and dividend income less fund expenses), only covers 30% of its dividend. But FOF’s overall GAAP earnings, which is its NII plus all realized and unrealized appreciation on its investments, recently provided a payout coverage of 230%, which is more than enough.

The distribution of FOF represents a yield of 8.4%. (That was three weeks ago. Now it’s returning 9.6%, with prices falling again.) Given that my long-term total return target is around 8-10%, I’m totally happy to have part of my income. pay a stable and reliable rate of 9.6%, even if it never increases this payment.

I also think that since the yield has sometimes fallen in the 7% range in recent years (not through dividend cuts, but through price increases), there is some likelihood that I could retrace FOF to a given time and collect a capital gain. But it would be icing on the cake if that happened, and I would only trade if I had another alternative at the time that paid me as much or more than FOF.

Bottom Line: FOF looks particularly attractive to me now at its current price and yield, and I’ve added a few to my personal portfolio.

“Discounts on discounts”

If you have ever purchased with “double coupons”, you will know what we mean by “discounts on discounts”.

FOF has recently moved back into discount territory and recently sold at a -4.28% discount. This means that whoever buys it only pays 95.72% of the actual market value of FOF’s portfolio of assets. This is a big advantage of closed-end funds in general, in that you can have more assets working for you than you paid for, if you get a discount.

Frankly, 4.28% isn’t a terrific rebate, but compared to where rebates were (or weren’t, given the number of premium funds) over the last year or so, a 4% discount is no reason to laugh. But it’s better. Managed rebates on top 30 holdings in FOF’s portfolio of over 100 funds and ETFs. Even with a few funds still with big premiums, like Guggenheim Strategic Opportunities (GOF), DNP Select (DNP) and Liberty All-Star Equity (USA), the average discount for the 30 largest holdings was -3.07%. This means that the market price of the funds held by FOF is itself only 96.93% of the actual market value of these holdings. (This assumes that the rest of FOF’s portfolio has the same average discount as the top 30 funds which represent 64% of FOF’s total portfolio.)

When you put this together, we see that the funds held by FOF have a -3.07% discount, but then we can buy FOF itself at an additional -4.28% discount.

When we multiply what we pay to buy FOF itself at a discount, times what it paid to buy its own wallet at a discount, we get:

95.7% X 96.93% = 92.76%, i.e. an overall discount of 7.24%.

Thus, the FOF currently represents a yield of 8.4% and an effective discount of 7.24%, on a large professionally managed portfolio of 110 high-yield closed-end funds, plus a handful of ETFs.

[Since originally writing this last month, FOF’s discount has increased to 6%, so when you run these numbers with that discount, the new “net discount” on the assets of the funds FOF holds is down to about 9%. Combine that with a yield of 9.6% and FOF looks more attractive than it has in years.]

Here is a chart showing FOF’s 30 largest holdings:



Readers have already pointed out that the downside of a fund of funds is that you pay management fees on top of the management fees of the underlying holdings. That’s true, but I think the Cohen & Steers fee on FOF of 0.95% is more than offset by the additional discount-on-discount effect. This is also a reason why I only like to buy FOF when it is at an attractive yield point, and also sell at the discount itself.

[NOTE: As currently priced (5/13/2022), with its 9.6% yield and higher discount than last month, I plan to add some more FOF to my personal portfolio.]

As always, we look forward to your comments and questions.



Comments are closed.