Every legendary investor worth their salt has some sort of phrase to describe what investors should be doing right now.
“Be fearful when others are greedy, be greedy when others are fearful.”
“Buy when there’s blood in the streets.”
Generally speaking, most stocks in the market are on sale to some extent. And of course, we could go out and make some targeted bets on these bargains.
But I prefer to squeeze even more value out of the stock market.
Seize closed-end funds (CEF).
Why CEFs are our best option now
If we were to go out and buy an exchange-traded fund (ETF) that invests in, say, the Nasdaq Composite or the Russell 2000, or really any area of the market that you feel is undervalued, you might profit the collective handover of all their assets. No more no less.
But with THIS Fwe can do even better.
My mother, to this day, denied pay the sticker price. If there’s a coupon to find, she’ll not only find it, but she’ll also find another coupon to get double the discount (even if it requires management approval to apply)!
And just like my mom, we can get a double discount by investing in closed-end funds.
You see, unlike ETFs, which can create and destroy as many stocks as needed to meet market demand, CEFs go public with a specific number of units, and that number doesn’t really change over time. As a result, the net asset value of CEFs may be dissociated from the value of its holdings. Sometimes this net asset value can be worth much more, in which case the closed-end fund will trade at a premium, say $1.05 for every $1 in holdings. But sometimes you get the best other benefit of this sword and buy a CEF at a discount to NAV, paying, say, 95 cents for every $1 in holdings.
When you combine that with a broader market that’s already on sale, us opposites can pull a page out of my mom’s playbook and get a double discount which in the case of the five funds I’m about to show you, can allow us to buy shares for as little as 81 cents on the dollar!
Let me introduce you to five CEFs that will allow you to do just that. And in addition to trading at a deep discount (of 10% or more), these funds offer high yields of 7% and more – and best of all, pay their distributions each month.
We’re going to start with a fund that’s been doing quite well this year: the First Trust MLP and Energy Income Fund (FEI, yield 7.7%).
Energy was the hottest sector in the market in 2022, and it’s not even close. The sector is up 38% so far, and it’s the only one in positive territory! The second best is utilities with “only” a 1% drop.
That said, energy-infrastructure Master Limited Partnerships (MLPs) have not been so explosive. First Trust’s EIF, for example, rose just 7%, which is far behind the broader energy sector and half as good as most index-linked MLP exchange-traded funds.
Conversely, FEI could be one of the only remaining bargains in the energy sector.
First Trust MLP and Energy Income is a tight and concentrated infrastructure portfolio that primarily deals with oil, natural gas, power and crude oil transportation. Industry blue chips such as Enterprise Products Partners LP
Value investors will appreciate the fact that they are getting double the bargain right now, with a 14% discount to NAV, double the historical five-year CEF discount of around 7 %.
You can find a few more double-digit discounts on NAV in the Neuberger Berman Next Generation Connectivity Fund (NBXG, yield 11.4%) and MainStay CBRE Global Infrastructure Megatrends Fund (MEGI, yield 7.7%).
The first thing that stands out? These are not traditional CEFs.
Neuberger Berman’s NBXG seeks stocks with growth potential from “the development, advancement, use, or sale of products, processes, or services related to the fifth-generation mobile network and future generations of connectivity and mobile network technology”. In other words, 5G shares. Nvidia (NVDA). Palo Alto Networks
MainStay’s MEGI is a little less straightforward. The firm says its fund is “focused on the investment megatrends of decarbonization, digital transformation and asset modernization, which are reshaping demand for infrastructure assets and generating revenue and growth potential.” . The portfolio itself is pretty much an energy fund focused on renewables – top holdings include National Grid (NGG), Williams Companies (WMB) and Atlantica (AY) Sustainable Infrastructure.
In short, they are thematics – a type of fund that can cross sectors to exploit an investable theme. They are big in ETFs; not so much in CEFs. But, NBXG and MEGI are a new breed. Very new, in fact. Both started trading in 2021 and have very little trading history, although both are getting pounded this year.
Both are also trading at mouth-watering discounts (NBXG: -18.4%; MEGI: -13.2%), although both also have very little history to compare this with.
These are ambitious offerings that could shake up the CEF world. But it’s hard to say if you can rely on them for income, monthly dividends and all.
BlackRock Health Sciences Trust II (BMEZ, yield 11.4%) is also greener, having launched in January 2020. And despite the seemingly specific name, it’s just a large, actively managed healthcare fund. Holdings are split roughly 50-50 between pharmaceuticals/biotech/life sciences and healthcare equipment/services.
So top holdings include everything from biotech Vertex Pharmaceuticals
However, it is difficult to know what to think of this young fund.
The BMEZ is down about 40% in 2022 compared to a loss of just 10% for the broader healthcare sector. You can’t blame the leverage either – the fund only uses a marginal amount. It sounds like just unfortunate decisions that roost, but more than a year ago Wall Street would have praised fund management for its broad outperformance.
If you still want to try your luck on BMEZ, you can’t ask for a better price. It is currently trading at a 14% discount, or 86 cents on the dollar, more than double its 6.4% year-over-year average, for an 11% return paid monthly.
If you’re looking for something really simple and straightforward, there’s nothing more basic than the Aberdeen Total Dynamic Dividend (AOD, 8.4% yield), which is trading at a 12% discount to NAV, which is slightly better than its norm. This is a global fund that seeks to pay high dividends. If it generates capital gains, so much the better, but that’s secondary to the money.
So far in 2022, it’s clear that capital gains are secondary.
“Global”, for the uninitiated, is Wall Street for “national and international”. Typically, global funds are at least half invested in US equities (AOD is 53%), with the remainder spread across a number of developed and/or emerging markets. Here, AOD has single-digit weightings for France, Germany, Switzerland, and a host of primarily developed markets.
The problem is that, despite a fairly healthy portfolio that includes companies like Apple
That’s why it pays to look beyond overall performance. Because despite a massive return of over 8% and holding stocks that have been on fire for the past decade, AOD is still struggling to match, let alone beat, the products indexed cheaper.
Brett Owens is Chief Investment Strategist for Opposite perspectives. For more income ideas, get your free copy of his latest special report: Your early retirement portfolio: huge dividends, every month, forever.