{"id":57109,"date":"2023-09-05T10:30:11","date_gmt":"2023-09-05T14:30:11","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/these-hidden-funds-yield-7-5-heres-how-to-pick-em\/"},"modified":"2023-09-05T10:30:14","modified_gmt":"2023-09-05T14:30:14","slug":"these-hidden-funds-yield-7-5-heres-how-to-pick-em","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=57109","title":{"rendered":"These \u2018Hidden\u2019 Funds Yield 7.5%+. Here\u2019s How To Pick \u2019Em"},"content":{"rendered":"
\n

Last Monday, we talked about the two biggest mistakes many investors make when buying high-yielding closed-end funds (CEFs). Today we\u2019re taking the opposite tack and delving into three things to look for to pick the very best<\/em> of these 7.5%+ payers for your portfolio.<\/p>\n

The upshot? If all three of these strengths are present, you likely have yourself a winner. But first things first\u2014let\u2019s talk a bit about what sets CEFs apart. These funds are different from ETFs and mutual funds in two key ways.<\/p>\n

    \n
  1. CEFs have fixed share counts and generally can\u2019t issue new shares to new investors (hence the \u201cclosed\u201d in the name).<\/li>\n
  2. CEFs aim to maximize payouts to shareholders through regular dividend payments, with many CEFs paying every month, rather than quarterly.<\/li>\n<\/ol>\n

    These two things cause many unusual side effects we can profit from\u2014and regularly do in my CEF Insider<\/em> advisory. These three top the list.<\/p>\n

    CEF Buy Indicator No. 1 An Unusual\u2014or Illogical\u2014Discount to NAV<\/h2>\n

    <\/fbs-ad><\/p>\n

    Because CEFs can\u2019t issue new shares to new investors, their market prices are often different than their per-share net asset value (NAV, or the value of their underlying portfolios), and they often trade at a discount. These discounts are key to our price upside in CEFs, so the first thing we need to look for is whether a fund\u2019s discount has gotten unusually wide or narrow lately.<\/p>\n

    CEF discounts tend to revert to the mean, so if a discount or premium suddenly appears\u2014especially if that trend isn\u2019t<\/em> happening in similar funds\u2014it\u2019s often a buy signal. A textbook example happened with the Virtus Dividend, Interest & Premium Strategy Fund (NFJ)<\/strong> back in 2016.<\/p>\n

    Investors saw 30% total returns (orange line above) within a year, mainly due to the fund\u2019s unusually large 17.4% discount fading to a still-high 10% discount. That was a peak, and NFJ\u2019s discount widened in October 2016 and stayed rangebound for three months, giving investors plenty of time to decide whether to sell or hold while profits kept climbing.<\/p>\n

    This is normal in CEFs, and it\u2019s their real power. NFJ\u2019s 8.1% yield is impressive, but the real story is the way you can earn a yield like that and <\/em>get capital gains by buying low and selling high. And CEFs\u2019 discounts clearly indicate when it\u2019s time to do either.<\/p>\n

    CEF Buy Signal No. 2: The CEF Is Beating Its Index (but Make Sure It\u2019s the Right Index)<\/h2>\n

    CEFs are actively managed, and active management gets a bad rap. Moreover, wealth managers don\u2019t generally recommend CEFs. With these two things in mind, it\u2019s no surprise that many investors initially look at CEFs with suspicion.<\/p>\n

    That\u2019s kind of silly. First, CEFs are publicly traded, SEC-registered funds based in the US\u2014they are not <\/em>some kind of wild west! In fact, CEFs are a sleepy part of markets, which is why they get little attention, although that makes no sense given that they yield an average 7.5% and offer diversification on top of their income potential.<\/p>\n

    CEFs don\u2019t help themselves by making their benchmark indices hard to find and understand. Take, for instance, the Eaton Vance Enhanced Equity Income II Fund (EOS
    \n
    \n EOS
    \n <\/fbs-ticker>),<\/strong> which benchmarks against the obscure USD CBOE S&P 500 BuyWrite Index. But even though this index is not nearly as well-known as the S&P 500, it\u2019s still important. And EOS has crushed it!<\/p>\n

    When a fund is ahead of its index on a total-NAV-return basis (or based on the performance of its underlying portfolio, including dividends), you know it\u2019s worth your attention. But comparing it to a more famous index that the fund isn\u2019t basing itself on will lead to misleading results. Yet it\u2019s a common mistake that both retail investors and pros make.<\/p>\n

    CEF Buy Signal No. 3: A Strong Portfolio and Management Team<\/h2>\n

    I\u2019ll admit, this last one is the hardest factors to judge. CEFs often hold hundreds of assets, and you often don\u2019t know how much the fund paid for them. If you see a fund has, for example, a bond issued by the Argentinian government (one of the most famous countries for not <\/em>paying its bills), you might be wary. But did the fund buy that bond at full price or at a 99% discount? In the second case, that\u2019s an entirely different story, but CEFs just don\u2019t tell us this kind of detail.<\/p>\n

    There are other ways of analyzing a fund\u2019s portfolio, though: by going through its monthly and quarterly filings, you can get a close estimate of what it paid for assets, and looking at its portfolio turnover tells you how management thinks and where it\u2019s going.<\/p>\n

    To show you what I mean, let\u2019s compare the total NAV returns of the aforementioned NFJ (in orange below) and EOS (in purple), since 2005, when both funds were launched. Both CEFs are covered-call funds with similar strategies.<\/p>\n

    As you can see, EOS has outperformed NFJ by almost a factor of five, showing that NFJ is only a short-term buy when its discount is unusually low and EOS\u2019s is not, like in early 2010, when NFJ\u2019s discount was 17% and EOS traded at over a 10% premium; NFJ outperformed EOS on a market-price basis for three years after that (beyond which EOS caught up and started overtaking NFJ).<\/p>\n

    Today, EOS\u2019s discount has widened as retail investors remain reluctant to come back into the market. But the less-active and in-demand NFJ\u2019s discount has stayed constant.<\/p>\n

    In a situation like this, given EOS\u2019s long-term outperformance, it\u2019s the better buy, even though its 7.9% yield is essentially the same as NFJ\u2019s 8.1%. Perhaps that slightly smaller yield is why its discount is bigger, even though EOS has returned much more in dividends and gains over the long haul than NFJ.<\/p>\n

    Who knows, but mispricings like this are the kind of opportunities that a bit of CEF research uncovers. And there are always opportunities like these across the CEF space.<\/p>\n

    Michael Foster is the Lead Research Analyst for <\/em>Contrarian Outlook<\/em>. For more great income ideas, click here for our latest report \u201c<\/em>Indestructible Income: 5 Bargain Funds with Steady 10.4% Dividends.<\/em>\u201d<\/em><\/p>\n

    Disclosure: none<\/em><\/p>\n<\/div>\n

    Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    Last Monday, we talked about the two biggest mistakes many investors make when buying high-yielding closed-end funds (CEFs). Today we\u2019re taking the opposite tack and delving into three things to look for to pick the very best of these 7.5%+ payers for your portfolio. The upshot? If all three of these strengths are present, you […]<\/p>\n","protected":false},"author":1,"featured_media":57110,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-57109","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"\nThese \u2018Hidden\u2019 Funds Yield 7.5%+. Here\u2019s How To Pick \u2019Em | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Last Monday, we talked about the two biggest mistakes many investors make when buying high-yielding closed-end funds (CEFs). 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