CEFs offer a taste of the private equity world.
Most investors are familiar with mutual and exchange-traded funds. Less known is the closed-end fund, or CEF, a powerful and diversified investing tool. Also a collection of underling assets, CEFs enter markets to raise capital. This makes them more like a private equity fund. Unlike the typical hedge fund or private equity offering, a CEF minimum buy-in is the price of a single share rather than massive minimums. With CEFs, income investors can tap into a wide array of investments they may not otherwise access, and do so in a cost-effective and diversified way. Here are seven CEFs worth a look.
Pimco Dynamic Credit and Mortgage Income Fund (PCI)
This is an unconstrained bond fund focusing largely on agency mortgages backed by the U.S. government but also dabbling in more aggressive credit like emerging market debts. The CEF then supercharges the returns from those assets with leverage — a form of investing with borrowed money. These non-agency securities and overseas loans don’t have the same stellar credit ratings, and the leverage comes with risk. However, this approach delivers much better income streams. And the managers at Pimco seem to know what they’re doing in managing that risk, as this fund is up about 35 percent since the start of 2016 on top of its mammoth distributions.
Current yield: 8.3 percent
BlackRock Enhanced Equity Dividend (BDJ)
The BDJ resembles a traditional dividend fund since it holds some big-names including JPMorgan Chase & Co. (JPM) and Pfizer (PFE). Managers take this to the next level by selling options contracts against the portfolio to supercharge distributions. Interestingly, the covered calls sold by BDJ’s managers are a popular tool by options traders to reduce risk because you are selling the right to lock in a future price on your current holdings. Your upside is capped if the stock soars, but the stability and income from selling the options is the appeal — not rapid share appreciation.
Current yield: 6.1 percent
Brookfield Real Assets Income Fund Inc. (RA)
This fund invests in loans tied to tangible assets, such as real estate securities, debt that has funded infrastructure projects and loans linked to natural resources. The appeal is you’re loaning money to a company or government that has something to show in exchange for the money. This isn’t always the case when loaning money to a corporation in financial activities or that uses that money for research. Assets backing up these loans help ensure there is collateral, and that the debt service will be paid on time. That supports a big and reliable yield, in addition to a lower risk profile.
Current yield: 10.4 percent
AllianzGI Convertible Income Fund (NCV)
Convertible securities typically are bonds that can be converted into a predetermined amount of equity (or stock). This allows investors to lock in income potential and the limited downside of a bond investment, but retain an option to swap for potential capital appreciation. This strategy is heavily reliant on the tactics of the fund manager, however, because it involves both hand-picking convertible debt that is likely to deliver the best results as well as picking the right time to pull the trigger and swap stock for bonds. NCV has a strong track record and an impressive distribution.
Current yield: 5.6 percent
Virtus Global Dividend & Income Fund Inc. (ZTR)
A truly one-stop shop for income investing, this fund seeks dividends wherever it can find them. That may be in equity investments or debt, domestic municipal bonds or foreign corporations, bulletproof U.S. government bonds or high-yield junk bonds. This is a very intensive and tactical strategy, and there’s a reason you won’t find a similar approach in a low-cost index fund that just sets and forgets. Investors are a bit at the mercy of the manager’s performance, which shows in January’s flop of about 15 percent. However, the fund has stabilized in recent months and looks to be headed higher once more.
Current yield: 11.6 percent
Aberdeen Asia-Pacific Income Fund (FAX)
Keeping with the theme of overseas opportunity, this fund invests primarily in government debt including China, India and Australia bonds. The credit profile of many of these Asia-Pacific governments is not as secure as some established western governments. But that means this fund can squeeze out a bigger yield. Consider one of its top holdings at present is an Indonesian government bond that matures in 2038 and yields a hefty 7.5 percent. That’s more than twice U.S. government bonds that mature around the same time.
Current yield: 9.3 percent
Nuveen Energy MLP Total Return Fund (JMF)
As the name implies, this Nuveen fund is focused on master limited partnerships, or MLPs. This special class of stock allows investors to become partners in oil fields, natural gas pipelines and other energy-related assets. The fund differs from a vanilla MLP fund, however, in that it reserves the right to use various hedging techniques to enhance its risk-adjusted total return. These include using leverage to maximize distributions, among other things. The result is a focused and tactical fund with just 31 holdings but a big-time payout rate.
Current yield: 10.8 percent
More from U.S. News
The Top 10 Investment Portfolio for Millennials
11 Steps to Make a Million With Your 401k
7 of the Best Emerging Markets Stocks to Buy
7 Ways to Invest in Closed-End Funds originally appeared on usnews.com
