When selecting among closed-end funds, a history of paying a consistent dividend separates the best from the rest, as this resilience demonstrates management’s ability steer the fund in a variety of markets and economic conditions, asserts Roger Conrad, editor of Conrad’s Utility Investor.
The aggressive sleeve of our Lifelong Income Portfolio includes two closed-end funds -- Aberdeen Asia-Pacific Income (FAX) and PIMCO Strategic Income (RCS).
Aberdeen Asia-Pacific Income has dished out a monthly dividend of $0.035 since the start of 2003. And PIMCO Strategic Income has paid investors $0.065 monthly since September 2006.
PIMCO Strategic Income relies on leverage to help maintain its generous payout, with the close-end fund’s debt standing at 27.52 percent of net asset value.
These borrowings increase the risk of forced liquidations when adverse market conditions reduce the fund’s net asset value and push its leverage ratio above statutory limits.
The carnage in the high-yield bond market over the past 12 months has tested management’s acumen, but Daniel Ivascyn and his team have managed to keep the fund’s net asset value steady.
Aberdeen Asia-Pacific Income also relies heavily on leverage to juice its returns; the fund’s borrowings amount to 28.97 percent of net asset value.
Over the past year, management has contended with weakness in emerging market currencies and the Australian dollar; 30.3 percent of the bonds in its portfolio priced in Australian dollars.
On the plus side, US dollar-denominated bonds account for about half the fund’s net asset value and have helped to offset this weakness.
Despite the tumbling Aussie, Aberdeen Asia-Pacific Income has maintained its net asset value and dividend.
Although both PIMCO Strategic Income and Aberdeen Asia-Pacific Income have held their own in a challenging environment, even the most skilled managers can only do so much when the market makes dramatic moves to the downside.
At the end of the day, an investment in a closed-end fund represents a bet that management will continue to hold their own in good and bad markets.
Both management teams have amassed impressive track records, but past performance doesn’t guarantee future returns.
This reality, coupled with high leverage, explains why Aberdeen Asia-Pacific Income and PIMCO Strategic Income are suitable for aggressive investors only.
Aberdeen Asia-Pacific Income rates a buy up to US$5 per share, while PIMCO Strategic Income is a buy up to $11.
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By Roger Conrad, Editor of Conrad’s Utility Investor
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