European Fund Pays For Itself

07/23/2008 12:00 am EST


Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

Richard Lehmann, editor of ISA ETF Investor, recommends a European fund geared towards income investors.

The [latest] trend seems to be towards income-oriented funds in the international space. The emphasis on income may be a result of the fear of the continuing volatility of stocks. The reasoning behind this shift may be that, in a falling market, at least a dividend received is money earned and kept—no matter the future of the stock market.

In addition, funds that pay income tend to be less volatile and more resistant to sharp swings in the underlying market. The premium\discount dynamic may change and this tends to moderate price change further.

We have recommended the Nicholas-Applegate International & Premium Strategy Fund (NYSE: NAI) before, in March 2006, at a price of $24.50. This “buy-write” fund attempts to replicate the iShares MSCI EAFE Index Fund (NYSEArca: EFA) that covers Europe, Australia, and the Far East.

Investors can get an idea of how the Nicholas-Applegate Intl Premium & Strategy Fund is performing during the day by checking the real time trades of EFA. The fund is currently trading [slightly below $20], a -3.39% discount to its net asset value, and yields a healthy 19.03%.

The fund’s managers cite some reasons why the fund is an appropriate investment at this time. “In a secular rising interest rate environment, the income produced by the equity dividends and option premiums might be an attractive alternative to the duration/credit risk of fixed income investments,” they write. “In a low-return environment for stocks and bonds the Fund offers an opportunity to earn gains from the receipt of index option premiums”.

The fund’s top holdings include Telefonica SA (Spain) (3.01%), Banco Santander SA (2.61%), Nokia (Finland) (2.44%), and Volkswagen AG (2.33%).

Editor’s Note: NAI is not currently rated by Morningstar. And according to Morningstar, the fund has returned, -3.42 % so far in 2008 and 11.25% annually for the past three years. The bulk of its holdings (47.85%) are in the manufacturing sector, while 38.72% are in service and 13.43% in the information industry. 96.5% of its assets are in foreign stocks: 69.8% in the UK/Western Europe; 15.5% in Japan, and ll.2% in Asia, ex-Japan.

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