Closed-End Funds on Sale

02/09/2015 8:00 am EST

Focus: FUNDS

Samuel Lee

Editor, Morningstar ETFInvestor

Discounts for many high-yield bond closed-end funds have widened, in some cases exceeding the discounts last seen during the ‘taper tantrum’ last year, explains Samuel Lee, editor of Morningstar FundInvestor.

In addition, US stock prices are very high, reflecting economic optimism, while junk bonds (which are similarly exposed to economic fundamentals) are reflecting pessimism.

Investors who are way over-allocated to US stocks should consider trimming them and adding to higher-quality junk-bond closed-end funds (CEFs), which I believe offer commensurate expected returns for lower risk.

A nice bonus is that some of these CEFs may be experiencing yearend tax-loss selling, which will reverse soon. If you’re a more tactical investor, exploiting CEF discount reversion can add a couple of percentage points to your total return.

There are plenty of interesting opportunities. Foremost is PIMCO Dynamic Credit Income (PCI), which, as of this writing, is trading at a discount of more than 10%. Its earnings yield on current market price is around 11%.

I estimate its expected real return, assuming no discount changes, is around 5%-6%, which is higher than the US stock market’s expected real return of 3%-4%.

An encouraging development was lead manager Alfred Murata’s purchase of 10,000 shares at an average price of $21.94 per share on Dec. 4, bringing his total shares owned up to 40,000, or about $850,000 at today’s market prices.

This is probably chump change for Murata, but it’s still a useful signal. PIMCO insiders tend to buy shares at favorable prices, usually when their CEFs are trading at big discounts.

For investors who crave other ideas, I’ve listed some solid to excellent CEFs that are trading at attractive relative and absolute discounts. You should, of course, investigate these funds further before buying.

AllianceBernstein Global High Income (AWF)
BlackRock Debt Strategies Fund (DSU)
DoubleLine Income Solutions (DSL)
LeggMason BW Global Income Opportunities (BWG)
MFS Charter Income (MCR)
MFS Multi-Market Income (MMT)
Prudential Global Short Duration High (GHY)
Prudential Short Duration High Yield (ISD)
Western Asset Global High Income (EHI)

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