On August 1, Fidelity took direct aim at index fund competitors Vanguard, Blackrock’s iShares ...
10/21/2015 9:00 am EST
Interest rates began a gradual decline after I first began writing my newsletter Forecasts & Strategies in 1980, when short-term rates hit 21%, recalls Mark Skousen, editor of High-Income Alert.
But never in my wildest dreams would I have predicted what happened last week: the interest payment on three-month T-bills fell to zero.
With government securities paying record low rates, the demand for alternative high-income investments is skyrocketing.
I see a special situation, an opportunity to earn a high dividend in a beaten-down foreign currency, the Australian dollar.
The Aussie dollar used to sell for more than a buck, until the collapse of commodities struck two years ago.
Australia is viewed as a commodity-driven economy. Now the Aussie is selling for 74 cents and it could rally here as commodities make a comeback.
The Aberdeen Asia-Pacific Income Fund (FAX) is a deeply discounted closed-end fund that invests primarily in Australian government bonds.
It also invests in other sovereign debt in New Zealand and other Asia-Pacific countries. It also has a hefty position in US Treasuries.
Yet because of the weak Australian dollar, FAX is selling at a historically high discount to net asset value of $5.63. At the current price (around $4.69), that’s a whopping 17% discount.
FAX pays a relatively high dividend of 3.5 cents per month, but only 58% of the income comes from interest on the bonds.
The rest (42%) comes from return on capital. Eventually, I believe that means that FAX will need to cut its dividend from 3.5 cents per month to 2 cents per month.
But in the meantime, FAX is grossly undervalued. Let’s buy Aberdeen Asia-Pacific Income Fund at market today and set a protective stop of $4 a share.
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