Unique Inflation-Linked Fund

03/16/2016 10:00 am EST

Focus: FUNDS

David Fabian

Managing Partner, FMD Capital Management

From a fixed income perspective, we continue to like longer duration high quality bonds that could offset volatility from the equity holdings within our portfolio, explains Dave Fabian, Flexible Growth & Income.

There is still plenty of room for the yield curve to flatten or even invert in this type of market.

Furthermore, since we’ve experienced a short-term back up in long duration yields, this could be an opportune time to increase our exposure. 

As a result of our desire to hedge the risk asset exposure within our portfolio, we are initiating a 5% purchase in the Western/Claymore Inflation Linked Opportunities Fund (WIW).

WIW adds a unique dynamic to the fixed income sleeve of our portfolio by investing in a leveraged basket of Treasury Inflation Protected Securities (or TIPs). 

We selected WIW specifically in light of our comparative analysis between nominal (fixed) coupon Treasury securities versus their inflation-protected counterparts.

For those that are not familiar with TIPs, their coupon rates float alongside core consumer price data, which is the government’s most coveted measure of inflation.

Following somewhat of a recent deflation wave in energy costs, we believe that TIPs could be an excellent hedge against expected future inflation and volatile risk asset prices.

We have been bearish on TIPs for years as a result of their persistent under performance in an otherwise fruitful fixed income environment.

However, we've witnessed TIPs outperform nominal coupon Treasury bonds during the last few months and from a technical standpoint they are showing very positive signs of building momentum.

In our opinion, a resurgence of enthusiasm in inflation-protected securities could allow them to outperform nominal coupon treasuries for the first time in roughly 10 years.

WIW provides a stable managed payout schedule, yet also offers our portfolio the chances for longer term capital appreciation.

The fund currently trades at a 13.4% discount and utilizes 30.73% leverage. Furthermore, it’s made up of over 80% Treasury securities, alongside some unique derivative overlays, to control risk.

Lastly, the expense ratio is very reasonable for a CEF with 30+% leverage and an exotic active management strategy at just 1.11% per year.

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