Two Inflation Hedges with Nifty Yields

04/06/2011 1:29 pm EST

Focus: ETFS

Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

Two closed-end funds investing in real estate and floating-rate loans are on sale, and poised to pop once rates head higher, writes Richard Lehmann of the Forbes/ISA Closed End Fund & ETF Report.

The tumult in the markets that led to such high volatility has as its base uncertainty about the future. Of particular concern is the Fed’s quantitative-easing program, and what will happen to interest rates once it is over.

The uncertainty is compounded by the fear that inflation will lead to hefty increases in interest rates, because higher rates are necessary to combat inflation.

One way to profit from higher interest rates is through adjustable-rate loans. The loan interest rate increases along with prevailing interest rates, giving the holder some immunity from rising rates.

The best way to play these securities is through a fund, because the individual securities are difficult to buy.

The Nuveen Tax-Advantaged Floating Rate (JFP) is one such closed-end fund that invests in adjustable-rate loans and preferreds. Most of these funds trade at a premium to their net asset value, but the Nuveen fund now trades at a 3.6% discount.

The fund announced on March 1 that it would cut the regular monthly dividend of $.015 by one-third of a cent, or 20%, to $.012. This caused the fund to decrease in market price—while at the same time the net asset value increased, giving rise to the current discount.

The fund now trades at $2.35, while the net asset value is $2.44. Its average 52-week deviation from net asset value is actually a premium of 2.19%. The extreme reaction to the dividend cut makes this a buying opportunity.

The fund invests mostly in adjustable-rate preferreds, making the fund’s 6.12% yield eligible for the 15% income tax rate.

Real estate is another excellent hedge against inflation. Our pick is the Alpine Global Premier Property (AWP). The closed-end fund invests in global real estate, with 28% based in the US and the remainder spread among ten to 30 other countries.

It currently trades at $7.08 with a net asset value of $8.46, giving it a discount of 16.3%. The fund yields 5.6%, which is in line with other global real-estate funds. Its monthly distributions are income and the fund does not use managed distributions that involve a return of capital.

Real estate sectors include retail at 20%, residential at 17.1%, and office at 15.9%. After the US, the largest country holding is Brazil at 19.4%, followed by Singapore at 8.7%.

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