Two Closed-End Funds for the New Inflation
08/04/2009 11:00 am EST
Richard Lehmann, editor of ETF Investor, finds two funds that should profit from rises in commodity prices, which he expects no matter what happens to the economy.
We [recently] hypothesized that the inflation/deflation debate was likely to resolve on the inflation side, although the timing was difficult to predict. Our reasoning was the increase in the money supply and low interest rates would eventually lead to increased economic activity, which would bring higher prices to commodities.
The worst-case scenario would be no increase in economic activity but the devaluation of the dollar, which would result in the same thing: Either way, commodity prices head higher. Our method of dealing with either is choosing a fund that trades at a discount and provides a steady return until inflation kicks in.
The BlackRock Real Asset Equity Trust (NYSE: BCF) meets the above criteria. It invests in “real assets,” such as energy, natural resources, and basic materials, all resources sensitive to inflation. We recommended this fund back in January 2009 at a price of $6.57 when it was yielding 16.55% and again in June 2009 at a price of $8.29 with a yield of 13.15%. [Monday the fund closed] at $10.45 and yields [around 10%].
The fund now trades at [less than a 10%] discount to its net asset value [of $11.13.] The discount has been narrowing over the past few months and the fund discount is now below its 52-week average discount of -14.95%. The discount and the attractive yield [are good shields] against possible price erosion.
The fund is invested 38% in metals and mining, 28% in and gas, and 12.8% in chemicals. It maintains the dividend by writing covered call options on some of the individual securities in its portfolio—typically about 40% of [its] holdings.
We might be interested in recommending one of the “safe” Treasury ETFs and a fund that is invested in commodities, but we found a closed end fund that invests in both, plus some depressed high-tech companies and trades at a substantial discount.
The Clough Global Opportunities Fund (Amex: GLO) invests in a mix of US and international equities as well as debt securities, including US Treasuries and corporate bonds. The fund is designed to be flexible, and the mix of investments changes over time. It has an annual turnover rate of more than 200% and takes short positions with up to 25% of assets.
Clough is currently leveraged at 28.61%, comfortably below the 50% danger level. The fund is currently trading at [around $12], which is [about a 14%] discount from its net asset value. Its average discount was -19.3% over the past year and it currently yields [around 8%]. The fund’s share price has gained 20% over the past three months. This might be why the discount is starting to narrow. It has a high expense ratio, so we would approach this as a short-term buy.