Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
3 Income Funds That Will Persevere
09/05/2012 8:00 am EST
Income investing, at least the most successful income investing, is a long-term prospect, so it pays to find solid investments that will outperform their peers year in and year out, notes Keith FitzGerald in Money Morning.
My dad held up his hands and shrugged his shoulders. "But what can I do in a yield-starved environment?" he asked.
"Plenty, actually," I told him.
In fact, there are a wide-range of choices available for income-hungry investors who are struggling to overcome the Fed's disastrous zero-interest rate policies. Obviously, though, the suitability varies widely depending on individual liquidity, credit, and yield requirements.
Here are some of the more interesting options I've been exploring lately:
Near-Term Tax Free Fund (NEARX)
From US Global Investors, this fund is billed as an alternative for investors who want safety but are willing to take on a bit more risk.
I like the fact that the fund is a very consistent performer, with more than ten years of positive numbers in the record books. I also appreciate that the fund has been around since December 1990, particularly since I view it as a possible substitute for traditional money market funds or even CDs.
Morningstar gives NEARX four-star ratings overall in the three-, five-, and ten-year categories, while Lipper bestows five stars for preservation, expense and tax efficiency.
The fund's goal is pretty straightforward. It invests in municipal bonds with short-term maturities issued by state and local governments nationwide. Examples include holdings from the City of Chicago, the Commonwealth of Puerto Rico, and the City of San Antonio Texas Water System Revenue.
The strategy is pretty simple. With at least 80% of its net assets invested in investment-grade munis, it's exempt from federal income tax—including my personal "favorite" middle-class eviscerator, the alternative minimum tax.
Maturities are kept to five years or less to avoid the volatility associated with longer-dated issues and the threat of rising interest rates. The average maturity is 3.4 years, while the average duration is slightly lower at 3.06.
30-Day SEC Yield: 1.03%
Expense Ratio: .45%
Note: Don't be unnecessarily put off by the 1.03% yield. Remember, this is a tax-exempt fund. On a tax-equivalent basis, the yield jumps to 1.77% for an individual in the 35% tax bracket. That's actually higher than the yield on ten-year Treasuries as of press time.
iShares Morningstar Multi-Asset Income Index Fund (IYLD)
From iShares, this fund is a more aggressive choice for income-hungry investors. It tracks the underlying Morningstar Multi-Asset High Income Index, which is itself comprised of equity, fixed income and alternative income exchange traded funds.
The fund's goal is yield and stability with capital appreciation potential. While the fund is the newest of the three I'm highlighting today, I am intrigued by the concept of tracking the multi-asset index, because it allows managers to move assets between income sources as market conditions change.
The fund's inception date was in April of this year, so performance data is difficult to come by using a longer-term yardstick. That said, according to Yahoo! Finance, the fund has chalked up a 6.28% gain versus the S&P 500's 2.04% since it started trading on April 9.
And while it's usually the bonds that hold this type of fund back as markets appreciate, this time around stocks appear to be the culprit, given the underlying index is split with 60% invested in bonds, 20% in equities and 20% in alternatives like REITs (Real Estate Investment Trusts) and preferred stocks.
Examples of the fund's holdings include various funds from the iShares family, such as the iShares iBoxx High Yield Corporate Bond (HYG), iShares JPMorgan Emerging Market Bond Fund (EMB), iShares S&P Preferred Stock Index Fund (PFF), and the iShares FTSE NAREIT Mortgage Fund (REM).
It's worth noting that IYLD may be much more volatile in the future when interest rates ultimately begin to rise because of its overemphasis on bonds.
30-Day SEC Yield: 1.51%
Expense Ratio: 0.60%
Note: Bloomberg data showing the 30-day SEC yield tracks 12-month trailing distributions; the fund has had only two distributions to date. CNBC.com reflects a yield of 3.67%.
Clearbridge Energy MLP Fund (CEM)
From ClearBridge Advisors (a Legg Mason company), this fund is pretty straightforward. It invests primarily in energy-related master limited partnerships.
Obviously what constitutes the "energy" sector is up for debate these days, with all the merger and acquisition activity going on. The fund determines its investment suitability using a 50% revenue threshold rule, which requires any investment to derive at least that from exploration, development, production, gathering, transportation, storage, refining, distribution, mining, and marketing of oil, natural gas liquids, refined petroleum products, and coal. (Whew...what a list!)
The goal is to invest in and produce sustainable cash flow that's generated by long-term assets in the energy sector. Not surprisingly, the fund's managers pursue choices based on geographic distribution, asset composition, and balance sheet strength.
I find it interesting the fund specifically targets companies believed to have the ability to make accretive acquisitions. This means they are looking for companies with the strength to buy growth as well as generate it organically.
Like IYLD, this fund is a relatively new arrival. Its inception date was little more than two years ago, in June 2010, so there isn't a lot to go on when it comes to measuring its long-term historical performance. But the yield is a healthy 6.19% against its market price, according to company documents as of Wednesday.
Ordinarily, master limited partnerships come with their own set of tax and reporting headaches, but CEM keeps that to a minimum. Investors actually receive a 1099 rather than a K-1 at tax time.
30-Day SEC Yield: 6.20%
Expense Ratio: 1.71%
At the end of the day, there are obviously tradeoffs, so don't think for a minute that income will be the smooth proposition it once was.
And remember what I told my dad: "Investors who persevere are typically rewarded for doing so."
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