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3 Picks to Help You Float
09/27/2011 6:30 am EST
Bryan Perry, editor of Cash Machine, shares some funds that he likes that will provide secure income to those seeking ballast in today’s turbulent markets.
Let’s talk about ballast income. First, define.
Well, if anybody’s been out there sailing in the middle of the Chesapeake Bay or out in the ocean and you’re getting tossed about, the bigger the boat, the steadier the ride. We like to be in a big boat, so when we step on it, it really doesn’t move.
You want something that can manage the stormy weather and the choppy waters of the current markets right now. So, that involves, for income investors, that means shortening things up.
Don’t chase yield in here. You know, depend on diversification. Buy non-correlating assets, so not everything is moving in the same direction.
And be happy with 5%, 6%, 7%, instead of trying to reach for those double-digit yields, which you know we love to have all the time, but there’s a time to step in and there’s a time to put our foot on the brake and sell for a little bit less to incur a lot less volatility. For a lot of people, that’s hard to do when they’re used to making 10%, but I think it’s a wise thing right now.
If you start with the highest quality and then you build your pyramid from there, to take more risk at the top of the pyramid and build down here at the bottom.
At the bottom is really where we want to start to see things like municipal bonds, okay. I am an absolute believer that taxes are going up after the elections next year because revenue came off the table in the debt-ceiling deal. There’s going to be some give and take in that whole area. So going forward, I think if you can look at muni bonds, where you are insured, I think that’s the way to go.
One of them I like is the Nuveen Municipal Insured Opportunity Fund (NIO). It’s currently paying about 6.7%. That generates a taxable equivalent yield of around 10.3% for those in the highest tax bracket, and you’re having a bond market that is on fire right now with the ten-year bonds down around 2.3% for Treasuries.
So, I think with the taxman cometh, and the bond market basically en fuego, and we have also a Fed that’s recommitted themselves to a zero-interest-rate policy for the next two years, I think tax-free bonds and an ETF that are liquid so that you can move them out if necessary, that really offers people a nice way to go. With Nuveen, that really know what they’re doing in a tax freeze, and it pays a monthly income, so I think that’s a sweet spot right now.
Sure. For those that want to just do something for their IRA, for instance—that’s where most people’s money lays—I would look at something like the Franklin Templeton short-term bond duration fund. That’s a corporate bond fund with high-quality corporate bonds and some of them down here now, they’re starting to buy some floating rate stuff, which you know two, three, four years out might make a lot of sense after interest rates ultimately move up at some point in time.
But they’re getting an 8% yield right now, and again it compounds monthly, and it offers you duration of less than four years, around three years right now, so you want to be on the short end of the curve if you can get that kind of yield. And that to me is also where people can start to look at something that makes sense.
Also, you want to be in other foreign currencies. The US dollar clearly is a go-to currency when there’s panic, but as things smooth out, you want to be in Singapore. You want to be in Australia. You want to be in China, you want to be in the yen. You want to be in the Canadian dollar. You want to be in Turkish paper and Brazilian Real and be where those local currencies have much better financial balance sheets than the US.
So, that being said, the Aberdeen Asia-Pacific Income Fund (FAX) is one I like. FAX pays around 5.75%. It pays monthly and is a short-term bond fund with all those countries I just mentioned with all those currencies intact.
It allows you to be contra-dollar, get a nice income stream while you ride this out, and I consider it just kind of a high-yield money market if you will, with a lot of non-correlating assets from the US dollar, where most people’s money lays. So those are my favorite picks at this juncture.
So, Bryan, it sounds like: don’t panic. Be smart. Be conservative and plan for the future.
And leg into it. Don’t buy it all at one time.
You know, our rule of thumb is to buy a third. If you see more support and more volume pick up, then you buy another third, and then when the smoke is clear, then you buy the last third and leg in and take full position.
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