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Published on Oct 10, 2016
Will
highly leveraged closed-end funds (CEF) be slammed by a December
interest rate hike? "A rate hike will likely impact highly leveraged
closed-end funds in the short run, however the lower for longer
environment will make them attractive over the long term," said said
John Cole Scott, chief investment officers at Closed-End Fund Advisors.
One of Scott's current favorite closed-end funds is the MFS High Income
Municipal Trust . The muni CEF trades at a 4% discount to its net asset
value and currently sports a yield of 5.5%. The three year average
discount for the CXE is 8.7%. Leverage in the fund is 36% and it has a
duration of 7.2, which is low for funds in this category. "The CXE is a
good equity hedge in an uncertain market environment and the
tax-equivalent yield of around 9% is hard to beat," said Scott. Scott is
also recommending the Calamos Global Dynamic Income Fund , a hybrid CEF
that mixes global stocks and bonds. It currently trades at an 11%
discount, close to its three year average, and has a leverage of 30%.
Yield on the CHW is 11.4% at last check. "Calamos has experienced active
managers so investors can feel comfortable that they are in good
hands," said Scott. The Cushing MLP Total Return Fund pays an 8.4% yield
and sports a 31% leverage ratio. The pipeline CEF trades at a discount
of 13%, well below its three year average premium of 1%. Scott said the
energy play is comprised of 71% midstream outfits so it is "less tied to
the price of oil" than many other funds. Finally, Scott is a fan of the
Saratoga Investment Corp. , a debt-based business development
corporation trading at a 19% discount compared to its three year average
of 28%. Saratoga yields a healthy 9.7% in a low-yield environment.
"Saratoga trades at a discount because it is small, not because it is
poorly run," said Scott.
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