Until a few years ago, nobody paid much attention to closed-end funds. There weren’t that many CEFs, and nobody really wanted to mess with something unusual. Times have changed, however, as the rise of exchange-traded products have made it easier to get into asset classes normally closed to the public.
Closed-end funds have provided yet another way of getting into alternative investments, but they also offer a great way to enhance income generation. Most closed-end funds spin off some kind of distribution on a quarterly basis, and some even do so on a monthly basis.
CEFs are a bit better than ETFs, in my opinion, because they have more flexibility. They can own private company investments and can use leverage to earn a better return. In addition, they may appear to have higher expense ratios, but some analysts think that any use of leverage should be considered a reduction of investment income.
Regardless, here are three particularly interesting closed-end funds that allow you to get into some otherwise difficult investment classes. And don’t worry, all come with high yields for the income crowd.
High-Yield Closed-End Funds — Voya Prime Rate Trust (NYSE:PPR)
Voya Prime Rate Trust (NYSE:PPR) invests in floating-rate, secured senior, below-investment-grade notes, but notes at the highest tier of that specific grade. Don’t freak out over “below-investment-grade”. The fund is so well-diversified that a few duds aren’t going to destroy the fund.
PPR holds 297 senior loans across 37 industries, where the average loan amount is only $4 million per loan. Health care represents the largest industry at 11%, with electronics/electrical at 9.8%, business equipment at 9.3% and retailers at 8.9%. The fund is about 30% leveraged.
The loans are floating rate, and below-investment grade can create a higher-than-normal risk for default. Any change in short-term interest rates does affect the high yield of the fund. If rates rise, the closed-end fund has to wait for resets on the floating rates of its investments. That lag period will squeeze the spread the CEF earns until after the floating rate resets.
PPR pays monthly and presently yields 6.5%. The expense ratio is listed at 2.13%, or $213 for every $10,000 invested.
High-Yield Closed-End Funds — Gabelli Convertible and Income Securities Fund (NYSE:GCV)
Gabelli Convertible and Income Securities Fund (NYSE:GCV) has been around for 25 years. It’s one of the greates closed-end funds for get exposure to the convertibles asset class.
Convertible securities are initially some form of high-yield debt or preferred stock or warrants. They allow the holder to convert the security into some form of common stock, in a certain period of time, at a specified price.
So, if a company needs to raise money and the market is tight for some reason, a high-yield bond may not be enough for investors. They may want the security of the bond and its high yield, but also the chance to convert to common stock to make their investment liquid, so they can get out, either to save losses or cash in big.
This CEF has 132 holdings, holds 16% in cash, and many big names you’ll recognize like Wells Fargo & Co (NYSE:WFC) and CVS Health Corp (NYSE:CVS). The top sector is financial services at 21%, with 11% each in energy and health care. GCV yields 9.2%, with an expense ratio of 1.9%.
High-Yield Closed-End Funds — Gabelli Utility Trust (NYSE:GUT)
Also from the Gabelli family comes Gabelli Utility Trust (NYSE:GUT). GUT is essentially a utility basket, but it does permit itself to expand into any area where government regulation of some kind exists in a macro sense, such as telecom.
Its 174 holdings are spread about, with 43% in “electric integrated,” 8% in electrical transmission, 8% in natural gas, 7% in cable and satellite and 7% in integrated natural gas. There is very little turnover here, with only 17% of assets being churned annually.
The fund has been very well managed, and dates back to 1999. That is a particularly interesting time from which to compare returns to the S&P 500, since it was hitting its internet-bubble high. Since then, the average annual S&P return has only been 4.6%, yet for the fund, average annual investment returns have been 9.6%. Very impressive.
The fund presently pays about 5 cents per month, or 60 cents per year, which comes out to a yield of 8.5%. Expenses run 1.6%, making GUT the cheapest of the closed-end funds mentioned here.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. As of this writing, he did not hold a position in any of the aforementioned securities. He can be reached at TheLibertyPortfolio@gmail.com.
