If you’ve been reading my column, you know that my mantra is to own a long-term diversified portfolio with many asset classes and securities represented. This is truly the best defense for a bear market like the one we are in right now.
One of the investments you should have (particularly if you are retired) are closed-end funds. CEFs are basically static capitalized mutual funds.
CEFs raise capital in an initial public offering and then invest that money. That allows them to trade like stocks. Mutual funds, however, trade based on the net asset value of a fund, with no limit on the number of shares issues.
There are several CEFs that you can invest in that will offer greater safety in bear markets. They’ll offer you solid dividends as well.
Closed-End Funds to Buy: Apollo Senior Floating Rate Fund Inc (AFT)
Distribution Yield: 7.8%
The Apollo Senior Floating Rate Fund Inc (AFT) is a CEF that invests primarily in senior position liens for certain issuers, so that investors are first in line to collect principal if the issuer defaults.
These usually pay floating rates of interest that are pegged to something like Libor plus a spread. That reference rate is usually adjusted every 30-90 days; and with interest rates now on the rise, this is one of few closed-end funds that will likely see increasing distributions.
This CEF is pretty broadly diversified across industries, with solid representation in healthcare, pharma, banking, financial services, high tech, media and retail.
Now, that’s not to say this is an entirely safe fund, since floating rate capital is usually the result of firms that have trouble raising regular financing because their bonds might not be investment grade. Still, floating rate benchmark funds outperform other fixed income in rising rate environments, so that somewhat offsets risk.
The AFT yields 7.8% and pays monthly.
Closed-End Funds to Buy: Cohen & Steers Select Pref & Inc Fd, Inc (PSF)
Distribution Yield: 8.6%
Cohen & Steers Select Preferred and Income Fund (PSF) is probably an even safer bet. I actually like preferred stocks more than bonds. Many preferred issues have sold off for no good reason and trade below par.
This CEF also invests in REITs, which offer consistency and dividends, even in bear markets.
PSF is a bit heavy in financials (57% of total assets and another 20% in insurance), but the financials it owns preferred stock in are big names with very little likelihood of experiencing liquidity problems. It’s also more diversified than most closed-end funds, with 58% of assets in the U.S., 16% in the UK, and 16% in several other countries.
Since inception, PSF has returned 9.19% annualized total return, although we haven’t seen it handle a true bear market yet. Still, with an annual distribution of $2.06 per share, paid in monthly increments, that’s an 8.6% yield.
Closed-End Funds to Buy: Pimco Municipal Income Fund (PMF)
Distribution Yield: 7.2%
I think the absolute safest bet, if you are truly conservative, would be to go with something like the Pimco Municipal Income Funds (PMF). There are many kinds of municipal bonds, but those in PMF are mostly state general obligation bonds and bonds that are guaranteed from various other types of municipalities.
GO bonds are guaranteed by the state and, to my knowledge, I don’t believe any state has defaulted on its GO bonds since 1933. Plus, this is a diversified fund, so any default should have minimal impact.
Other guaranteed bonds are guaranteed because a municipality has specifically issued a bond tied to some guaranteed income source.
The PMF is not a barn-burner. In fact, even after the financial crisis, it only doubled off its low. It’s at the higher end of a trading range now, but does yield 7.2%. That’s about as high a yield as you can find in something so safe.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.