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 (CXE) . 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 (CHW) , 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 (SRV) 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. (SAR) , 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.