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Friday Fixed Income

Three Fixed Income Picks

music selection:  “Children Of The Damned” — Iron Maiden

A trader needs the discretion to not make a trade if nothing attractive is on offer.  It makes no sense to pick up nickles in front of a steamroller.  I like to keep 40% of my portfolio in fixed income within Closed End Funds bought at a discount to NAV.  This provides a significant portion of my budget in case I need to sit back and let the markets cool off before making trades.

Each Friday, I recommend three CEFs that are yield rich and trading at an attractive price.  This week, two names are making return appearances and I offer up one new possible trade.

Aberdeen Inc. Credit Strategies (ACP) is a closed end fund that invests in senior loans.  It pays monthly and the distribution type is “income only”.

  • Discount to NAV – 5.95%
  • Yield – 10.01%

Franklin Limited Duration Inco (FTF) is a closed end fund that invests high yield corporate bonds, floating rate bank loans and mortgage and other asset backed securities.  It pays monthly and the  distribution type is “managed distribution”.

  • Discount to NAV – 4.04%
  • Yield – 10.53%

EV Tax Advantaged Bond & Option (EXD) is a closed end fund that invests in high quality bonds with a rules based options overlay strategy.  It pays quarterly and the distribution type is “managed distribution”.

  • Discount to NAV – 6.61%
  • Yield – 11.25%

Devour your prey raptors!

{ 5 comments… add one }
  • Chris B January 12, 2018, 9:43 pm

    Recommend also listing their leverage.

    Thanks again for writing this blog!

  • Mr. Tako January 15, 2018, 6:58 pm

    Hey FV! Why do you suppose these CEFs are trading at a discount to NAV?

    Perhaps apprehension of returns dropping in the near future?

    • The Lizard King January 15, 2018, 10:36 pm

      More than half of the CEFs in the debt space are trading at a discount. It makes little sense to me. It is almost always this way!

    • Chris B January 17, 2018, 3:09 pm

      Mr. Tako,
      The assets are discounted because they are held captive inside a fund that will charge 1 to 3% per year in fees forever. I.e. a bond worth X outside the fund is only worth X minus the discounted fees after it is locked inside the fund. A proper discount makes owning the CEF financially comparable to owning the assets directly. Otherwise there is an arbitrage opportunity.
      There probably are lots of arbitrage opportunities in this space because CEFs tend to lack liquid options markets. Their discounts range up and down over periods of months.
      Some CEFs sell for a premium over NAV, which is harder to explain. CEFs have access to very cheap leverage which is worth something to those of us without such access. Also, CEFs can package illiquid or hard-to-manage assets like bank notes or futures contracts in a nice, liquid container, which is also a value-add.

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