2 CEFs Presenting Excellent Value Opportunities

The choppy gyrations of the equity and fixed income markets have caused a bit of a ruckus for closed-end fund investors during the first half of 2015.  Driven primarily by shaky retail investors, the schizophrenic-like persona of many popular CEFs have created opportunities for investors with spare capital seeking high income.

Yet, I don’t see this as an opportunity that is universally applicable to every fixed-income CEF in the marketplace. Investors should be mindful of overly leveraged or risky high-yield strategies with upcoming Federal Reserve policy changes afoot.

A facet of quality, investment grade assets within a diversified bond portfolio could be a good way to insulate against these effects. Since high yield and high quality fixed-income securities typically counterbalance each other’s price movements.

As always, looking at funds that meet or exceed their distribution policies is a sound way to weed out funds that could erode your capital over time. In addition, I prefer to stay away from clunky Treasury or investment grade only funds that might not have a flexible enough mandate to capitalize on high yield assets in the event of unforeseen relative value opportunities down the line.

Two funds that I have an affinity towards as a result of our firm’s top-down research efforts with respect to sponsor, manager, and portfolio strategy are the DoubleLine Opportunistic Credit Fund (DBL) and the PIMCO Strategic Income Fund (RCS).

While managed completely different from a portfolio strategy perspective, DBL utilizes a more traditional approach to fixed-income portfolio management with a prospectus rule requiring at least 50% of the fund be invested in high-quality securities. As a result of Jeffrey Gundlach’s experience and inclination toward mortgage backed securities (MBS), DBL benefits from both agency and non-agency exposure.

In addition to a complimentary slice of MBS derivatives to control prepayments, credit, and interest rate fluctuations.

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Disclosure: FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this post. The commentary does not constitute ...

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