The Federal Reserves Lower for Longer interest-rate policy suggests that some closed-end fixed-income funds provide generous yields and big discount rates to net possession value. Here are four that look particularly guaranteeing for income investors.
I particularly like debt funds that are handled by leading private-equity and alternative-asset fund supervisors like Apollo Global Management (APO) and Blackstone Group (BX). After all, Apollo and Blackstone have huge credit operations, bring a high level of proficiency and experience to the table and have attained a terrific deala lot of success in the leveraged-loan markets. That produces a higher sense of self-confidence for me as a financier.
Both companies closed-end fixed-income funds likewise presently offer good yields and trade at healthy discount rates to their net possession values. Lets inspect a few out:
Apollo Senior Drifting Rate Fund (AFT)
This fund buys floating-rate senior-secured loans made to business with sub-investment-grade debt ratings.
While thats not run the risk of free by any stretch of the creativity, AFT trades at about an 8.4% discount rate to NAV and offers a 6.18% existing yield. And if rates do begin to rise, so will rates on the loans in the funds portfolio.
Apollo Tactical Income Fund (AIF)
This fund yields approximately 8.4% and trades at about a 12.2% discount to net asset value.
AIF purchases different kinds of credit instruments based on absolute- and relative-value factors to consider and its analysis of credit markets. I went through the funds newest yearly report and am quite comfortable with its existing asset mix. Nearly 75% includes securities and loans rated B or better, while energy exposure is relatively low.
The funds management also said in the yearly report that while it expects unpredictable credit markets, that ought to give AIF the opportunity to buy securities at attractive costs and hold them as longer-term investments.
Blackstone GSO Strategic Credit Fund (BGB)
My Real Cash associate Doug Kass is a big fan of BGB, which purchases a fashion comparablemuch like the method AFT does.
The fund presently yields about 8.4% and trades at a roughly 9.72% discount rate to NAV.
Blackstone GSO Long-Short Credit Earnings Fund (BGX)
This fund trades at about a 10.42% discount to net possession value and yields around 8.45%.
BGX utilizes a long/short strategy, investing in very first- and second-lien safe loans and high-yield bonds. However as credit markets are still quite strong, the fund was 100% net long since March 31, with no brief positions.
Still, I like the truth that Blackstone has the capability to short if the firm feels that credit or market conditions are changing. BX also has great deals of knowledge and experience in leveraged markets.
The Bottom Line
I sometimes sympathize with Federal Reserve chair Janet Yellen and the other Fed officials who will satisfy today and tomorrow to review United States financial policy.
They desire to raise rates– some even feel they need to just to refill the toolbox in case of a financial disaster. However they always appear to face a huge rock in the roadway each time it appears like the path to tighter policy is clear.
For instance, it actually looked a few weeks ago following a nice string of economic reports that the Fed would raise rates in June. But then we got the dismal Might US tasks report, which all however ruled out a hike at todays Fed conference.
In reality, the fed-funds futures market appears to be telling us that we wont see any tightening up up until September at the earliest. As well as if the Fed manages a September hike, the centralreserve bank is aware that it wont have the ability to raise rates really much at any time soon. As the Federal Free market Committee said in its most current communique: The federal funds rate is most likely to stay for some time below levels that are anticipated to prevail in the longer run.
I suspect Yellen rather is sorry for changing her significant from philosophy to economics all of those years earlier. If she hadnt, she could be a tenured approach professor someplace, with no stress and a higher salary than she gets for enduring a recalcitrant US economy.
Personally, I don’t believe rates are going to go meaningfully greater in the foreseeable future. This suggests that interest-rate danger wont be a huge issue for fixed income for an extended periodtime period.
That leaves simply credit danger– and nobody does credit risk much better than private-equity funds. Thats why I think the 4 funds above could act as an effective part of a widely diversified portfolio of alternative-income chances.