Income Stream from Closed-End Funds

While the technical and fundamental factors at play in the market have been relatively benign, the unpredictable government policy moves have become rather annoying in recent months, David Fabian, money manager, fund expert and editor of Flexible Growth & Income Report.

This began with heightened trade tensions with China and has now morphed into grappling with the decision to withdraw from the Iran nuclear deal. This has been a boon for energy stocks, but also a double-edged sword as prices at the pump will edge higher in tandem.

West Texas crude oil is now over $70 a barrel after reaching a low of roughly $28 a barrel during early 2016. This represents more than a 100% move higher for a commodity that was largely written off as a result of weakening demand.

Yet, with renewed threats of instability in the middle east, oil is likely going to continue its trend higher and may add meaningfully to inflation through the duration of 2018.

This move is also supportive of the high yield debt markets, as evidenced by the high yield bond correction during late 2015. Investors should remember that about 30% of traditional high yield bond indexes are made up of exposure to energy names.

While that correction did lead to some rebalancing in many indexes, and therefore a reduction in energy exposure, this move is a quiet reminder of the ebbs and flows of sectors within the broad economy.

On the positive side of the ledger, interest rates are continuing to trade inside a reasonable and steady trendline without any outsized moves higher. We have pointed out that a significant spike in the 10-Year Treasury Note Yield could lead to instability in risk assets and spook the markets even further.

Taking a step back and reading the tea leaves of commodities, equities, and fixed-income, it feels like we are very near if not due for a change in trading behavior.

The market feels like it’s due for an even larger flush out before we can see a stable base and a pathway to higher prices. Yet, as trend followers, we’re inclined to let the trend play out and make adjustments along the way.

Examining our portfolio, the 25% we have allocated to CEF’s — closed-end funds — continues to trade relatively well in both a difficult interest rate and equity market.

Funds such as Pimco Dynamic Credit and Mortgage Income Fund (PCI), Nuveen Preferred & Income Term Fund (JPI), and Floating Rate Income Strategies (FRA) have virtually bucked the aforementioned trends, while Blackrock Credit Allocation Income Trust (BTZ) and Western Asset Global Corp. Defined Opportunities Fund (GDO) have stabilized at current levels.

All funds are providing a valuable income stream despite grappling with higher borrowing costs and tight spreads at the longer end of the curve. CEF’s continue to be the best way to access talented managers, intricate interest rate hedged portfolio strategies, and high-income streams.

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