by Travis Johnson, Stock Gumshoe | February 27, 2014 2:25 pm
“Started in 1873 to provide monthly income to widows and orphans in Scotland…
“‘Title VI’ Funds Are Now the Preferred Investment Secret of the Super-Rich! ….
“There’s a type of fund — a fund that most Americans know very little about — that’s responsible for protecting and growing the wealth of the world’s greatest investors.
“I call this kind of fund ‘Title VI,’ thanks to the clause given to it by the SEC.”
That’s the intro that caught the attention of a great many Stock Gumshoe readers over the last few weeks. It’s from an ad for The Wealth Advisory[1], a newsletter from Angel Publishing[2] helmed by Brian Hicks[3], and it promises — as so many have promised before — to introduce you to the secrets of the super-rich … particularly these secret “Title VI” funds that you can invest in for large dividends[4].
So what are they?
Well, it’s a two part question — the type of fund Hicks is teasing is simply a Closed-End Fund, which is a kind of mutual fund. Most mutual funds[5] that people have heard of are open-ended funds, meaning that when people invest money with them they create new shares … and when people withdraw money they erase those shares, with each share redeemable at any time (occasionally with some rules or restrictions) at whatever the net asset value of the fund might be then.
Closed-end funds are different, often referred to as CEFs or even as a variety of exchange-traded fund (most ETFs are open-ended, like a standard mutual fund). CEFs are, well, closed — they’re not creating new shares, except with (very occasional) rights offerings or secondary offerings, so they have a fixed number of shares. The shares are listed on an exchange, like the NYSE or Nasdaq, and they trade just like a stock.
So what happens? Well, since they’re traded every day the price is dependent not just on the asset value of their portfolio, but on what investors are willing to pay for the shares (or sell them for) … so they often trade at either a discount or a premium to the net asset value, sometimes a huge discount or premium.
And yes, Bill Gates[6] did get some attention for buying CEFs fairly recently — he bought a couple of the inflation-linked CEFs from Western Asset that are now managed by Guggenheim, I think the two he bought where WIA and WIW. Haven’t checked to see if he still owns them through his ownership of Cascade Investment or not (Cascade is essentially Gates’ investment portfolio).
Most closed-end funds[7] are designed to generate income for investors, since that’s the niche they’ve set out for themselves now that much of the initial need for CEFs has been met by (usually better) ETFs. For many countries or types of bonds, for example, you used to have to use CEFs to get diversified exposure in an exchange-traded instrument, ten or twenty years ago there weren’t handy low-cost index ETFs for nearly any investable asset class like there are today. In the year 2000, if you wanted an exchange-tradeable fund for Korean stocks or for municipal bonds[8] or for corporate high yield[9] bonds or for simple strategies like covered-call selling, you could buy a closed-end fund or, well, do nothing.
The things that most often come up with Closed End Fund are the management fees, the premium/discount to net asset value, the portfolio composition (ie, what kinds of stocks or bonds, what does it buy?), and the leverage[10].
That’s right, leverage. Which in investing circles is the happy word for “debt.” Unlike regular ETFs or mutual funds, CEFs can and often do borrow money — sometimes a lot of money — to let them juice their returns. That’s a big part of the reason why funds that might invest in, for example, steady utility stocks that have 4% yields, can offer you a 6% or greater yield. They borrow money cheaply, and use that money to buy more stocks, and thus the dividend per share of the fund is higher.
And you’ll probably be unsurprised to learn that it was leverage that brought so many closed-end funds to their knees in the 2008-2009 financial crisis — that’s not because interest rates skyrocketed, necessarily, but because no one wanted to lend them money against their collapsing portfolios … and many of these funds, like other risky leveraged investments like Mortgage REITs[11], borrowed their money on a very short-term basis with the assumption that such borrowings would always be available as they rolled over their financing every few weeks or months. If there doesn’t happen to be a debt crisis, that works great. And, to be fair, probably the next crisis will be completely different and maybe the leverage that many (not all) of these funds carry will be a non-issue for the foreseeable future, and the kinds of leverage they use seem generally to be thought of as safer now … but investor memories are pretty long, which is probably one reason why some closed-end funds are looking fairly cheap.
The second part of the question, of course, is which CEFs does Brian Hicks think we should buy?
He has a long list, and the clues are not thick or deep for most of them, but we’ll do our best to get at least a few named for you today. Here’s how he gives some idea about what he’s looking for, which can probably mostly be described as “safer income” — a real hot topic for investors, particularly retirees, in this low-interest-rate environment:
“Title VIs are like dividends — but with much higher yields and a lot safer returns.
“What’s more, they’re more of a bargain…
“[Title VI funds] have long had a cost advantage over open-ended funds, with no upfront charges other than stamp duty on purchases, and annual management charges that tend to be lower than the industry-standard 1.5% AMC on actively managed open-ended funds.’ — IFAonline
“Unlike regular dividends, there’s only a limited amount of Title VIs available to be purchased, which makes them practically invulnerable to wild market swings caused by uncontrolled speculation.
Their limited availability also makes finding the reasonably priced ones an extremely difficult task — that is, unless you know exactly where to look.”
Well, if you just want to sniff around in closed-end funds that have high dividends and low management fees I can certainly tell you where to do that (though 1.5% seems very high these days, given the general move down in mutual fund fees and the downright cheap fees for indexed ETFs) — you can easily screen for closed-end funds using the excellent CEF screener hosted by Nuveen[12] (one of the big CEF management companies, though their database includes the funds of other managers as well) or the site run by the Closed-End Fund Association[13].
So let’s look into a few of the picks teased by Hicks and see if we can name some of them:
“Title VI Income #1: Cash In on the $759 Million Income-Generating Powerhouse!
“Trying to invest in the stability of large-cap American companies can be tough on the wallet…
“Shares for Exxon ($88), Google ($589), and Wal-Mart ($61) are a bit pricey for everyday investors.
“You could try to get a part of them by paying outrageous manager fees for a mutual fund that probably won’t beat the market average… or by buying the stocks individually (but then you risk losing money if the share prices fall).
“Why bother with the risk and weak returns when you could take part in Title VI Income #1?
“This is a diversified, large-cap portfolio with companies like Exxon, Apple, and Pfizer right at your fingertips.
“No need to invest hundreds of thousands of dollars making just one of these stocks pay for you…
“Now you can get the same stability and income payouts at a fraction of the price.”
Well, there’s really no sense at all in investing in a diversified large cap CEF just to get exposure to a bunch of large cap companies — they’re all substantial members of the S&P 500, so you could get a nice basket of them easy as pie by just buying any of the S&P index funds, most of them have expense ratios well below a quarter of one percent now.
So I suspect if we’re talking large cap stocks and yield, Hicks is teasing one of the funds that generates income by selling covered call options[14] against these kinds of large cap stocks. There are several such CEFs, the one that jumps to the top of the list for me is BlackRock Enhanced Capital and Income (CII), which has a relatively low expense ratio (for a CEF) of a little under 1%, does not use leverage, has shares of many of those named stocks, and has a distribution yield of about 8.5%. Other somewhat similar ones, if you like the general idea, are EOS, BGY, BOE and JSN. Those generally are trading at a discount of 8-12% — do be careful about expectations, because closed-end fund almost always trade at a discount. They can provide leveraged returns if you choose good funds and the discount shrinks, but the discount isn’t likely to go away.
It could be one of many other kinds of CEFs, of course — those aren’t very thorough clues — though I’d be surprised if he was recommending something like the managed distribution funds that trade at big premiums to assets and have high expenses, like the Cornerstone Funds (CLM, CFP, CRF), though those do also own many of the same large cap stocks. Those might be effective ways to generate high yield, but they underperform the overall market pretty substantially over long periods of time (they clobbered the market in 2009, but that was largely a snapback from a bad 2007 and 2008, for example).
And then we get one that’s related to gold[15], which certainly piqued interest among many of our readers:
“Title VI Income #2: Every Month, an Astounding 14% ‘Payment’— Straight to Your Wallet!
“Use this Title VI fund, and reap a stable source of income worth more than 14% annually.
“That’s right… 14%.
“More amazing, this Title VI fund focuses primarily on gold and natural resources, paying you even when prices tank.
“Let’s face it; if you own physical gold, you can’t really do much with it…
“If its value rises, great. Your gold is worth more (if you ever even sell it). If prices crash, you’re stuck with a yellow rock in your safe.
“In other words, physical gold will never again be the same as cash. And neither will risky stocks in a market as hectic as this.
“That’s where this unique Title VI fund comes into play…
“Simply put, there’s no safer way to make a fortune in gold, silver[16], or any other precious metals. Whether prices go up or down, this Title VI fund won’t leave you — or your investment — hanging.
“No matter what happens to spot prices on Wall Street or the performance of mining companies, you can rest assured that this special fund continues to pay you every single month.”
There are two reasonably likely solutions to this one, both from GAMCO (Mario Gabelli[17]’s management company) — GAMCO Global Gold, Natural Resources & Income Trust (GGN) and GAMCO Natural Resources, Gold & Income Trust (GNT). GGN (fact sheet here[18]) is a bit more global and weighted a little more to energy than to gold, GNT (fact sheet here[19]) more US-focused and slightly broader, with agriculture[20] and specialty chemicals exposure, but also more heavily weighted to gold. Both have done substantially worse than the energy stock index, and substantially better than the gold stock index. Both also sell covered calls against their holdings to generate income, and GGN uses a little bit of leverage (less than 10% right now). GGN would have a 14% trailing yield, but they cut their distribution from 12 cents to nine cents per month at the end of the year so the forward expected yield is more like 10% (GNT’s is similar).
And one more before your friendly neighborhood Stock Gumshoe turns into a pumpkin:
“Title VI Income #3: Make 13% Annually from Industries that Never Lose Demand
“Energy. Water. Waste. Electricity. Roads. Utilities.
“For some people, the prospect[21] of investing in basic goods might seem ‘boring’…
“The people who pass up this Title VI jackpot are suckers.
“Understandably, most of the utility stocks available are downright weak. On average, a ‘good’ one will hand you a dividend of about 4% — nothing to get excited about.
“But what if you could supercharge your utility investments and have them start handing you real money, month after month?
“That’s exactly what this Title VI fund is designed to do!
“Managed by some of the brightest minds in the financial world, it manages to hand the risk-averse investor safe, sizable checks, month after month — 275% larger payments than buying regular utility companies!”
I don’t know that there are any utility CEFs that currently top out near 13% annual yields, but a few are pretty close (and this ad is several weeks old, so the effective yield could have been higher in recent months). Best candidates for high-yield utilities[22] funds, if it’s pretty aggressive yields you seek, would probably be Gabelli’s Global Utility and Income Trust (GLU), which doesn’t use leverage but pays out substantially more than their dividend income (if you pay out more than 4-5% and you’re a utility fund, you’re either generating capital gains from trading in and out of stocks, selling covered calls, or using leverage). Their basics are here.[23] As with most CEFs that focus on the stability of utilities, they also boost the income by including telecom stocks that typically have higher yields than the traditional water[24], gas and electric utility companies.
Another possibility for high yield in that niche is Brookfield Global Listed Infrastructure Income Fund Inc (INF) — like Gabelli’s GLU, they go abroad to get some higher yields. Brookfield is one of the leaders in institutional management of infrastructure investments, so they ought to know what they’re doing and generate solid returns over time, but they also command a high fee (2.25% expense ratio) and they also do lever up by about 25% — yield is around 12% now, and they are trading at a 12% discount to NAV.
So there’s a small smattering of some of these “Title VI Funds” for you, with the caveat that we aren’t working with a lot of clues on this one so I’d call most of those “reasonable guesses” for what Hicks might be touting.
I have a fondness for closed-end funds because it’s sometimes possible for them to trade at irrational discounts to their net assets, but I’m also leery of the high fees that many of these firms charge … and of the fact that discounts can tend to be extremely persistent, so you can’t necessarily count on the fact that the discount will narrow over time. As with all other kinds of actively managed mutual funds, it makes sense to take a close look at historical performance and management tenure … and, unfortunately, I’ve found that it’s quite rare to come across a closed end fund that beats broad market averages (or sector returns) over an extended period of time. There’s great appeal particularly for those who like or need income, to be sure, or for those who think a discount has gotten too big and will narrow with a market turn, but pay close attention to historical returns and leverage if you’re thinking of these as long-term investments.
Have any favorite “Title VI” ideas to share with the group? Words of wisdom for Closed-End Fund investors in general? Shout ’em out with a comment below.
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While I agree with the Gumshoe Guru that you shouldn’t buy discounted closed-end funds (CEFs) thinking the discount will go away, there is still an edge for investors doing so. You buy for 85 or 90 cents assets (net asset value, NAV) worth a dollar. That money then works for you with a 10 to 15% higher payback than the money you put up.
Being older than many of you and investing since I was in junior high, I may add that the closed-end fund world is very appealing even apart from stocks trading below NAV. Travis mentioned leverage which is something other funds can’t use, but which CEFs can. And yes, it is risky and has hurt funds during the 2008-9 mess.
The original CEFs were created in the US copying Investment Trusts, invented in the 19th century in Britain, and then brought to its colonies like Canada. The US rules were set in 1940 after the Great Crash in part because there were mystery funds offered by fly-by-night brokers whose purpose was never properly declared, and whose valuations were not shared with the stockholders. A sort of South Sea Bubble American-style.
CEFs distribute their earnings to shareholders at least annually gross. You pay the taxes. But you cannot own them in a tax-sheltered account (like an IRA.) They do not get into funny distributions like some Exchange-Traded products which cause complicated tax reporting.
Another appeal for me with CEFs is that they cannot turn into a pumpkin. When markets turn against an asset class, like gold last year, the exchange-traded funds (ETFs) have to cut down on their holdings, adding to the selloff. CEFs just hang on because their portfolio is fixed. Those anxious to sell just get less money but the fund’s holdings remain fixed (unless its managers change their view, which is not something they do in a panic.) The main holders of gold are GLD and IAU which are not ETFs but ETPs but there are also ETFs using futures or just tracking the gold price, which are taxed less fiercely.
We like CEFs for investing outside the US more than ETFs, although there are no CEFs which buy physical gold, which would be an alternative to the sell-off last year. For quick and diversified foreign investment in stocks as well as bonds, nothing beats CEFs. For markets where I don’t have reporters (my gumshoes!) on the spot, I like CEFs as an investment vehicle. They are also good for newbies just learning the ropes of leaving the safety of the good old USA.
Now here is a challenge to you all: is there anyone out there who knows about the closed-end funds which may have invested in Ukraine? or about the 84 (84!) Ukrainian companies which have issued American Depositary Receipts? How about a Ukraine ETF?
Spasibo.
“there are no CEFs which buy physical gold.” Actually there is, and ironically it has the symbol CEF, Central Fund of Canada. It is now selling at a discount slightly above 5%, which is more of a discount than usual. Its annual fee is only 0.31%. When gold is hot CEF sells for a premium. CEF holds both gold and silver.
Spasibo? Would you trust advice from someone who doesn’t know the difference between Ukraine and Russia?
‘You cannot own CEFs in a tax sheltered account’—- that is factually incorrect.
I agree with letitfly- I had BTO, HPI and HEQ in my IRA and SEP for the past ten years and the IRS is well aware from annual reporting and never challenged. And if it slipped through the IRS cracks, my CPA or Fidelity would easily have warned me to remove them.
I own several CEF’s in my IRA, including one of several Tortoise funds (TYY) picked up during the crash that is paying me 10% on purchase price. I will keep it until the IRS says I can’t have it any more. CEF’s are not on the IRA prohibited list, unless they make distributions in bullion or collectibles (reference: Bob Carlson’s Retirement Watch). The funds are an excellent way to avoid the dreaded UBI tax that may arise from owning individual MLPs in IRA’s, as they usually are taxed as C-corps and send 1099s as opposed to the K-1s you get with MLPs.
As for the Ukraine, I know nothing, but it’s been said there is more turmoil to come. The country may be split in two: akin to Euro-Ukraine and West Russia. Where do you want to put your money?
Have enjoyed PIMCO’s PGP and PKO in 401k since the crash and will be riding well in income when I do retire in 2 years. Set the dividends to reinvest and let them ride. Even though they sell at a premium normally, it’s been well worth it!
source capital (SOR) is well worth a look. I have owned it for about 20 years. unfortunately their star stock picker and strategist died quite few years ago (George macaelist) excuse the spelling. phonetic.their quarterly reports are a must read,and the strategy has remained constant, conservative and insightful..