“The Bond God’s Top 3 High-Yield Investments”

What's being teased by Contrarian Income Report?

The last teaser pitch I looked at from Brett Owens turned out to be very fortuitously timed — he was teasing several health care REITs as his way to “benefit from the biggest demographic shift in US history” back in early February, and that turned out to be just a few days before the sector bottomed out thanks to the the HCR ManorCare panic that brought down Manorcare’s landlord HCP, which was the standard-bearer partly because it’s the only REIT in the “Dividend Aristocrat” category.

HCP dropped by more than 25% in one day in early February, and pretty much every other healthcare real estate stock was crushed by at least 5-10%, even those who have no exposure to skilled nursing facilities or Manorcare. All of them have bounced back to at least some degree, though those in the skilled nursing/long-term care segment have continued to be the weakest players in the bunch — HCP is still down by 10% from February 1, Omega Healthcare (OHI) is about flat now… the one from Owens that still stands out as weak is Care Capital (CCP), the skilled nursing facility owner spun out of Ventas (VTR). CCP, which another reader asked about yesterday, hasn’t recovered and is still down 12% from that arbitrary Feb. 1 date.

Those kinds of quick panics, when a company-specific problem brings down a whole sector, are often great buying opportunities, even if it seems difficult to buy at the time. There is risk, of course, sometimes those problems really aren’t company-specific… but long-term investors should generally be looking to take advantage of panics by buying at a discount, not selling out of fear. When you have stocks that you think you’d like to own but they’re just too expensive, keep track of them — that’s what I did with Ventas for a long time, I didn’t get a discount “buy” price that tempted me until that panic but when the panic hit I was ready to buy quickly. Keep that list of possible buys somewhere close at hand, and keep a little cash in your brokerage account so you can take advantage of opportunities… you never know when they’ll come.

I don’t know if Owens had any inklings of prescience when he put out that ad for Contrarian Advantage, or if he just got lucky with the timing and considered the generally weak period we were in back in late January/early February to be a good time to pick up income stocks (which it certainly was, in retrospect), but it worked out well… so we’re going to check out another income-focused teaser pitch of his that’s been circulating for a couple weeks.

(If you want to see that earlier pitch of his about health care REITs, a sector where I’m also pretty heavily invested, it happened to be in a Friday File for the Irregulars but I’ve just opened it up for anyone to read here.)

So what is it that Owens is talking up now?

He’s suggesting that we buy closed-end funds, partly because the latest “Bond God,” Jeff Gundlach, has called them out as being priced at an appealing discount. Here’s a bit of the intro for the ad:

“The Bond God’s Top 3 High-Yield Investments

“The best bond manager on the planet is pounding the table about these ‘slam dunk’ income plays. Bank 8%, 8.4% and 11% annual dividends, paid monthly, with 7-15% additional price upside.

“Worst case, he said, these investments will trade flat and we collect a fat dividend. Best case, they’ll return 20%, and we’ll still collect a fat dividend….

“I’m a bit more conservative – anticipating gains that are ‘only; between 16% and 25% over the next year. That’s still a pretty good stock tip from the world’s smartest income investor. The real kicker is, he likes these issues no matter what the S&P 500 does between now and the end of 2016.”

Owens goes through some background that shows why so many folks follow Jeffrey Gundlach’s ideas and commentary — it’s not just that he runs a massive fund of mostly bond investments at DoubleLine Capital and has really taken over much of Bill Gross’s mantle as the most influential commentator on bonds, but he has also made some very solid contrarian calls over the last few years, and presumably made his investors quite a bit of money. DoubleLine manages several dozen mutual funds, many of which have Gundlach as at least a titular manager, so you could always let them manage some of your money if you’re interested… though the funds tend to be fairly expensive.

Owens also includes some quotes from Gundlach about why he likes closed-end funds — the quotes are from the Barron’s Roundtable from back in January (this year Gundlach replaced longtime member Bill Gross), so I’ll just quote that original source to give you a fuller picture:

“… a portion of the credit market has a safety cushion large enough to absorb another 200- or 300-basis-point widening in junk-bond spreads versus Treasuries. I’m referring to closed-end bond funds, which trade on the New York Stock Exchange. Closed-ends are one of the best plays on the Fed not raising interest rates….

“Closed-end funds are leveraged, and investors have been afraid to own them because they fear that the Fed has launched a tightening cycle. Also, based on daily data going back 20 years, they have traded at a 2% discount, on average, to net asset value. Recently, however, the sector traded at a 10% to 12% discount to NAV. It has traded at such a steep discount only 5% of the time. In the past 20 years, the discount has been wider than that only during the financial crisis in 2008-’09.”

He was talking only about fixed-income closed-end funds (meaning, those that invest in bonds — not those that invest in stocks or other asset classes)… and Gundlach actually even suggested a specific closed-end fund:

“Under current circumstances, you have about two percentage points of downside, and 10 points of upside to return to the historical discount. That makes a basket of closed-ends attractive. If you bought a junk-bond-oriented closed-end trading at a 12% discount to NAV, some of the bonds would be trading at a 15% discount. This isn’t a bad idea, but I prefer Brookfield Total Return fund [HTR]. It is trading just as poorly as some other closed-ends, but is vastly safer.

“Brookfield’s NAV is $25.75 a share. It is trading at $21.77, for about a 12% discount to NAV. It pays a monthly dividend of 19 cents, which it hasn’t changed for more than seven years. While investors have been crushing anything that is interest rate-exposed, there is also little ability in the closed-end fund market for institutional investors to arbitrage the discounts.”

DoubleLine also manages a couple of closed-end funds, though Gundlach (appropriately) didn’t specifically try to sell those in the interview — they have the Income Solutions Fund (DSL), which invests in mostly lower-grade bonds right now, and the Opportunistic Credit Fund (DBL), which is mostly in mortgage-backed securities. DBL trades at a huge premium to net asset value (NAV), DSL at a 4% discount. Brookfield Total Return is also mostly a mortgage-backed security fund, at least right now, and trades at a 6% discount to NAV.

So what, then, is it that Owens is touting as his favorite buys in the closed-end fund space?

“Bond God Buy #1 Pays 8.2%

“Buy #1 is a backdoor way to purchase the greatest infrastructure companies in the world at a bargain price. As you know, America’s infrastructure is crumbling after decades of neglect and underinvestment. The American Society of Civil Engineers graded the current state of roads, ports, power plants and water treatment a “D+” in aggregate.

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“There are few bright spots, with the ASCE estimating $3.6 trillion will need to be invested by 2020 for upgrades….

“… it’s trading at a 14% discount to the value of the assets it holds! In a knee-jerk reaction, ‘first-level’ investor types have sold this fund along with other energy stocks. But it doesn’t loan money to energy producers – it buys stocks and bonds in the top infrastructure companies in the world. And these holdings are constantly marked to market, so there’s no reason for the fund to trade at such a steep discount.”

This one is almost certainly Cohen & Steers Infrastructure (UTF), which is indeed a closed-end fund, currently trading at about a 14% discount to NAV, which owns mostly infrastructure owners — including utilities, toll roads, cell towers, airports and the like. The data in the tease is probably from the December 31 filing, as of March 31 it has adjusted slightly but the top holdings teased in the ad are still similar — right now the top three are NextEra Energy, Transurban, and Crown Castle — a regulated electric utility, a toll road operator, and a tower company.

The only thing that doesn’t fit as a perfect match here is that UTF pays a quarterly dividend, not a monthly one as is hinted — but I haven’t located a better match. The current dividend is understated in a lot of the finance sites, but they pay $1.60 per year right now as a “managed distribution” so the yield (at about $20 a share) is expected to be 8% annually.

It’s not a bad fund, the expense ratio is not particularly crazy (sometimes Closed-End Funds have huge management fees, UTF is below average for the