OK, so I was called away before we got through the rest of Mark Skousen’s ideas for profiting from the election (which he is convinced will bring a victory for Romney and stock market ebullience) — so let’s jump right in and finish sniffing out those picks, shall we?
The first three were energy and dividend plays — Seadrill, Enterprise Product Partners, and a business development company … if you want to check out those and get the big picture intro, click on over to yesterday’s article here.
While you do that, we’re going to jump right in to picks four through six. Here’s the first batch of clues:
“BUY #4 — Way More Money in Your Pocket!
“Let’s face it, eventually — and probably sooner than most think — interest rates are going to rise in the face of inevitable inflation cause by Obama-era spending and record debt.
“My next pick is a closed-ended fixed income fund currently yielding 6.7%. This no-load mutual fund invests primarily in senior, secured floating rate corporate loans. As short-term interest rates rise, the fund will increase its monthly income gradually. Thus, this prime-rate fund operates just the opposite of a long-term bond fund. When interest rates rise, long-term bond funds decline in price; but prime rate funds like this one increase.
“The fund invests in fixed income securities operating across diversified sectors in the United States, primarily invests in senior, secured floating rate loans. It benchmarks the performance of its portfolio against the S&P/LSTA leveraged loan index.
Like all prime rate funds, this one is leveraged to maximize yield. Its 1.2% expense ratio is the lowest in the industry, and the 6.5% dividend yield is especially attractive.”
This one is almost certainly Eaton Vance Floating Rate Income Trust (EFT), a closed-end fund that does, indeed, invest in floating rate bank loans — which effectively means they’re buying floating rate corporate loans from banks, not bonds (which sometimes also have adjustable rates) but actual bank loans that typically reset interest rates much more frequently, often every month.
And, to reinforce that, we can tell you that this is one closed end fund that Skousen has touted publicly in the past as well — including in this article from earlier in the year. Still yields around 6.5%, and like most closed-end funds it uses leverage (meaning it borrows money to amplify its returns — leverage ratio is about 36% at the moment, which is fairly typical) and charges a fairly high expense ratio, right around 1%. It also, unlike most closed-end funds, trades at a small premium at the moment (typically they trade at a discount, on average), so if you buy the fund now you’re paying three or four percent more than the asset is worth — which is about half of a year’s expected dividend yield.
There are other funds which specialize in floating rate debt, both floating rate bonds and bank loans, and they’re fairly popular right now