3 Conservative Mutual Funds on Sale
January 14, 2009 – by Richard Band
I’ve been a fan of closed-end funds for a long
time. In fact, the first investment I ever bought, in
the summer of 1973 (can it be that long ago?), was a
What are these strange critters, anyway — and
what’s so great about them?
Closed-end funds give you many of the same
advantages as standard mutual funds: instant
diversification, professional management, simplified
paperwork at tax time. Yet closed-ends are also
different in a key respect.
Unlike open-end mutual
funds, they don’t continuously issue and redeem
shares. If you want to buy or sell shares, you have to
go through a broker, who will find a party willing to
take the other side of the transaction.
In short, the price of a closed-end fund is set by
supply and demand on a stock exchange. As a result,
closed-end funds can — and often do — trade at
significant discounts to “net asset value” (the value
of the securities in the fund’s portfolio).
the discounts widen amid fear-driven markets, giving
you a chance to buy a dollar’s worth of assets for 90
cents, 85 cents or sometimes even less. When the
mood of the market improves, you can reap a double
reward: from an increase in the fund’s NAV and
from a narrowing of the fund’s discount (which may
even turn into a premium if investors decide they
really want to own the fund). (See also: How to Win With Mutual Funds and Building a Fortune From Scratch.)
Well, we’re certainly in a market driven by
fear now, with some astonishing discounts on
conservatively managed funds.
Here are three that
catch my eye…
Fund #1: Cohen & Steers Dividend Majors (DVM)
This fund earmarks about 35% of its portfolio for
real estate investment trusts, with the remainder
spread among utilities, banks and a variety of
dividend-rich industrial stocks.
At the moment,
DVM’s monthly distribution rate works out to a generous 7.6% — an attractive yield for a closed-end fund that doesn’t employ leverage
Part of that payout represents a tax-free return of
your original capital. Still, the stocks in the fund’s
portfolio are so depressed, and the fund’s discount
to NAV (over 19% at last glance) is so wide, that
I think DVM could prove to be the biggest winner
on my list a year to 18 months out.
A total return — dividends plus price gain — of 50%, or even a bit
more, over that period wouldn’t surprise me at all.
My second fund is the only leveraged fund I’m
recommending for purchase as we speak. In recent
months, virtually all leveraged funds have suffered
sharp declines in net asset value.
To comply with
SEC limits on borrowing, many funds have been forced to sell part of their holdings, triggering
further declines in NAV (as well as dividend cuts in
However, funds that focus on municipal bonds have
generally taken less of a dent than those that invest
in stocks or master limited partnerships.
For safety, I
would channel fresh cash into muni funds first.
Fund #2 is the largest (hence, easiest to buy and sell)
of a clutch of Morgan Stanley funds that concentrate
on high-grade municipal bonds. A deep discount
lets you buy a buck’s worth of munis for only 85
cents. The discount also enhances your going-in
yield, currently a juicy 9% — the equivalent of a
taxable bond yielding 13.8% for an investor in the
top federal tax bracket.
Get the name and buy-below price of Fund #2 when you join Profitable Investing risk-free. Click here to get started.
This fund has seen it all — and handled
itself quite respectably. Although it lost money
in 2008, the fund’s portfolio declined substantially
less than the major market indexes.
Over the past
10 years (through November 30), the fund at net asset
value has outperformed the S&P 500 by a handsome
584 basis points annually.
Yet it was recently quoted 23% below
NAV, its widest discount since 1987. Talk about Tiffany quality
with a Wal-Mart price tag!
Any risks to be aware of? Fund #3 carries a hefty
stake (21% of the fund’s portfolio) in a small but very circumspect insurance
company that writes property/casualty coverage. This
is the kind of insurer, with massively redundant
reserves, that Warren Buffett would love to
own — and perhaps someday will.
Get complete details on all three funds in the January issue of Profitable Investing online now. As editor of Profitable Investing, Richard Band is the newsletter world’s #1 authority on investing for low-risk growth. His flagship Total Return Portfolio has more than quadrupled in value since its inception in 1990, while taking far less risk than the popular stock market index funds. For details on a risk-free trial subscription, click here now.