The Federal Reserve's "Lower for Longer" interest-rate policy means that some closed-end fixed-income funds offer generous yields and big discounts to net asset value. Here are four that look especially promising for income investors.
I particularly like debt funds that are managed by leading private-equity and alternative-asset fund managers like Apollo Global Management (APO) and Blackstone Group (BX). After all, Apollo and Blackstone have enormous credit operations, bring a high level of expertise and experience to the table and have achieved a great deal of success in the leveraged-loan markets. That creates a higher sense of confidence for me as an investor.
Both firms' closed-end fixed-income funds also currently offer decent yields and trade at healthy discounts to their net asset values. Let's check a few out:
Apollo Senior Floating Rate Fund (AFT)
This fund invests in floating-rate senior-secured loans made to companies with sub-investment-grade debt ratings.
While that's not risk free by any stretch of the imagination, AFT trades at about an 8.4% discount to NAV and offers a 6.18% current yield. And if rates do begin to rise, so will rates on the loans in the fund's portfolio.
Apollo Tactical Income Fund (AIF)
This fund yields roughly 8.4% and trades at about a 12.2% discount to net asset value.
AIF invests in different types of credit instruments based on absolute- and relative-value considerations and its analysis of credit markets. I went through the fund's latest annual report and am pretty comfortable with its current asset mix. Almost 75% consists of securities and loans rated B or better, while energy exposure is fairly low.
The fund's management also said in the annual report that while it expects volatile credit markets, that should give AIF the opportunity to buy securities at attractive prices and hold them as longer-term investments.
Blackstone GSO Strategic Credit Fund (BGB)
My Real Money colleague Doug Kass is a big fan of BGB, which invests in a fashion similar to the way AFT does.
The fund currently yields about 8.4% and trades at a roughly 9.72% discount to NAV.
Blackstone GSO Long-Short Credit Income Fund (BGX)
This fund trades at about a 10.42% discount to net asset value and yields approximately 8.45%.
BGX uses a long/short strategy, investing in first- and second-lien secured loans and high-yield bonds. But as credit markets are still pretty strong, the fund was 100% net long as of March 31, with no short positions.
Still, I like the fact that Blackstone has the ability to short if the firm feels that credit or market conditions are changing. BX also has lots of expertise and experience in leveraged markets.
The Bottom Line
I sometimes feel sorry for Federal Reserve chair Janet Yellen and the other Fed officials who will meet today and tomorrow to review U.S. monetary policy.
They want to raise rates -- some even feel they have to just to "reload the toolbox" in case of an economic meltdown. But they always seem to face a huge rock in the road every time it looks like the path to tighter policy is clear.
For example, it really looked a few weeks ago following a nice string of economic reports that the Fed would raise rates in June. But then we got the dismal May U.S. jobs report, which all but ruled out a hike at this week's Fed meeting.
In fact, the fed-funds futures market seems to be telling us that we won't see any tightening until September at the earliest. And even if the Fed pulls off a September hike, the central bank is well aware that it won't be able to raise rates very much any time soon. As the Federal Open Market Committee said in its latest communique: "The federal funds rate is likely to remain for some time below levels that are expected to prevail in the longer run."
I suspect Yellen somewhat regrets switching her major from philosophy to economics all of those years ago. If she hadn't, she could be a tenured philosophy professor somewhere, with no stress and a higher salary than she gets for putting up with a recalcitrant U.S. economy.
Personally, I don't think rates are going to go meaningfully higher in the foreseeable future. This means that interest-rate risk won't be a huge concern for fixed income for an extended period of time.
That leaves just credit risk -- and no one does credit risk better than private-equity funds. That's why I think the four funds above could serve as a successful part of a widely diversified portfolio of alternative-income opportunities.
