Using Discounted Closed Ended Funds designed to Increase Income and Reduce Risk
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Boosting Income and Minimizing Risk with Discounted Closed-End Funds
Overview
The primary goal of investing in certain funds is to achieve a high level of after-tax total return through utility securities. This strategy focuses on both immediate income, often from tax-advantaged dividends, and long-term capital appreciation.
Investing in Cohen & Steers Select Utility Fund (NYSE: UTF)
Designed to optimize returns, the Cohen & Steers Select Utility Fund heavily invests in utility industry securities. Typically, at least 80% of its assets are allocated to equities like common and preferred stocks in this sector.
Industry Growth and Discount Opportunity
The utility sector is expected to grow by 8.5% over the next five years, presenting an attractive investment avenue. Currently, this fund trades at a 16.89% discount, meaning a $100,000 investment requires only $83,000 of capital. Historically, US-based closed-end funds average a 5% discount. If this trend normalizes, investors could see around a 12% increase in principal value, assuming market values remain stable.
Income and Performance
This fund offers a 6.14% income rate, significantly higher than usual due to its discounted entry point. If investors spend $83,000, they still yield over $5,000 annually, equating to more than 6% in returns.
Historically, purchasing funds at a discount can be profitable. For instance, funds with the steepest discounts have seen returns jump 160% in five years, compared to 48% for the most expensive ones.
Risk Mitigation through Diversification
To manage risks associated with discounted funds, diversification across various asset classes and fund families is essential. Our growth and income model incorporates seven asset classes to maintain portfolio balance. Diversifying investments helps minimize risk, as different asset classes often react differently to market events.
For instance, during significant market downturns like post-9/11 or the 2000 crash, high-grade bonds surged in value while stocks declined. This non-correlation is key to reducing volatility risk.
Selection Criteria
When building portfolios, we focus on unique asset classes, deep discounts, high yields, consistency in payments, and ongoing fees. We evaluate the past performance of funds and their management teams to identify the best options out of more than 600 closed-end funds, selecting only a few per asset class that meet our strict criteria.
The principle: avoid putting all your eggs in one basket. Diversification among non-correlated assets helps lower portfolio risk.
Cohen & Steers Select Utility Fund Summary
1. Operates in a stable industry.
2. Offers diversified investments within utilities.
3. Industry poised for 8.5% growth.
4. Currently available at a 16.89% discount.
5. Provides a 6.14% income return.
6. Expected 12% principal growth via regression to the mean.
Future Outlook
We anticipate this fund to align with industry growth rates while reverting to historical discount norms. This suggests a projected total return of 10.9% per year over the next 3 to 5 years.
About the Author
Randy Durig manages several portfolios, including the Growth & Income Portfolio. For more information, visit [Durig.com](http://www.durig.com) or [Money-Manager.us](http://www.money-manager.us).
Note: Randy Durig holds the Cohen & Steers Select Utility Fund in his personal and client portfolios. Past performance does not guarantee future results. Information provided is believed accurate but not guaranteed.
For more insights, visit [Investment-Investment.us](http://www.investment-investment.us) for articles on mutual and exchange-traded funds.
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