Using Discounted Closed Ended Funds designed to Increase Income and Reduce Risk

Posted By Team iBizExpert On March 12, 2022 03:09 AM Hits: 93

Cohen & Steers Select Utility Fund is the main focus right now (nyse: UTF)

The goal of its investments is to get a high total return after taxes by buying utility securities. In order to get a total return, the Fund gives equal weight to both current income, which is mostly tax-advantaged dividend income, and growth in value. Under normal market conditions, the Fund will put at least 80% of its managed assets into a portfolio of common stocks, preferred stocks, and other equity securities issued by companies in the utility industry.

It is expected that the Utility and Electrical industry will grow by 8.5% over the next 5 years.*

At the moment, the Cohen & Steers Select Utility Fund is at a discount of 16.89%.

That means that for every $100,000 you put into the business, you put in about $83,000.

Using the regression to the mean theory and the fact that historically, US-based closed-end funds have traded at a 5 percent discount from their historical mean, we would predict that Cohen & Steers Select Utility Fund would increase by about 12 percent if the market value didn't change.

*Regression to the mean is a statistical term. It means that things tend to go back to the average. It means that when things are left alone, they tend to go back to normal, whatever that is.

Cohen & Steers Select Utility Fund has a short but profitable history of growing principal.

14 percent of this fund's money is coming in at the moment.

We think this because, for an investment of about $83,000, you could buy $100,000 worth of utilities that bring in more than 5% in income, or over $5,000 per year. Those who invest $83,000, which is a much smaller amount, still make over $5,000, which is a much higher return of 6.14 percent.

Performance:

"If you can wait, buying money at a deep discount can be a very profitable move. For example, say you split the closed-end universe into fifths, starting with the most expensive. In the last five years, the 20 percent that cost the most went up by 48 percent. The 20% that got the biggest discounts, on the other hand, went up by 160%." ***

To cut the risk

In order to reduce the risks that come with closed-end funds that offer deep discounts and a high income, we recommend using asset allocation to spread your money out among many different asset classes and fund families. In our growth and income model, we use seven different types of assets to make a portfolio that is well-balanced. This structure was made to keep changes to a minimum. Something that could hurt one type of investment could help another. After the 9/11 terrorist attacks and the stock market crash of 2000 are two examples of this. In both cases, there was a big drop in the stock market, but the high-grade bonds went up a lot. During these two events, there was no link between the stock market and high-grade bonds. Many experts think that the best way to reduce volatility risk is to spread your money across different asset classes that don't have anything in common.

When building portfolios, we use a set of selection criteria that focuses on things like unique asset classes, deep discounts, high yields, regular payments, and ongoing fees. We also look at the past performance of the fund and the management team, as well as the management team itself. We use our selection criteria on more than 600 closed-end funds, with the goal of finding only one or two in each asset class that meet our needs.

Don't put all of your eggs in a single basket. If the asset classes don't move together, the portfolio risk goes down.

To sum up Cohen & Steers Select Utility Fund, we can say:

Getting a current income of 6.14 percent
An industry that is expected to grow by 8.5%
If the market stays the same, regression to the mean would mean that the principal would grow by about 12%.
Makes different kinds of investments in the utility business
Investing at a discount of 16.89%
An old-fashioned business

We expect the Cohen & Steers Select Utility Fund to grow at the same rate as the industry and then fall back to more normal levels. Together, these two things would mean a total return of 10.9% per year over the next 3 to 5 years.

Randy Durig is in charge of several Portfolios, including the Growth & Income Portfolio. To see the full list, go to www.durig.com or www.money-manager.us.

Randy Durig has Cohen & Steers Select Utility Fund in his own account and in the portfolios of his clients who give him a lot of freedom. Past performance does not mean that future returns will be the same. We think that all of the information is correct, but we can't promise that it is.

By Money Manager Review's 4th Quarter 2005 National Performance Rankings for Large Capitalization Blend, Durig's Monopoly Blue Chip Portfolio was ranked third in the United States based on its three-year annual return.

A registered investment advisor is what Durig Capital is. If you know someone who would like our research, have them call 877-359-5319 (toll-free).

Randy recommends www.investment-investment.us for people who want to read articles about closed and mutual funds. There are about 75 articles on mutual funds and Exchange trade funds on that site.