If you need to produce income off of your investment portfolio — and that’s anyone who’s retired or approaching retirement — you’re probably looking around and wondering how you’re going to generate enough money off of your nest egg to live the retirement lifestyle you’ve been dreaming of.
Traditional income opportunities like certificates of deposit, savings accounts and even Treasury bonds offer tiny, miniscule yields. Corporate bonds might yield a bit more, but that’s still not going to provide you with the income you need to live.
So, what can you do to earn more income? Well, today I want to bring you an opportunity to earn almost 8%, with the money being managed by the most talented fixed-income investor on the planet right now.
Boaz Weinstein, who we’ve talked about before, has had some incredible adventures during his career. Back in 2012, he noticed that there were some trades going on that made absolutely no sense in the London financial markets.
He took advantage by buying those mispriced securities. The seller was a trader at JPMorgan Chase & Co. (JPM), who kept doubling down to try to make back the losses and eventually lost over $6 billion for the bank. Well, an awful lot of that money found its way into the pockets of Weinstein and investors in his fund.
As recently as late 2019, he noticed that credit default swaps, which are bets on the financial condition of a company, for junk companies were priced almost exactly the same as the high-quality companies. That meant that you weren’t paying for the excess risk of the junk companies seeing their credit go down on credit conditions worsening and possibly defaulting.
So, Weinstein put together a massive portfolio where he bought all of these junk credit default swaps, betting that the credit situation would deteriorate, they would have a real risk of a default and these would go up. At the same time, he sold some of the higher quality ones to capture the spread between them.
He didn’t predict the COVID crisis, but when COVID did hit, all of the junk companies saw their credit default swaps soar in value as people made increasing bets that they were going to go out of business, while these higher-quality companies fell in value. In one month, his fixed-income fund jumped by 100%, and the fund ended 2020 with a triple-digit return.
Saba Closed-End Funds ETF
So, why do I bring this up? Well, Weinstein is a big fan of closed end funds and runs Saba Closed-End Funds ETF (CEFS), which is an exchange-traded fund (ETF) that is devoted entirely to closed-end fund arbitrage. He looks at closed-end funds trading at large discounts that are out of favor. This allows you to buy the shares for less than the actual value of the stocks and bonds the fund holds.
He likes to buy these funds at a discount to their asset value, and then he’ll lean on management very hard to do whatever is necessary to close the discount. All the while, all of these fixed-income closed-end funds pay above-average dividend yields.
And if you look at the top holdings in the fund right now, it starts to get pretty exciting.
He’s got the Invesco Senior Income Trust (VVR) in there, which is trading at a nice discount and owns floating-rate loans that are going to do extremely well if in fact inflation continues to push interest rates higher. As rates go higher, so will the payments made on the bonds, which continue to flow through to investors as dividends.
Another fund that’s doing much of the same thing is the Blackstone/GSO Strategic Credit Fund (BGB), which is also one of the largest fund positions in his closed-end fund ETF.
Another one that I absolutely love is The Cushing NextGen Infrastructure Income Fund (SZC), which owns infrastructure for today’s world — airports, roads, bridges and energy infrastructure — but they’re also building a presence in tomorrow’s infrastructure — data centers, cell phone towers and renewable energy facilities.
So, they’re looking ahead and watching the transition of the world from today to tomorrow, and they’re invested in both ends while slowly increasing the technology and renewable energy side while reducing the legacy infrastructure side. It’s a neat fund with a very high yield and a large discount to net asset value, and it’s one of the largest positions in the fund.
The Saba Closed-End Funds ETF (CEFS) is currently yielding about 7.8% in regular monthly dividends, but you also get substantial upside potential as Weinstein and his team lean on these closed-end fund management teams to do whatever’s necessary to eliminate the discount to net asset value.
Those increases will of course increase the value of the holdings, and we can see some capital gains and upside potential in the funds owned by the ETF. This is one of the best solutions to the “where am I going to get enough income” problem that I’m aware of in the market today.
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