ING Risk Managed Natural Resources Fund (IRR) is an equity sector closed-end fund that invests in companies primarily engaged in energy, natural resources and basic materials. These sectors have been beat up lately and may provide value now, but their volatility is too high for many conservative investors.
The IRR fund is risk managed and offers a low volatility way to investing in the energy, basic materials and natural resource sectors. The fund's objective is to seek total returns through a combination of current income, capital gains and capital appreciation.
The fund uses an option collar strategy to reduce the volatility of returns. They try to exploit the high implied volatility of the natural resources sector:
- Create put spreads by buying 3-month puts about 5% "out of the money" while selling puts 10-15% "out of the money" (same maturity and notional value).
- Write call options on 50-100% of the Fund's underlying assets. Generally writes one month call options ("at-the-money" or "near-the-money).
- In a declining market, the fund tries to generate gains from the purchase of the put options and from premiums generated from writing the covered calls.
Within the equity covered call CEF sector, I prefer funds that use index options over those that use options on individual stocks. Aside from the tax advantage, the options on stock indexes generally trade with a lower bid-asked spread and are much more liquid. This means reduced "slippage" costs resulting in less drag on performance. IRR uses index options on the highly liquid Select Sector SPDR ETFs- (XLB) Materials and (XLE) Energy. They primarily use over-the-counter options for their enhanced liquidity.
The fund has been paying a $0.28 quarterly distribution since October 2012. This has been gradually lowered since the fund's inception, largely because the fund makes large distribution payouts. I would never buy IRR when it sells at a premium over NAV, but the high distribution payouts do provide some alpha whenever the fund sells at above average discounts.
The portfolio is largely domestic with some global exposure. This was the top five sector breakdown as of Mar. 31, 2013:
Industry Sector Breakdown
Integrated Oil and Gas
Oil & Gas Exploration and Production
Oil & Gas Equipment and Services
Oil & Gas Refining and Marketing
The Country weightings as of Mar. 31, 2013 were:
Calendar Year NAV Performance (before taxes)
The top ten holdings on Mar. 31, 2013 were:
Occidental Petroleum (OXY)
EOG Resources (EOG)
Phillips 66 (PSX)
Natl. Oilwell Varco (NOV)
Option Writing Strategies (as of 3/31/2013)
Index Put Option Statistics
Percent of Portfolio with Put Spreads
Type of Put Options
Avg. Put Option Life when Purchased
Avg. Put Option Time to Maturity
Avg. Index Put "Moneyness" when purchased
Out of the money
Index Call Option Statistics
|Percent of Portfolio with Call Options||58.5%|
|Type of Call Options||Index/OTC|
|Avg. Call Option Life when Written||35 days|
|Avg. Call Option Time to Maturity||19 days|
|Avg. Index Call "Moneyness" when Written||At the Money|
The fund is managed by a team of five analysts and portfolio managers.
The discount to NAV as of April 29 is -7.51% which is somewhat below the 52-week average discount of -6.52%. The 52 week discount Z-score is -0.78, which means that the discount to NAV is slightly less than one standard deviation below the mean over the last year.
This may be a good time to buy a risk managed fund like IRR. We are entering the "Sell in May and Go Away" time of the year, and equity markets seem a bit extended. It is fairly liquid for small purchases, but care must be taken when acquiring larger blocks.
Because of its large distribution payouts, IRR is a good holding in a tax deferred retirement account.
ING Risk Managed Natural Resources Fund pays quarterly
- Total Assets= $260.7 Million
- Annual Distribution (Market) Rate= 10.72%
- Fund Expense ratio= 1.22% Discount to NAV= -7.51%
- Portfolio Turnover rate= 28%
- Average Daily Volume= 88,000 Average Dollar Volume= $900,000
- No leverage used