A Low Volatility Way To Play The Natural Resource Sectors

| About: Voya Natural (IRR)

ING Risk Managed Natural Resources Fund (NYSE: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- (NYSEARCA:XLB) Materials and (NYSEARCA: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

30.09%

Oil & Gas Exploration and Production

22.38%

Oil & Gas Equipment and Services

14.51%

Oil & Gas Refining and Marketing

5.90%

Diversified Chemicals

3.62%

The Country weightings as of Mar. 31, 2013 were:

Country

Weighting (%)

United States

93.95

Canada

2.83

Netherlands

0.97

United Kingdom

0.91

France

0.31

Norway

0.28

Calendar Year NAV Performance (before taxes)

2007

+9.74%

2008

-9.94%

2009

+12.45%

2010

+0.59%

2011

-4.57%

2012

-0.38%

YTD

+2.63%

The top ten holdings on Mar. 31, 2013 were:

Stock

Allocation (%)

Exxon (NYSE:XOM)

12.24

Chevron (NYSE:CVX)

10.75

Schlumberger (NYSE:SLB)

5.57

Occidental Petroleum (NYSE:OXY)

3.22

Anadarko (NYSE:APC)

2.89

Halliburton (NYSE:HAL)

2.53

EOG Resources (NYSE:EOG)

2.39

ConocoPhillips (NYSE:COP)

2.14

Phillips 66 (NYSE:PSX)

1.84

Natl. Oilwell Varco (NYSE:NOV)

1.68

Option Writing Strategies (as of 3/31/2013)

Index Put Option Statistics

Percent of Portfolio with Put Spreads

98%

Type of Put Options

Index/OTC

Avg. Put Option Life when Purchased

98 days

Avg. Put Option Time to Maturity

82 days

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

Fund Management

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

Disclosure: I am long IRR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.