Closed-End Fund Portfolio Change: Drop HIX; Add ERC

Includes: ERC, HIX
by: Joe Eqcome

Summary: The Eqcome CEFBig10™ Portfolio (CEFBig10) was designed as a simple, self-directed, economical way to participate in a diversified portfolio of close-end funds (CEFs). The objective of the CEFBig10 portfolio is total return: an attractive initial yield with the potential for capital appreciation purchased at a discount to NAV.

The CEFBig10 Portfolio consists of 10 CEF stocks. Each of the 10 stocks represents one of the largest CEFs in continuous operation within each of the 10 major fund types. Substitutions are made from time-to-time if valuation targets have been reached or a particular CEF fund type would be better served with another CEF selection. (See: “CEFBig10™” tab at Joe Eqcome’s website for details.)

Portfolio Changes: On July 7, 2009, Western Asset High Income Fund II (NYSE:HIX) was added to the portfolio in substitution for another high yield CEF. At that time HIX was trading at $7.27 per share with a monthly annualized yield of 15.6% and at a slight premium of 2.1%. Today, HIX is trading at $9.56 per share at a 10.8% premium with a monthly annualized yield of 11.9%.

In an effort to maintain an attractive price discount to net asset value of the portfolio—one of the investment criteria—along with HIX having reached its price target (31.2% capital appreciation), HIX is being substituted with another high-yield oriented CEF.

New CEF Selection: HIX will be replaced with Evergreen Multi-Sector Income Fund (NYSEMKT:ERC). ERC is currently trading at $14.34 per share with a month annualized yield of 9.1% and at a discount of 9.4%.

Over the next 12 months it is likely CEF investors may be rotating out of CEFs that sell at high premiums into those CEFs that trade at discounts to their NAVs. Such a tactical move may help cushion investors from the prospects of higher interest rates and its potential to erode the value of high-yield fixed income securities.

ERC’s fixed-income portfolio has more sector diversification and higher credit quality ratings (40.4% of its holdings are rated “AAA” with at average credit quality of BBB+).

Timing Is Everything: It may be an appropriate time to diversify, up-grade quality and revisit CEF valuations in the high-yield CEF fund type category.

Disclosure: Author owns all the stock in the CEFBig10 portfolio.