Investing In Closed-End Funds: Trading In And Out Of The AllianceBernstein Income Fund

Nov.22.13 | About: AllianceBernstein Income (ACG)

It seems to me that fixed income funds nowadays are taking a beating, which is clearly overdone. The recent run up along with the market still doesn't justify current market prices. One fund that has been hit the hardest is ACG. Investors have been getting rid of this thing as if it were haunting their portfolios. ACG is getting pounded mainly because most of its investment holdings are in U.S. Treasury Bonds.

ACG is a bond fund managed by Alliance Bernstein. It's managers have managed this fund very well since inception, returning rates that have won its peer index and the S&P 500 for the past few decades. This astute performance doesn't come at a hefty price tag for managing the fund. The expense ratio currently stands at .65%.

Making the case for investment in ACG isn't so difficult. You can obtain a fully funded dividend of at least 5%. Fully funded, meaning that the money that ACG collects from the U.S. government and other sources in interest covers more than enough to pay out its monthly distributions. If the fund appreciates from these levels, it too will contribute to your total return on investment in ACG.

One more thing that fellow investors are discarding is the fact that ACG may provide year-end special dividends. These gains typically come from bets made on various currencies around the world. If these bets pay off, investors holding these types of funds will be getting a nice bonus. On the other hand, if the bets turn sour, the loss normally would either be absorbed by the revenue coming in or be offset it by a temporary dividend cut.

During times of uncertainty, ACG may be a good stock to trade in and out of. However, if you do get stuck with the shares, at the very least you're holding something of quality that pays out monthly. Now when it comes to the timing on when it is a good time to buy, I disagree with most. Most investors are avoiding bonds, REIT, and bond funds altogether. I too am not a big fan of owning treasuries directly at under 3% for the 10yr, but when the fund that I'm buying is netting at least 5% it's a bit different. The advantage of investing in a basket of bonds that mature at different times is great. It allows the fund to take advantage of higher interest rates during inflationary times and then lock in those returns. The diversification in the bond fund also protects from any potential default. In the case of ACG, that diversification is limited, since most of the assets are invested in U.S. Treasuries.

ACG is considered to be a safer investment than most other closed-end bond funds, mainly because of its concentrated holdings of U.S. treasuries. Consequently, its dividend yield is a lot lower than a junk or lower graded investment bond fund that invests in lower quality of debt. Besides diversification and the potential to default risks, bad management, excessive fees and underperformance are some of the other risks associated with investing in ACG.

In closing, I feel that ACG actually provides a decent income that can provide some stability in ones portfolio.

Disclosure: I am long ACG. 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.