2 Closed-End Funds For Total Return

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 |  Includes: BIF, PEO
by: Kate Stalter

The advantages of closed-end funds over other mutual funds, are numerous, says Scott Schultz. In Part One of a two-part discussion, he tells MoneyShow.com about two of his favorite closed-end funds. Part Two can be found here.

Kate Stalter: Today we are talking about closed-end funds with Scott Schultz. He’s an asset manager and also the author of Scott Schultz’s Guide to Closed-End Funds.

Scott, you’ve written this book to explain to people what closed-end funds are. It’s an investment vehicle that many people listening today may not be familiar with, so give us a brief explanation of what these are.

Scott Schultz: Closed-end funds are different from open-end funds in the respect that they have a specific number of shares that trade on the exchanges—the New York, Nasdaq, and American—with a bid and an ask price, just like Microsoft (NASDAQ:MSFT) or IBM (NYSE:IBM) or Ford (NYSE:F).

Whereas if you are with a mutual fund, an open-end fund, it could be Fidelity, it could be Templeton—pick it. It has a never-ending number of shares, and it’s a symbol that at the end of the day, you plug in and you see what your values were.

With closed-end funds, they have a net asset value, but you have a bid and an ask price, which can often be different than net asset value.

That being said, I’ll equate it to a simple grocery-store analogy. If you walk into the grocery store and you’re there to get eggs, you cannot tell the difference from one egg to another egg. I’m going to look if it’s small, medium, large, or extra large, but once it’s open in the bowl with some eggs, I can’t taste it.

So I’m going to be driven by the price of it, because all eggs to me are going to be similar, so I’m going to buy the least expensive. In that case, I’ll take that.

When I look at people who want to pay full price for a security, I think they’re crazy, because it’s a mutual fund. I can purchase them and you can, the public can, on the exchanges, for a minimum ask price at usually a discount. So you’re buying, basically, mutual funds with sort of like a coupon and a discount. I think that’s the easiest way to explain it to people.

Kate Stalter: That’s a great, succinct explanation. Thank you very much. Now let me ask you, for individual investors who are listening to this today, Scott, what is the benefit for them of going into closed-end funds?

Scott Schultz: I note in the book and I’d ask you, I’d say if anybody is equal to anybody else, as far as in physical state, and one person starts running on the 13-yard line and the other one on the goal line and they make a run for 100 yards. I equate that to the person on the 13 is the person who bought the closed-end fund and the person on the goal line bought the open-end fund.

And you run that race 1,000 times, 1,000 times the person on the thirteen yard line is going to win by 13 yards. It just has to happen. Mathematically, there isn’t really another alternative. So, to me, why would anybody ever pay retail, full-price, for a product that you can have on sale, so to speak. That’s what the discount is with a closed-end fund.

We look at screening discounts versus premiums. You wouldn’t want to pay $1.20 for an item that’s $1. Of course, I can find a fund that has Berkshire Hathaway (NYSE:BRK.A) in it for 82 cents on the dollar.

So, it’s the advantage inherent that’s built into it: That you are able to purchase an asset for less than what its net asset value is, so anybody who is a mutual-fund owner really has to pay attention to this.

Kate Stalter: Scott, tell us a little bit about some of these funds, then. What are some of these closed-end funds?

Scott Schultz: Kate, I’m just going to list a few here. I want your listeners to grab a paper and pencil or pen or get to the computer, and write these names and ticker symbols down, so you can find them and follow them yourself.

I’m going to disclose fully right now, I am invested in these funds for my clients. I have a vested interest in this for them. So, that has to be disclosed right up front. So, I make that statement for each of these investments that I’m going to recommend, that I have. There are five different ones and I’ll share them with you now.

Boulder Total Return (BTF). It’s on the New York Stock Exchange. The fund’s objective is to see total return for investment in common stocks and income-producing vehicles.

What I like about it is the fact that it’s got about $306 million. There are 12.3 million shares in existence. But what I really like about it, is when I look at what the top holdings are of the fund. Because again, this is a mutual fund that trades as a stock on the exchange.

Thus, in this fund in particular, the BTF, I can get Berkshire Hathaway, Warren Buffett’s A shares. 25.7% of the fund is comprised of Berkshire Hathaway A. Berkshire Hathaway B is 11.4%. This is as of today.

So, to me, at roughly 37% of the underlying assets are Berkshire Hathaway. The second-largest holding is Yum Brands (NYSE:YUM). Now they’re the fastest growing. It’s KFC. It’s Taco Bell. It’s Burger King. It’s Pizza Hut. Between those three holdings, Kate, we’re pushing almost 60% of the assets.

So, I’m able to go for my clients right now, if it were a trade today, we can do this minute-by-minute and buy these assets for about 81 cents on the dollar, which goes back to my analogy about buying the eggs. If you’re going to buy an egg, everybody bloody well knows who Berkshire Hathaway and Warren Buffett are, for the most part.

If they don’t, they probably live under a rock. I don’t mean to belittle the Geico holdings, because Buffett and company do own Geico.

So, be that as it may, that value, when I look at Berkshire Hathaway A, Yum Brands, Berkshire B, at 81 cents on the dollar, I’d have to be sort of silly not to own that one. That’s one of my very, very favorites, and has been for many years.

People want to be in integrated oils. Here’s a new one: Petroleum Resources (NYSE:PEO). It’s got about $700 million in assets under management. Right now, it’s selling for about 86 cents on the dollar.

To me, when I look at what the top holdings are—we have Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Schlumberger (NYSE:SLB), Occidental (NYSE:OXY), ConocoPhillips (NYSE:COP), Royal Dutch Shell (NYSE:RDS.A), the royalty of petroleum and natural resources—and I’m able to pick up these assets at almost 85 to 86 cents on the dollar. How can I go wrong if I want exposure to the oil and energy and natural resources market?