Currency Swaps In Lazard Global Total Return & Income and World Dividend & Income (CEFs: LGI, LOR)

 |  Includes: LGI, LOR
by: Roger Nusbaum

Roger Nusbaum submits: I stumbled across two interesting closed-end funds (CEFs) from Lazard that do some things I have never seen in a CEF before.

The funds are the Lazard Global Total Return & Income Fund (NYSE:LGI) and the Lazard World Dividend & Income Fund (NYSE:LOR). The funds are actively managed, so you never really know what is in there. But some of the stocks shown as holdings on ETFconnect for LOR are interesting and show an effort to think outside the lines. The top ten includes one of my faves, Telecom New Zealand, Bank Hapoalim (Israeli bank), Magyar Telecom ( the one Hungarian NYSE listed ADR with a huge dividend that is more than its earnings, if someone knows about this stock please leave a comment) and Tele Norte Leste (a Brazilian phone company).

Aside from having an interesting stock picking process, both funds use currency swaps to enhance yield. The details of this are complicated. The funds can leverage assets up to 50%. Of the 50% that can be leveraged only 1/3 of the 50% leverage can be deployed into the swaps. I take this to mean that roughly 17% of the fund can be in swaps. I do not know if the managers can have 10% leverage with all 10% being in swaps or if only 1/3 of any amount of leverage can be in swaps. I'll try to get an answer.

I get the impression that the swaps used are entirely for emerging market currencies. Speaking of the leverage, neither fund shows up on the Closed End Fund Association leveraged fund list (which is not the be-all-end-all but its the only site I know that has any leverage info). Looking at the yields of both funds though, 6.83% for LGI and 7.88%, I don't think the leverage is that high. Both funds are at double digit discounts to NAV. The yields of the NAVs are 5.8% and 6.9% respectively. High? Yes. Some leverage? Probably, but if you look at the yields of the stocks you will see a lot of 4% and 5% yielders.

The LOR is more interesting to me than LGI, but I want to watch them for a while. I like the swaps idea for the innovation (as I say I am not aware of any other funds that do this). I continue to buy into the idea that products will continue to evolve to be more and more useful. Of course that means dealing with a lot of not-so-hot ideas too.

Update: Both Lazard funds are using about their maximum leverage. Most of that leverage is in swaps for the goal of accessing foreign money markets. They view the leverage a little differently in terms of how much.

The site says they can use 50% leverage. If they have $100,000 in equity they can borrow $50,000. That $50,000 would be the limit but they view that as 1/3 leveraged. They have a point but you can decide for yourself. The more important thing is that the funds are essentially fully leveraged. The concept is still interesting.