WIA: A TIPS Fund for the Conservative Investor

The Western Asset/Claymore Inflation-Linked Securities Fund (NYSE: WIA) is built to weather stormy markets. Whether the tailwinds are credit writedowns, inflation fears, a slumping dollar, or interest rate surprises, this fund has it covered.

As of October 31, 2007, over 80% of its $390 million portfolio was invested in U.S. Treasury inflation-protected securities [TIPS] with the highest "AAA" credit rating. TIPS pay a fixed rate of interest, but the government adjusts their principal value each year by the rate of consumer inflation. The end result is a security that increases in value as inflation rises.

The balance of the portfolio was invested in government-backed mortgage securities and higher-yielding corporate bonds like Ford's (NYSE: F) 7.45% note. The portfolio wasn't leveraged, but hedging strategies were in place to limit risk. The fund may also invest up to 40% of its assets in non-U.S. dollar inflation-linked securities to hedge against the falling dollar, a strategy that has worked well in recent months.

After hiking the payment +10% in October, WIA pays a monthly dividend of $0.0575 a share, which equates to $0.69 annually. Including the year-end capital gains payout of $0.0467, the total annual payout of $0.7367 gives a yield of 6.0%. An annual management fee of 0.79% of the fund's average weekly asset value takes a small bite out of distributable income.

The distribution is taxable as ordinary income, but the portion coming from U.S. TIPS -- over 70% in 2006 -- is exempt from state income tax in many states. A dividend reinvestment plan is available and potential investors can contact the fund at 1-866-486-2228 for more information.

WIA raked in returns of over +13% in the past year, placing it at the top of the leader boards for its category. With year-to-date returns of close to +5.5%, WIA is on track for a successful 2008. Also, the fund has traded at a double-digit discount to its portfolio value since September 2005, and despite the recent price run-up, WIA is still attractively priced at a -12% discount.

Action To Take ---> With its defensive portfolio of low-risk inflation-linked Treasuries, this fund is well-suited for conservative investors looking to weather a market downturn.

Comments

[hunter00:]

Yes WIA made some money in the last two years when TIPs ran amok. But is this a conservative investment? Decidedly not! This is just another amateur closed ender where your distributions are more likely to be carved out of capital as they are from interest. The TIPs rampage bailed out these guys in the last year or so; they still have a NAV below inception value. Lastly the manager has a hunting license to mix apples and oranges. Hold on to your wallet here!

2008 Mar 18 05:20 PM

[proseadvocate:]

Dear Carla: I think you need to open your eyes. The Government lies about inflation. They frequently move the goalposts to simply fit their objectives. The concept sounds good, but the road to hell is paved with good intentions of best laid plans. Ask anybody who buys milk, eggs and gas if inflation is benign and they'll probably tell you where to go. We are set with all bad options, while the packagers of this crap and that MBS eat at the Ritz on the backs of misled taxpayers and small investors.

2008 Mar 18 05:56 PM

[Ravo:]

I am retired, and heavily invested in TIPS through an ETF. The CPI is meaningless, as real inflation is running at about 12%, according to my calculations. As long as TIPS is tied to the CPI, they do not provide the protection that is advertised. I regret my investment decision, and unfortunately, cannot identify a 'safe haven' for my dollars.

2008 Apr 17 01:32 PM