Aberdeen Asia-Pacific Income Fund, Inc. (FAX) and Royce Micro-Cap Trust, Inc. (RMT) are two closed-end funds that feature annual yields at 5%-plus. That is where the similarity ends. This article highlights why both of these polar-opposite funds should be considered as part of one's portfolio.
Aberdeen Asia-Pacific Income Fund
I like to think of the Aberdeen Asia-Pacific Income Fund as a fund with equity-like returns and bond-like risks. Since its inception in April 1986, FAX has posted a total return of nearly 1000%. On an annualized basis, the return amounts to 9.5% - almost identical to that of the S&P 500. FAX is a closed end fund comprising the difficult-to-reach debt from Australia and various Asian nations.
As of June 30, 2012, 46% of the fund's total holdings were in government debt, 34% in corporate debt, 14% in state debt, 4% in supranational debt spanning multiple countries, and the rest in cash. As indicated by the name of the fund, the geographic exposure is as follows: 42% in Australia, 10% in South Korea, 7% in the Philippines, 7% in Malaysia, 6% in Indonesia, 6% in Hong Kong, 5% in China, 5% in India, and 3% in Singapore.
Less than 4% of the holdings are exposed to either the United States or Europe. The European debt is from the economically stable countries of Germany, Norway, and the Netherlands; 69% of FAX's holdings is rated A or greater, 14% at BBB, 17% at BB, and just 1% is B rated. In short, FAX's portfolio is a nice blend of strong, mature, and relatively stable economies (e.g. Australia, Hong Kong) and emerging markets (e.g. Malaysia, Thailand, India) with solid credit quality.
FAX has paid a dividend of $0.035 per share on a monthly basis for the last five years, which translates to a current dividend yield of 5.4%. Management charges a modest 1% expense fee, and trades within a few percent of its net asset value. Recently, FAX was listed as one of only five closed-end funds with a Gold rating by Morningstar. This Gold rating is based on the analyst's conviction in the fund's ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term.
Royce Micro-Cap Trust
The Royce Micro-Cap Trust is a closed-end fund comprising micro-cap stocks (market capitalizations up to $750 million USD). RMT claims to be the only micro-cap closed-end fund. Since its inception in December of 1993, RMT has an annualized return of 10.1%. Almost the entire portfolio comprised of 338 unique holdings is US-based, and the largest holding is only 2.2% of the entire portfolio. Its top five holdings as of June 30, 2012, were as follows: Kennedy-Wilson Holdings (real estate), Epoch Holding Corporation (capital markets), Advisory Board (software for health care), Raven Industries (industrial conglomerate), and Seneca Foods (food products).
Most recently, RMT paid a quarterly dividend of $0.12, which translates to an annual yield of 5.3%. It should be noted, however, that the dividend is cyclical - with higher payouts during significant market gains, and lower payouts during down markets. In fact, RMT temporarily suspended its dividend during the Great Recession of 2009, since it only pays out a portion of capital gains and/or investment income. One significant positive for RMT is its discount to net asset value. The fund typically trades at a discount between 10% and 15%, which is published daily under the ticker symbol XOTCX.
RMT is a high beta stock that represents a diversified vehicle for obtaining broad exposure to the micro-cap space, and is currently trading at a compelling valuation. FAX, on the other hand, is a low beta closed-end fund comprising the hard-to-access Asia-Pacific debt, and makes monthly dividend payments. Both closed-end funds should be considered, for they are worth owning.