Using CEFs to Buy TIPS at a Discount

Includes: WIA, WIW
by: George Spritzer, CFA

Investors who use a trend following strategy have likely raised some cash recently when some positions have traded below a trailing stop loss or moving average. Cash is earning next to nothing in brokerage money market accounts.

Because of the Federal Reserve’s quantitative easing policy, nearly all traditional low risk, low volatility investments like T-Bills, CD’s and money market accounts currently have extremely near-zero yields. But many fear that interest rates may soon start to move higher and are reluctant to deploy the cash in longer duration fixed income funds.

One potential place to park some of this excess cash is in inflation-linked securities. In the U.S., there are Treasury Inflation-Protected Securities, or TIPS. The principal value of a TIPS increases with inflation as measured by the CPI index. At maturity, you are paid the adjusted principal or original principal, whichever is greater.

TIPS pay semi-annual interest at a fixed rate. But since the interest rate is applied to adjusted principal, interest payments also rise with inflation.

There are several ways to buy TIPS. You can buy individual bonds directly from Treasury Direct. There is also a liquid ETF with the ticker TIP available with zero commission from Fidelity.

In this article, I will be discussing some closed-end funds that may own TIPS, but may also own non-U.S. inflation-linked securities.

Western Asset/Claymore offers two closed-end funds that invest primarily in inflation-linked securities, but have somewhat different investment strategies:

WIW: Western Asset/Claymore Inflation-Linked Opportunities and Income Fund.

  • Invests at least 80% of its managed assets in inflation-linked securities.
  • May invest up to 40% in below investment grade securities.
  • May invest up to 100% of the portfolio in non-US dollar inflation-linked securities.

WIA: Western Asset/Claymore Inflation-Linked Securities and Income Fund.

  • Invests at least 80% of its managed assets in inflation-linked securities.
  • Must invest at 60% in US TIPS.
  • May invest up to 40% in non-US inflation-linked securities. No more than 20% of its non-US dollar exposure may be unhedged.
  • Will not invest in below investment grade at time of purchase.

Both funds use a hedging strategy to help limit risk and volatility. They are particularly focused on hedging high-volatility market events such as employment release dates, where they attempt to achieve a relatively stable net asset value.

Although their mandates are quite different, at the present time the portfolios of WIW and WIA are actually quite similar. Both funds are primarily invested in U.S. TIPS. As of April 30, investments in U.S. TIPS were 90.45% for WIA and 86.18% for WIW.

Currently, the discount to net asset value for WIW is 9% (versus about 6% for WIA), so I’ve decided to write about WIW in this article, although WIA may also be a good choice depending on your risk profile and desire to own non-investment grade or non-US assets.

WIW is a large closed-end fund with 835 million in assets. It does not currently use leverage. The fund’s primary objective is to provide current income. Capital appreciation is a secondary objective.

WIW has a pretty good long term performance record based on its net asset value. Since inception, it has only had one losing year in 2008 when the net asset value dropped by 9.49%. Over the last five years, it has earned 6.83% a year.

WIW is currently selling at a discount to NAV of -9.0% compared to the 6 month average discount of -7.25%. The 1-Year Z-Statistic is -1.75. This means the current discount to net asset value is nearly two standard deviations below the mean.

WIW is team managed by Western Asset Management Company which specializes in value oriented fixed income investing.

Asset Class Breakdown (as of 04/30/2011)



Investment Grade Corporates




Mortgage Backed Securities


Hi Yield Corporates


Short-term Debt


NAV Performance (as of June 17, 2011)



One Year


Three Years (annualized)


Five Years (annualized)


Here are some other stats on WIW:

Western Asset/Claymore Inflation-Linked Opportunities and Income (WIW) pays monthly:

  • Total Assets= 2917MM
  • Annual Distribution (Market) Rate= 3.24%
  • Income Only Yield= 2.75%
  • Last Monthly Distribution= $0.0335 (Annual= $0.42)
  • Fund Expense ratio= 0.73% Discount to NAV= -9.00%
  • Portfolio Turnover rate= 48%
  • Average Credit Rating= AAA
  • Effective Duration= 7.31 years
  • Leverage: 0.0%

Overall, I think either WIW or WIA is a worthwhile purchase at current levels as a short term place to park cash in the expectation that the discount to net asset value may narrow over the next few months. But the real yield of TIPS is still below 2%, so these funds are not that attractively priced as a long term “buy and hold” investment. The funds should be re-allocated when better opportunities occur in the fixed income or equity markets.

Disclosure: I am long WIW, WIA.

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