Evaluating CEFs As Dry Powder Assets

May 31, 2020 3:25 AM ETMGF, WIA, WIW21 Comments


  • A barbell investment approach which combines higher- and lower-quality assets has a number of benefits.
  • Higher-quality or "dry powder" assets provide diversification and a more stable source of capital that can be used to rebalance into weaker assets during drawdowns.
  • We evaluate MGF, WIW and WIA which hold high-quality assets as potential "dry powder" CEFs for income portfolios.
  • Our takeaway is that none of the funds ticks all the boxes which is why we would tilt to open-end funds to fulfill this portfolio need.
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A popular way to construct investment portfolios is to use a barbell approach, that is, combine higher- and lower-quality assets. This approach has a number of advantages. It provides diversification across the quality spectrum, opportunities for rebalancing and a source of dry powder to spend during drawdowns. Normally, this higher-quality allocation takes the form of government or investment-grade bonds.

In this article, we take a look at whether the few CEFs with significant government bond allocations can play this role in investor portfolios. In particular, we evaluate the following CEFs:

  • MFS Government Markets Income Trust (MGF)
  • Western Asset/Claymore Inflation-Linked Securities & Income Fund (WIA)
  • Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (WIW)

We evaluate the funds on a number of what we call dry powder criteria which are:

  • Low NAV/price drawdows
  • NAV/price resilience
  • Robust leverage mechanism
  • Cost effectiveness

Our main takeaway is that these funds fail to tick all the boxes which is the reason why we would tilt to open-end funds to fulfill the role of dry powder assets.

A Look At The CEFs

All three funds are at the very high end of portfolio quality in the CEF space.

MGF holds about 85% in Treasuries, Agencies and other AAA securities with another 13% in investment-grade bonds. It holds about 11% in BBB-rated assets and has low single-digit high-yield holdings. MGF carries no leverage and has a 0.75% total fee on net assets. The fund also has a managed distribution policy of 7.25% of the monthly NAV. MGF closed Wednesday at a 3.5% discount and a 7.5% current yield.

The Western Asset funds have slightly lower-quality portfolios. They hold about 76-78% in AAA securities, 6-8% in BBB bonds, about 5% in high-yield and another 5% in unrated paper. The funds hold about 35% of leverage. WIA closed Wednesday at a 12.4% discount and a 3.67% current yield. WIW closed at

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This article was written by

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Income investing across BDCs, CEFs, ETFs, preferreds, baby bonds and more.

At Systematic Income our aim is to build robust Income Portfolios with mid-to-high single digit yields and provide investors with unique Interactive Tools to cut through the wealth of different investment options across BDCs, CEFs, ETFs, mutual funds, preferred stocks and more. Join us on our Marketplace service Systematic Income.

Our background is in research and trading at several bulge-bracket global investment banks along with technical savvy which helps to round out our service. 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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