In recent months, it has become increasingly difficult to find reasonably priced buying opportunities, especially in the realm of fixed income. Even the closed end fund (CEF) world has been bid up as there are very few funds that meet my investing criteria (market cap of at least $500MM, no excessive leverage or management fee, and at least a 10% discount to net asset value). In fact, more often than not when I screen CEFs there are no funds that meet my hurdles. However, there appears to be one very attractive bargain still available in fixed income CEFs, the Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (WIW).
WIW is rare in the current market environment. It is a non-exotic fixed income fund with no leverage and a big 11+% discount to net asset value. This fund is fairly liquid, with significant trading volume and a market cap in excess of $900 million. With a management fee of .60%, the fund is not being greatly overcharged by its manager (a distressingly common problem in the CEF world). As I detail in a prior post, WIW meets all of my screening criteria for finding a clear value in CEFs (see http://lifeinvestmentseverything.blogspot.com/2012/01/how-to-buy-dollar-for-90-cents.html).
So what does this fund actually hold? As you can see below, the fund has over 75% of its assets in US TIPS and another 8.4% in non-US inflation linked bonds (largely developed economy bonds). The remaining 15% of the portfolio is a smattering of high yield, investment grade corporates emerging markets bonds, and other miscellaneous bonds.
Portfolio Concentrationas of 10/31/12
Source: Guggenheim Investments
Credit Qualityas of 10/31/12
Source: Guggenheim Investments
The case for WIW is relatively simple. I would like to maintain an allocation to TIPS in my portfolio to complement the modest amount of I bonds I am able to buy ($10,000 per year per social security number). The problem with TIPS is that they appear rather generously priced and sport negative real yields (compared with I bonds which have a real yield of 0%). Because WIW is trading at a significant discount to NAV, it effectively enables an investor to buy 10 year TIPS (with some extraneous stuff in the non-TIPS 15% of the fund's portfolio) at a real yield of about positive .5%. Positive .5% real yields are not exactly going to blow the doors off for anyone, but they are far more attractive than 0% (I bonds) and -.6% (10 year TIPS). The fund yields about 3% (paid monthly) and the large discount to NAV will likely narrow at some point (could be days, months or years), offering the possibility of a capital gain over and above whatever the underlying assets do.
I think WIW is one of the best values in the fixed income CEF universe at present. Given the fund's relatively modest volatility, it also offers an opportunity to add some less volatile assets to one's portfolio.
As always, the above is not intended as investment advice. Do your own due diligence, consult your advisers and be careful. You can lose money on this stuff. Not guaranteed by anyone.
Disclosure: I am currently long WIW and may purchase more without warning or updating this post.