When mainstream investors let headlines scare them, they sell anything that isn’t firmly attached to the floor. This includes closed-end funds (CEFs), which see their price-to-NAV gaps expand when the market sells off, asserts Brett Owens, editor of Contrarian Income Report.
The discount window is a phenomenon mostly confined to CEFs. They have fixed pools of shares, so their prices can wander above and below NAV based on how many buyers versus sellers — just like any stock.
As value-focused contrarians, we of course prefer to purchase the funds when they trade at discounts because we can:
- Bank more dividends for our dollar.
- Enjoy price gains when the discount window narrows in the future.
- Get our management fees “comped.”
As I write, our DoubleLine Income Solutions (DSL) trades at a 5% discount to its NAV. This means we can buy the bond portfolio handpicked by “bond god” Jeffrey Gundlach and his excellent team for just 95 cents on the dollar. Not bad for a portfolio that pays a very rich 7.9%.
Meanwhile sister fund DoubleLine Yield Opportunity Fund (DLY) — referred to as “Dilly” by the fun-loving team at DoubleLine — trades at a 6% discount to its NAV. DLY pays a quite respectable 7.5%.
Inflation and interest rate worries are the reason for the current bargain. But higher rates are unlikely to catch the DoubleLine team off-guard. For example, DLY’s holdings have an average duration (time until they mature) of just over two years.
This is impressively low and provides the fund with flexibility if interest rates were to rise more than we are currently expecting. (It won’t get caught holding unfavorable bonds for years; it can move its money around to take advantage of rate changes.)
We can think of DSL and DLY as 7%+ retirement solutions. They dish us dividends every month. And we don’t need to lift a finger (unless we want to buy on more discounts).
Action to Take: Buy DoubleLine Income Solutions up to $18.50 and DoubleLine Yield Opportunities up to $19.75.
