The Bond God’s
The best bond manager on the planet is pounding the table about these “slam dunk” income plays. Bank 8%, 8.4% and 11% annual dividends, paid monthly, with 7-15% additional price upside.
Worst case, he said, these investments will trade flat and we collect a fat dividend. Best case, they’ll return 20%, and we’ll still collect a fat dividend.
And with their gaudy 8-11% payouts, we’re talking about gains of 8% to 31% over the next 12 months!
I’m a bit more conservative – anticipating gains that are “only” between 16% and 25% over the next year. That’s still a pretty good stock tip from the world’s smartest income investor. The real kicker is, he likes these issues no matter which way the S&P 500 turns.
“If the S&P rises 10%, closed-ends could return 20%. If the stock market falls 30%, a decline is already priced in.”
Meaning our downside is minimal, and our 8-11% yields are safe.
Most individual investors aren’t very familiar with the closed-ends that billionaire “Bond God” Jeffrey Gundlach likes so much. I’ll explain more in a minute – and also share my three favorite buys in the space today. But first, let’s talk about the difference between a mere Bond King, and an outright Bond God.
You probably know Bill Gross, who is widely known as the “Bond King.” The New York Times once called him “the nation’s most prominent bond investor.”
He’s lorded over the fixed income market for decades from his perch as the boss and Chief Investment Officer at PIMCO. As recently as two years ago, his firm was the toast of fixed income. They managed over $2 trillion in assets. Everyone wanted to invest with Gross.
In recent years though, the Bond King’s crown has slowly faded. His performance slipped. Of course, Gross didn’t forget how to invest in fixed income. The fact of the matter is that he gradually got weighed down by his own success, and the money it attracted.
Warren Buffett himself has said that it’s easy to invest $1 million and net big returns, but when investing $1 billion one has far fewer opportunities. Imagine trying to deploy a trillion or two effectively?
Eventually, the firm Gross co-founded more than four decades earlier appeared ready to move on without him. Not only were his returns down, but also personal tensions with his fellow managers were at breaking points. His peers figured they could get on just as well without him.
Gross knew he was working on borrowed time. The King was in need of a new throne! So he drove a few hours up the freeway to Santa Monica to the 13,000-square-foot mansion of the best bond guy he knew – and asked for work.
An Awkward Job Interview
“I am Kobe Bryant. You are LeBron James,” Gross told Gundlach. “I have five rings, you have two – probably going to five,” he clumsily made an NBA championship analogy regarding his peer’s potential.
Gross wanted to bring his PIMCO “rings” to DoubleLine Capital, the firm Gundlach co-founded in 2010. What a flattering compliment – you’re great, and with my help you can equal my greatness. Eventually. Probably.
But Gundlach was sick of being disrespected. Morningstar had previously named Gross its “Fixed Income Manager of the Decade” – even though the younger prodigy beat his rival’s performance over that 10-year period!
But that snub was overshadowed by a larger slight. In December 2009, Gundlach was pushed out by his own firm!
Trouble had been brewing since 2001, when a large bank acquired his boutique and reduced his ownership stake without permission. When things finally boiled over Gundlach left and took his favorite employees with him.
He immediately launched DoubleLine – where his flagship fund produced 8.4% annual returns over the next five years. That nearly doubled up the 4.5% returned by the Barclays U.S. Aggregate Index over the same time period. And led him eventually to $85 billion in assets.
Gundlach didn’t need Gross. He made it clear he’d stay in full control of the firm, and there would be no power share. They agreed to keep the dialogue open… but there was no follow up chat. One week later, Gross departed PIMCO unceremoniously for lesser-known rival Janus Capital.
The Bond King was no longer fixed income’s figurehead. Barron’s even ditched him from its famous roundtable in favor of Gundlach.
High Priest of Contrarian Calls
When Gundlach speaks, he often takes heat from his peers and the media because his calls run contrary to popular belief. But he’s usually right – and profitable:
- In 2007, he warned investors to get out of subprime mortgages just before the credit markets melted down.
- In 2011, he predicted a big rally in U.S. Treasuries when rates were already near 30-year lows (and Bill Gross was predicting otherwise). Rates dropped in half again over the next year as bond prices skyrocketed.
- In 2014, he called a rally in the U.S. dollar when most pundits were predicting its demise – and the buck soon rallied 20%.
Gundlach Called the U.S. Treasury Rallies in 2011 and 2014…
… And the U.S. Dollar Rally in 2014, Too
Gundlach’s out-of-favor wagers help him counter the drag of the increasingly large pile of money he manages ($85 billion and growing). His investors give him their capital and let him work his magic – which means he’s free to scour the globe and invest in his best fixed income ideas.
Now, Gundlach’s strategy is a sophisticated one that shouldn’t directly be replicated at home by you or me. Most of his portfolios are invested in securities that are below investment grade or not rated at all.
But we can invest as Gundlach would and hire an expert of his caliber – and even the Bond God himself – with a “single-click” via the closed-ends that he spoke so glowingly about.
The 3 “Best Plays” Today
The “slam dunk” investments Gundlach was referring to are closed-end funds, which have pools of shares that are fixed. And these shares trade publicly like regular stocks. So you can buy them quite easily, as you would any other stock.
An open-end fund, on the other hand – commonly called a mutual fund – issues as many shares as investors want to buy.
I personally prefer closed-end funds because they often sell at great values. Gundlach agrees:
“Closed-ends are one of the best plays on the Fed not raising interest rates. Investors have been afraid to own them because they fear that the Fed has launched a tightening cycle.
“For 20 years, they have traded at a 2% discount, on average, to net asset value (NAV). Recently, however, the sector traded at a 10% to 12% discount to NAV.”
In other words, you’re getting $1 worth of assets for just 88 or 90 cents. That’s free money.
I love watching closed-end fund discounts because they’re clear contrarian indicators. The more investors dislike a strategy at the moment, the greater the discount they demand.
The irony is that most people love chasing recent performance, which means they’re most inclined to sell a loser at the moment it’s most likely to turn around.
Over the next few minutes, I’m going to tell you more about this – and three closed-end funds paying 8% and 9% yields, with 10% upside in the next year to boot. But first, a bit about myself…
My name is Brett Owens and I’m an unabashed dividend investor. Ever since my days at Cornell and all through my years as a startup founder in Silicon Valley, I’ve hunted down safe, stable, meaningful yields.
For the last 10 years, I’ve been investing my startup profits and finding 6%, 7%, even 8%+ dividends with plenty of double-digit gains along the way.
Like Gundlach, I haven’t been this excited about an income opportunity in years.
And we’re actually in a better position than the Bond God. He can buy whatever bonds he wants, but he can’t claim the discount you and I get when we buy a closed-end fund.
Larger funds in the space have market caps around $1 or $2 billion. That’s plenty big for you and me, but too small for Gundlach. If he started to accumulate shares, he’d move the entire market and eliminate the “free money” bargain.
You and I don’t manage billions – so we don’t have this problem. We’re free and clear to buy the bonds AND get them at a discount with high quality “closed-end funds.”
Let’s talk about my three favorite plays today. All three pay big yields that distribute payouts monthly. Plus, the trio has 7-15% upside — or better — thanks to their discounts…
Bond God Buy #1 Pays 8.2%
Buy #1 is a backdoor way to purchase the greatest infrastructure companies in the world at a bargain price. As you know, America’s infrastructure is crumbling after decades of neglect and underinvestment. The American Society of Civil Engineers graded the current state of roads, ports, power plants and water treatment a “D+” in aggregate.
There are few bright spots, with the ASCE estimating $3.6 trillion will need to be invested by 2020 for upgrades.
No matter what happens next in Washington, America will need to up its investment in infrastructure. This fund is riding a bullish trend that will continue for decades, at least.
But it’s trading at a 14% discount to the value of the assets it holds! In a knee-jerk reaction, “first-level” investor types have sold this fund along with other energy stocks. But it doesn’t loan money to energy producers – it buys stocks and bonds in the top infrastructure companies in the world. And these holdings are constantly marked to market, so there’s no reason for the fund to trade at such a steep discount.
That’s good news for us – we can make a “one-click” purchase for 86 cents on the dollar. In return, we’ll collect income from utilities, airports, toll roads, railroads, and other physical framework around the world.
We’ll get paid every single month and collect an 8.2% yield at current prices.
The fund’s top holding is Crown Castle International, the largest provider of wireless cell towers in the U.S. Number two is National Grid, a British electric and gas utility. And rounding out the top three is Transurban Group, a toll road developer that operates in Australia and America.
Buy #1’s Top 10 Holdings
Over the past twelve months, these stocks have gained 6.8%, 13.9% and 21.8% while the S&P 500 has dropped 1.2%. They should continue to outperform in the years ahead.
Together, these stocks pay an average yield of 4.1%. But we can actually double our payout – and capture more upside, too – simply by buying this fund.
Reason being, the fund’s investment managers have access to preferred stock shares that pay even higher yields than the common stock shares you and I see quoted. These preferred shares generally aren’t available to retail investors like you and me – but we can buy a basket of them with a single-click by picking up this high-yielding virtual toll bridge.
Plus, the fund’s 14% discount will close in the months ahead, providing us with “instant upside” on top of our secure 8.2% dividend.
Bond God Buy #2 Pays 8.7%
Buy #2 has double contrarian appeal. Investors ditched it throughout 2015, concerned the Fed was about to embark on a sustained rate raising campaign (which, of course, never materialized).
Then, to kick off 2016, these headline-fearing folks avoided anything they perceived to be tied to China. In fact, they sold this fund simply because it has “Asia” in its name!
These dual panics are the reason fund trades at a 12% discount to its underlying assets. Given its steep sale price, you’d think it’s holding the debt of some obscure Chinese companies. But that couldn’t be any farther from the truth.
It actually holds safe government bonds in financially-stable sovereigns such as Australia, India, and Korea!
Top 10 Holdings – Not Exactly Risky
And 81% of the fund’s holdings are investment grade…
81% Investment Grade (AAA, AA, A or BBB)
The fund’s been around for almost three decades, and management has seen its share of Asian crises. Each one of them has been a great buying opportunity in the past. Check out the fund’s current yield – this is the best time to buy this decade:
Best Time To Buy This Decade
Best part is, management buys its own dips, too. Since 2001 it’s helped its own cause by repurchasing shares when they’re trading at a steep discount to NAV. It has ongoing board approval to buy back up to 10% of its outstanding shares of common stock during any 12-month period.
I expect they’ll continue to do so as long as the fund is trading at a 10%+ discount to NAV. Which means it’s smart to buy shares alongside management today. You’ll collect a secure 8.4% yield, with an additional 12% in upside potential as its discount window narrows.
Bond God Buy #3 Pays 11.3%
Finally we have an 11.3% yield brought to us by the Bond God himself – with 8% upside to boot.
We’ve talked a lot about discounts – there is a flipside. Premiums exist, but they are rare in the closed-end space. And usually reserved for “rock star” managers and hot ideas.
For example, PIMCO’s funds would often trade at a premium when Gross was running the show. In fact, three still do trade at double-digit premiums, with the most excessive above 80% today. Yes, you read right – there are people who pay $1.80 for $1.00 to invest with the ghost of Gross!
In 2012, DoubleLine launched a closed-end of its own. Not surprisingly, it trades for a 17% premium to its NAV today. Investors, in other words are paying $1.17 for $1.00 just to get in with the Bond God.
As you know, the investing odds are against you when you run with the crowd with a popular trade. But there’s actually a contrarian income opportunity in DoubleLine’s second, lesser known fund.
You see, this “stepchild” fund launched at an unlucky time – when investors fretted about the possibility of higher rates. Thanks to initial interest rate paranoia, it actually trades at an 8% discount to NAV – even though it’s managed by the same team and provides the same flexibility for them to invest in their best fixed income ideas.
Even better, this “other” DoubleLine fund pays a whopping 11% yield after fees!
The “smart money” is no longer worried about rising interest rates. The Fed Fund futures market is betting on only one rate hike between now and next summer. As a result, investors are starting to buy up the Bond God’s other fund. I expect the 8% discount window to close quickly – which will give new investors total gains of 19% over the next 12 months.
8% to 11% Dividends With
7% to 15% Upside in 12 Months
It’s only a matter of time before other income investors ditch their paltry 2% and 3% payers and find their way over to “slam dunk” income plays.
That’s why I’ve prepared an in-depth guide on all three of my favorite closed-end funds called “Monthly Dividend Superstars: 8-11% Yields with 15% Upside.”
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- The global infrastructure play that pays 8.2% annually and sells at a 14% discount to net asset value (NAV).
- The safe play on secure Asian and Australian government bonds that pays 8.7% and sells at a 12% discount to NAV.
- The brainchild of the Bond God himself that pays 11.3% and sells at a 7% discount to NAV.
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