Fund of Closed-End Funds

An Income Stream That Spreads the Risk (From Smart Money)

Since I highlighted some of my favorite ideas for income last week, yields on government bonds have soared, pushing prices on many traditional bond and bond equivalents sharply lower. Thankfully, the floating rate, foreign currency and muni funds we mentioned have generally held up.

Even given the uncertainty over interest rates, the economy and continued government intervention in the economy, I’ll add one more idea to the list. Cohen & Steers Closed-End Opportunity Fund (FOF: 9.78, +0.10, +1.03%), a unique closed-end “fund-of-funds” that holds stakes in no fewer than 95 different closed-end income-oriented funds, all of which pay regular dividends. To that end, the investor in FOF achieves two levels of diversification, owning one fund that owns literally dozens of funds, each with its own portfolio of investments.

Cohen & Steers Closed-End Opportunity Fund (FOF)



Source: Cohen & Steers

Covered-call funds, which sell options on a portfolio of stocks, account for its biggest allocation at approximately 15%, along with tax-advantaged equity funds, meaning the FOF tends to generally correlate with the broad stock market. The difference is the income – an investment in the S&P 500 will yield less than 2.5% while at current levels FOF yields more than 11%, thanks to the fund’s investment in high yield, convertible and preferred funds. Real estate, senior loan, utility and master-limited partnerships are a few of the other asset classes represented. It truly has a little bit of everything that throws off income.

Moreover, FOF itself trades at a 7% discount to its NAV – a chasm likely to narrow should liquidity and market confidence stabilize.

Income investors are essentially bankers and thus should look to build bulletproof portfolios based around a range of various types of securities and risks. FOF offers a highly diversified portfolio consisting of a wide range of income-oriented ideas. This is by no means a bond equivalent and carries plenty of market risk. But for a total-return investor hunting for yield, this is certainly one to consider