During the past several months, many high yielding sectors of the closed-end fund marketplace have underperformed investors’ expectations. This is especially prescient in light of the broad equity market’s push to new all-time highs following the October volatility. Wide spread selling pressure has been cropping up in nearly all credit heavy and commodity related funds, which begs the question: opportunity or falling knife?
I think that everyone is aware of the news feed coming out of the financial complex lately because it has seemingly marked the current correction in oil prices to be the end of our addiction to fossil-fuel energy. I think I even recall seeing a sentiment statistic that pointed to only 3% of market participants surveyed as being bullish on energy prices, which is typically a strong contrarian indicator. Furthermore, it seems as though every market pundit has become a self-proclaimed expert on supply dynamics, demand metrics, and OPEC ‘s motives.
Yet just like all corrective forces, it appears the deck is stacked against any sort of recovery or stabilization, but from a pure price perspective its obvious crude is overextended on the downside. While that might not be a significant enough catalyst for a turnaround, equities linked to the underlying commodity are attractive long term investments for a world that is addicted to oil without a cost-effective rehab plan.
From a closed end fund investor’s prospective, the best values are always unlocked during these types of raucous downtrends, since the individual investor-dominated marketplace always overcorrects. Two of my favorite funds that I would consider for clients in our Dynamic CEF Income Portfolio that house large oil integrated producers include the Petroleum and Resources Fund (PEO), and the Blackrock Energy & Resources Fund (BGR).
Interestingly, both funds exhibit recent discount narrowing even in light of the large selloff, which could be indicative of bottom feeding from large institutional investors. I will be monitoring the relationship between NAV and price closely to uncover any anomalies that point to a potential turnaround. Furthermore, the funds both levy reasonable expenses, have very little leverage, and attractive distribution yields in the low 7% range.
