What are closed-end mutual funds? In many ways, closed-end funds are similar to open-end funds. When you invest is closed-end funds you spread your money over a diversified group of investments. Like open-end funds, closed-end funds have an investment manager who invests on behalf of the fund’s shareholders. Once you invest in a closed-end fund, you rely on the manager to invest your money and decide when to buy and sell.
A major difference between closed- and open-end funds is that closed-end mutual funds have a relatively fixed number of shares. A closed-end fund manager does not offer to buy back shares or units at any time, and only occasionally (if at all) sells new shares or units.
Most closed-end mutual funds trade on a stock exchange and their share price is set according to supply and demand. That means shares of these funds often sell at a discount or premium to the per share value of the fund’s assets. In contrast, open-end funds always buy back their shares directly from investors at a price equal to the net asset value, or NAV, per share.
A particularly attractive feature of closed-end funds is that you get extra leverage when you buy their shares at a discount. That is, you get the investment benefit of a dollar’s worth of assets, even though you invest less.
The discount may eventually shrink if the fund winds itself up or investors drive its net asset value (NAV) up. That way you earn an extra capital gain. Both of the funds below offer to buy back their shares at NAV once a year.
Aston Hill VIP Income Fund
Aston Hill VIP Income Fund (TSX─VIP.UN) managed to avoid much of the volatility and outperform the market in the first half of 2015. The fund posted a return of 3.2 per cent versus a 1.0 per cent decline for the S&P/TSX. Within this market environment, the fund has continued to maximize its allowed investments in high yield bonds (30%) as well as foreign equities and non-dividend paying stocks (10%).
Aston Hill VIP Income Fund is a closed-end fund whose investment mandate is to achieve a high level of monthly distributions and the opportunity for capital appreciation by investing in a broadly diversified portfolio of income-producing securities, including dividend-paying equities and fixed-income securities.
For the periods ended June 30, 2015, Aston Hill’s portfolio performed as follows: one-year, -1.2 per cent; three-year, 10.1 per cent; five-year, 10.4 per cent; and 10-year, 5.1 per cent.
Since the beginning of 2011, the fund’s net asset value has increased 2.4 per cent to $10.04 as of June 30. The distribution, however, has declined from $0.84 a share in 2011 to an annualized $0.54 in the first half of this year. In August, the annualized distribution was reduced further, to $0.42 a share.
The management expense ratio is 1.63 per cent.
Aston Hill continues to underweight energy and materials stocks in the fund. Overweight sectors include consumer discretionary and Canadian REITs.
Aston Hill’s annual distribution of $0.42 a share yields 4.6 per cent. Aston Hill is a buy for income.
Blue Ribbon Income Fund
Income stocks, in which Blue Ribbon specializes, underperformed the broad market in the third quarter. But Blue Ribbon Income Fund (TSX─RBN.UN), which has been taking defensive measures, outperformed the S&P/TSX High Dividend Total Return Index during the quarter. Nonetheless, the fund underperformed the S&P/TSX Composite Index in the first nine months of this year, losing 12.1 per cent of its value versus a 7.0 per cent decline for the Index.
Blue Ribbon Income Fund is a closed-end mutual fund whose investment mandate is to provide a high level of monthly distributions and the opportunity to participate in capital gains by actively managing a portfolio of publicly listed or traded securities, including income trusts, royalty trusts, real estate investment trusts, preferred securities and debt instruments.
For the periods ended Sept. 30, 2015, Blue Ribbon’s portfolio performed as follows: one-year, -21.1 per cent; three-year, -0.9 per cent; five-year, 3.7 per cent; and 10-year, 5.2 per cent. The fund has underperformed the S&P/TSX Index in all periods, except the 10-year period, in which the Index gained an annualized 4.8 per cent.
Since the beginning of 2010, the fund’s net asset value per share has increased just 0.1 per cent to $9.76 as of June 30. Meanwhile, the annualized distribution per share began and ended the same period at $0.84, though it has fluctuated within the period.
Blue Ribbon expects income stocks to resume their outperformance over the longer term. In the meantime, the fund has taken further defensive measures, raising its cash level to about 20 per cent and holding fewer commodity-related stocks.
Blue Ribbon’s shares trade at a 1.7 per cent discount to their net asset value of $9.16 a share. The current annual distribution of $0.84 a share yields 9.3 per cent, a level which suggests that a cut in the distribution may be in the offing.
Blue Ribbon Income Fund is a buy for income.
Money Reporter, MPL Communications Inc.
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