Will highly leveraged closed-end funds (CEF) be slammed by a December interest rate hike? “A rate hike will likely impact highly leveraged closed-end funds in the short run, however the lower for longer environment will make them attractive over the long term,” said said John Cole Scott, chief investment officers at Closed-End Fund Advisors. One of Scott’s current favorite closed-end funds is the MFS High Income Municipal Trust . The muni CEF trades at a 4% discount to its net asset value and currently sports a yield of 5.5%. The three year average discount for the CXE is 8.7%. Leverage in the fund is 36% and it has a duration of 7.2, which is low for funds in this category. “The CXE is a good equity hedge in an uncertain market environment and the tax-equivalent yield of around 9% is hard to beat,” said Scott. Scott is also recommending the Calamos Global Dynamic Income Fund , a hybrid CEF that mixes global stocks and bonds. It currently trades at an 11% discount, close to its three year average, and has a leverage of 30%. Yield on the CHW is 11.4% at last check. “Calamos has experienced active managers so investors can feel comfortable that they are in good hands,” said Scott. The Cushing MLP Total Return Fund pays an 8.4% yield and sports a 31% leverage ratio. The pipeline CEF trades at a discount of 13%, well below its three year average premium of 1%. Scott said the energy play is comprised of 71% midstream outfits so it is “less tied to the price of oil” than many other funds. Finally, Scott is a fan of the Saratoga Investment Corp. , a debt-based business development corporation trading at a 19% discount compared to its three year average of 28%. Saratoga yields a healthy 9.7% in a low-yield environment. “Saratoga trades at a discount because it is small, not because it is poorly run,” said Scott.
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