This Income Play Is a Perfect Hedge Against a Choppy Market

Shah Gilani|June 26, 2023

The Fed seems to have taken the wind out of the recent A.I.-related rally with its recent comments about more rates hikes on the horizon, and its commitment to getting inflation down to its 2% target.

With that as the backdrop, and the current bull market under pressure, it’s more important than ever to be looking for income investments to smooth out some of the volatility, and provide some upside when stocks begin trading higher again.

Just like in last week’s watchlist, I want to focus our attention on inflation-beating Closed End Funds (CEF). In case you’re not familiar with CEFs, they are a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.

I tend to look for two things in CEFs. Yield is important, of course, but also the relationship between its current trading price and its net asset value (NAV) – that is, the value of all the assets that the fund has under management.

When a CEF is trading below its NAV, it’s said to be trading at a discount, and this creates a great entry point for investors who can benefit from both the upside potential and the income.

And I’ve got a pick this week that checks off all the boxes.

I’m watching Thornburg Income Builder Opportunity Trust (TBLD), a closed-end fund that seeks current income and total return by investing in global securities alongside covered call options. In addition to holding equities producing attractive distributions, writing covered calls against those equities, it also writes uncovered call and put options.

The TBLD portfolio composition consists of 65% global equities, 31% global debt, and 4% cash.

Regarding the portfolio, the price to trailing 12-months earnings is just 10.0x, compared to its benchmark, which is 17.7x. That’s impressive, especially considering how high valuations have gotten after the recent A.I.-fueled rally.

At the current price, the fund delivers an 8.29% yield, and it’s trading an -14.13% discount to its net asset value (NAV).

I’m watching TBLD for the income, but I’m also watching for a potential price breakout which could bring the current shares price in line with its NAV.

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