Grab This Inflation Killer and Score an 11.9% Yield

Shah Gilani|October 17, 2022

Wednesday’s release of the Fed minutes made it pretty clear the central bank has no intention of pivoting until inflation is more under control, and recent inflation numbers show little change from what we’ve seen in the past few months.

At this point, without any significant change from the Fed or inflation numbers, I see stocks continuing to drift lower. That’s why it’s more important than ever to find a place to put your money where you can capture some inflation-beating income.

To that end, today I want to talk about Closed End Funds, which 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.

Just like most standard mutual funds, closed end funds have a professional manager overseeing the portfolio and actively buying, selling, and holding assets. But unlike a standard mutual fund, closed end funds trade just like any stock or ETF, its shares fluctuating in price throughout the trading day.

One of the things I really like about closed end funds are the high yields they can provide. Because closed end funds are professionally managed, they can deploy leverage to push the yield much higher than they could if they were simply buying stocks or bonds. And because they trade just like stocks, you can sometimes buy them for less than the Net Asset Value (more on that here in a moment) of their holdings.

My favorite pick in this asset class is a fund that manages more than $2 trillion in diverse assets, boasts a solid 11.9% yield at the time of writing, and has a profile that looks good for the long-term.

As I said, one thing I really like about closed-end funds is pricing when it comes to the Net Asset Value (NAV) of the portfolio. The NAV of the fund is calculated regularly, based on the value of the assets in the fund. This means that a closed-end fund can trade at a premium or a discount to its NAV.

Given all that, my favorite closed end fund right now is PIMCO Access Income Fund (PAXS). The fund primarily invests in corporate debt, mortgage-related and other asset-backed instruments, government and sovereign debt, taxable municipal bonds, and floating-rate income-producing securities with varying maturities.

In case you’re not familiar with PIMCO (Pacific Investment Management Company), it’s an American investment management firm founded in 1971 in California. The firm focuses on fixed income and manages more than $2.2 trillion in assets.

You read that right, PIMCO manages more than $2 trillion in assets. That’s significant because it means the company’s funds are run by some of the best and brightest managers in the business.

PAXS holds a basket of various debt instruments. Its largest allocations are to mortgage-backed securities (24.32% of the fund), commercial mortgage-backed securities (22.42% of the fund), high yield credit (22.89% of the fund), high yield credit (22.89% of the fund), and non-USD developed debt (14.52% of the fund).

The majority of the debt has maturities of less than 1 year (28.25% f the fund), 3-5 years (26.94% of the fund), and 1-3 years (14.25% of the fund). I like that a lot, because shorter duration debt is less volatile that longer debt, so PAXS profile looks good.

As I write this, PAXS is paying 11.90% yield and it’s trading at a 9.18% discount to the NAV. You have to like that – a significant yield, and it’s trading at a discount!

So, if you’re looking for an investment that’s delivering a yield that’s higher than the current rate of inflation, and you want to buy it at a discount, you might want to consider PAXS.