Equity CEFs: Enough Is Enough, Consider The Cohen & Steers Infrastructure Fund
Summary I realize this is a “have” market and you have to own what works but sometimes, the valuation of some CEFs become so absurd, you can’t ignore it. A number of CEFs are getting to this absurd level, including some REITs, but one fund I have owned a small position in for years I believe is especially attractive. You would be hard pressed to find an equity CEF that has had as good an NAV performance historically as the Cohen & Steers Infrastructure fund, despite a subpar year. I’m going to write this article rather quickly after yesterday’s market close since I wanted to get this out fresh today. The disgust in this market is becoming palpable as investors throw in the towel on what doesn’t work and are forced to buy what does, even at all-time highs. But there comes a point, like in the fall of 2008, when investors are flat-out wrong and making what I would consider to be emotional and short-sighted decisions. I believe we are at such an inflection point with a number of equity CEFs, but none more so than the Cohen & Steers Infrastructure fund (NYSE: UTF ) , $18.96 market price, $23.18 NAV, -18.2% discount, 8.4% current market yield . You read that right. UTF now trades at an unbelievable -18.2% discount with a market price well over $4 below its NAV. Think about this for a minute. UTF went public back in March of 2004 at a $19.10 NAV and a $20 market price (after a $0.90 sales credit per share). So after paying quarterly distributions averaging say, 6% to 7% annually, Cohen & Steers has still been able to grow UTF’s NAV from $19.10 to $23.18 today, even with some subpar years like 2015. You would be hard pressed to find any other equity CEF that has accomplished that. How strong has UTF been historically? Here is UTF’s Annual Performance figures taken from UTF’s Fact Sheet dated 9/30/2015. (click to enlarge) How many CEFs do you think have beaten the S&P 500 in both total return market price and NAV since their inception? Trust me, not many. And UTF has accomplished this as a global equity fund, including a portion of its portfolio in high yield corporate bonds and preferred securities. UTF also happens to be one of the largest CEFs at $2.8 billion in total assets so it is quite liquid. Here are UTF’s top 10 holdings as of 9/30/15. (click to enlarge) Now has UTF had a good past year? No, but I guess if you don’t own Facebook (NASDAQ: FB ) , Amazon (NASDAQ: AMZN ) , Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL ) o r Netflix (NASDAQ: NFLX ) in your portfolio somewhere, you probably wouldn’t be having a good year either it seems. Year-to-date, UTF’s NAV is down -5.5%, but that’s hardly what I would call a disaster, especially considering what sectors UTF invests in. UTF is an infrastructure fund which means its owns mostly global stocks in the utility, communication tower, toll roads, rails and satellite sectors. Here is UTF’s sector and geographic breakdown. (click to enlarge) Obviously, UTF is invested in some areas that are under an immense amount of pressure this year, i.e. energy MLPs for example, but you’re also talking about a management team that has been in place since the fund’s inception and has weathered many storms. Barron’s also recently wrote a very positive article on two of UTF’s top positions shown above, Crown Castle International (NYSE: CCI ) and American Tower (NYSE: AMT ) , when it came out with this article on October 17th, How To Profit From The Real Estate Play In Wireless Stocks . If you can’t access the article since Barron’s is subscription based, here is a brief highlight from the article. The companies have slightly different identities. American Tower is the largest with the most international exposure, while Crown Castle has focused on U.S. urban areas. SBA is the smallest and fastest-growing. But the opportunity is the same. The stocks could each rise 20% or more in the coming 18 months, especially as investors shrug off near-term concerns and focus on the big picture. Also consider that UTF has been steadily raising its distributions over the years, most recently this past March from $0.37/share to $0.40/share and now offers an 8.4% current market yield, a healthy bonus over its very reasonable 6.9% NAV yield. Conclusion You almost have to go back to 2008 to find opportunities like this in my opinion. Now I have no crystal ball in regards to where interest rates go or if the utility, energy or “have not” sectors gets worse before they get better, but I do know that when emotions drive CEF market prices to these discount levels, your risk/reward improves dramatically if you just hold onto the fund and even add to your position on any added weakness. The Federal Reserve’s resolve to raise interest rates does not mean the end of anything and everything interest rate sensitive, though that seems to be the consensus of the markets right now, particularly in CEFs. But at some point, there will be a leveling of emotions and sanity will creep back into the market. UTF has been one of the best long term performers of all the CEFs I follow though it has historically traded at a wide discount. But that shouldn’t deter you from owning this fund as that is hardly an indication of its historic market price performance and in fact, some of the worst CEFs I follow trade at premium market prices despite having horrible market price performance. UTF’s -18.2% discount may be a valuation anomaly but it also presents an opportunity for investors to pick up one of the best windfall yield bonuses I have seen in years. In other words, the fund has only to cover a modest 6.9% NAV yield, which is a big reason why UTF has been so successful at growing its NAV over the years as a leveraged CEF, but because of the -18.2% discount, investor’s can receive a bonus 8.4% windfall market yield. Emotions are running high right now and investors, big and small, are jettisoning anything that hasn’t “worked” this year to chase what has. Though I have also been forced to adapt to this strategy, I also believe there are opportunities that can become either a “have” or “have not” as well. UTF has now become a “must have” opportunity.