2 Closed-End Funds for Retirement

Brittney Barrett  |

Investors approaching retirement have been victimized by several financial game changers including, but not limited to the Federal Reserve’s decision to drive down interest rates. A broad exit from equities and a seemingly new standard of volatility have made options few and far between for investors seeking options for their retirement. There are also the risks of inflation on many investments; long-term bonds for instance are now offering annual yields far less than the 3.8 percent rate of inflation.  So what if I invest in Inflation-protected Treasury bonds to avoid that conundrum? Unfortunately, many people have beat you to it and TIPS, as they are called, have become so overbought that 5-year yields would actually be negative according to a MarketWatch report.

The report then goes on to mention one suggestion, embraced by expert money maker Bill Gates. Betting on inflation, Gates has embraced the if you can’t beat it, join it philosophy and invested in two closed-end funds that invest in a basket of inflation-linked bonds. The funds are appealing by virtue of their capacity to offer inflation-protected bonds at a discount, an 11 percent discount according to the MarketWatch piece.

Here is a bit about closed-end funds. As a rule, closed-end funds sell a predetermined number of shares at one time in an initial public offering rather than continuously make the funds available. After this period, the shares can be sold by those looking to exit the fund on a secondary market. In the case of the funds selected by Gates, Western Asset/Claymore Inflation-Linked Securities (WIA) and Western Asset/Claymore Inflation-Linked Opportunities & Income (WIW), they are traded on the New York Stock Exchange.

The other important element of a closed-end fund, is timing the investment correctly. The market price of closed-end funds does not consistently correlate with its actual value. It may be worth $2 but sell for considerably less. Therein lies the discount. Buying at a time when a fund is selling for lower than its actual cash equivalent allows an investor to get more than they’re paying for and increase the capital gains that would be available if the bonds were bought directly.

WIA, where Gates has around $56 million invested through his vehicle Cascade, invests primarily in inflation-linked securities with another portion of its managed assets in United Treasury Inflation Protected Securities and an additional part in non-US dollar investments or corporate debt securities of investment-grade quality. The fund is currently being sold at an 11.24 percent discount to Net Asset Value with an estimated yield of 3.14 percent.

Gates has an additional $106 million invested in WIW, which sticks to the same formula, attempting to keep as much as 80 percent of its total managed assets invested in inflation-linked securities with several other avenues peppered in.

Both funds seek to provide current income to their investors as opposed to bonds and treasurys which are no longer able to offer significant yields on a short-term basis. With inflated costs for traditional retirement investments, the double digit discounts offered at these closed end funds look appealing.

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