The article “Buy Bonds!” from Contrarian Outlook has observed a significant shift in the sentiment toward fixed-income investments over a span of two years. Initially, in the second half of 2022, the authors advocated for purchasing bonds, emphasizing the importance of contrarian investment strategies. Fast forward to the second half of 2024, and mainstream investors have largely adopted this perspective. While early adopters who followed the contrarian outlook have likely reaped benefits, the current market climate poses challenges for those looking to invest newly. High valuations and increased popularity can lead to increased risks, particularly when buying into well-known names or funds that are now in demand.
Among the products discussed, PIMCO closed-end funds (CEFs) emerged as strong contenders in the fixed-income space. However, the author urges caution, noting that these formerly undervalued assets are now trading at premium prices that may not be justified. The article highlights the search for overlooked, under-valued CEFs that offer both substantial dividends and discounts to their net asset values (NAVs). The focus lies on three specific financial instruments that stand out for their attractive yields. Each comes with unique characteristics, including aggressive debt leveraging and a focus on various asset classes.
The first fund examined is the Invesco Municipal Opportunity Trust (VMO), which focuses on municipal bonds. The fund distinguishes itself by employing a notable amount of leverage—37%—to amplify income, leading to a distribution rate of 7.4% and an attractive 11.4% tax-equivalent yield for higher-tax-bracket investors. Despite warnings about the risk associated with its significant stake in junk and unrated bonds, the fund’s prospects appear promising, particularly given its historical tendency to narrow the discount to NAV during market upcycles. As VMO’s discount reaches an average level, the potential for greater appreciation warrants attention from contrarian investors.
In addition to VMO, the article discusses the Flaherty & Crumrine Preferred Securities (FFC) fund, which targets preferred securities primarily within the finance sector. The fund enjoys a degree of diversification by including international preferreds and carefully selecting high-quality financial institutions. A striking feature of FFC is its reliance on leverage, with a current debt leverage of 38%, leading to considerable price volatility. Although the income potential isn’t as strong as before, recent shifts in performance indicate that timing remains crucial—a theme the author emphasizes when reflecting on past performance and market conditions. Currently, FFC trades at a 6% discount to NAV, presenting a favorable entry point compared to its historical valuation.
The third highlighted option is the abrdn Asia-Pacific Income Fund (FAX), which focuses on emerging-market debt—more specifically, sovereign and corporate bonds from countries in Asia and the Pacific. FAX positions itself with a significant proportion of BBB-rated bonds, making it appealing for those seeking exposure to international markets. While historically sensitive to shifts in U.S. rates, the fund currently has a discount to NAV of over 6%, which is historically low for the fund. With a manageable leverage of 30%, FAX can outperform when managed prudently. However, its vulnerability to rapid market changes necessitates a vigilant approach to investing.
Ultimately, Brett Owens, Chief Investment Strategist for Contrarian Outlook, advises potential investors to be wary of high valuations while seeking opportunities in under-owned CEFs that have maintained discounts and offer substantial yields. The article reinforces the necessity to remain adaptive in today’s market, bearing in mind the risks associated with increased leverage and volatility inherent in fixed-income securities. Investors are encouraged to explore diverse investment avenues, and Owens offers access to additional insights through a special report aimed at constructing robust income-generating portfolios. With recommended strategies falling firmly in line with contrarian philosophy, the core principle remains to identify and seize opportunities while exercising caution in an evolving financial landscape.
