Mutual Funds
Big Yields, Not-So-Big Risks
Your payoff rises right along with interest rates.
By Steven Goldberg, Contributing Columnist
From Kiplinger's Personal Finance magazine, August 2005
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Earning 6% without taking big risks isn't a pipe dream. You can find that kind of yield among a small group of closed-end funds that invest in low-grade bank loans. Known as senior-loan funds, these products are immune from swings in long-term interest rates. On top of that, the funds, which trade like stocks, sell at enticing discounts to the value of their underlying assets.
The funds invest in loans that banks make to corporations, generally those with low debt ratings. In the event of bankruptcy, holders of these senior loans stand at the head of the creditors' line. "That makes them a coward's way to play high yield," says analyst Mariana Bush, of Wachovia Securities, who recommends the funds. Moreover, the interest rates on these loans reset periodically -- typically every two months. That means the interest rates borrowers pay rise along with jumps in short-term rates.
Bush favors five closed-ends that invest solely in senior loans: Citigroup Corporate Loan (symbol TLI; recent price, $13; yield, 5.5%), First Trust/Four Corners Senior (FCM; $18; 6.5%), First Trust/Four Corners Senior 2 (FCT; $18; 6.3%), ING Prime Rate Trust (PPR; $7; 6.4%) and Van Kampen Senior Income Trust (VVR; $8; 6.2%). In mid June, the funds traded at discounts to net asset value of 4% to 8%. Check current discounts at www.closed-endfunds.com.