Money Management: Buying corporate America at a discount

By Terry J. Diehl
Posted: 5:49 pm Tue, February 7, 2012

Over the past eight plus years since I’ve been working at Karpus Investment Management, I’ve been asked numerous times by sophisticated investment professionals who have large books of business in closed-end funds, “ How do you do it ? How do you keep up with all the research?”

The honest answer is that I don’t, but we, as a team, do. Our portfolio managers have the responsibility of being an analyst and trader, and having the ability to invest client funds in the best opportunity available at any given time.

We do all our research independently and uncover many opportunities that other managers may miss. Recently our group uncovered an equity closed-end fund that I have shared with many clients as an excellent example of what we do.

What if I were to tell you that you could buy the following stocks at 86 cents on the dollar (as of Feb. 2):

• Apple
• Exxon Mobil Corp.
• AT&T Inc.
• Qualcomm Inc.
• Coca-Cola Co.
• Danaher Corp.
• International Business Machines Corp.
• Google Inc.
• Ebay Inc.
• Nike Inc.
• United Health Group Inc.

 There is an actual closed-end fund that owns the above equities as their top 10 holdings. On Feb. 2, you could buy it for a -13.94 percent discount.

Here’s the part where I feel like one of the late night TV infomercial pitchmen: “But that’s not all.”

This example also pays a 12.03 percent dividend. The fund’s managers have an elaborate covered-call strategy. The managers employ a strategy whereby they enter into a contract with an option exchange to sell their shares at a higher price in the future. For that you receive the funds (the premium) immediately.

Many things can occur between now and the option expiration date. This strategy, called a covered write, is successful slightly more than 80 percent of the time, and is the only option strategy allowed inside an IRA account.

What happens if 2012 is a flat year, like we had in 2011? In 2011, the S&P 500 was -.003 percent on the year, and if you added dividends back in, you received a total return of 2.12 percent. With the above example, if we run into another flat market, the investor would still make the 12 percent dividend.

This fund has an excellent track record; trading at a premium (above its Net Asset Value) back in July 2010. Overall, the Domestic Equity Closed-End fund discounts are now reasonably attractive on a historical basis for the past five years. The discounts were at their widest in December 2008.

In addition to the above example, our equity research team has uncovered two sister funds with quite similar characteristics. We are adding all three funds on a respective percentage basis throughout the equity portion of our portfolios.

These three funds are just part of approximately 18 to 25 funds in the average domestic portfolio that when you break down each fund represent more than 3,000 individual securities. Does your manager provide you with this extent of diversification?

Imagine having the opportunity to buy large corporations’ stocks below their true market price.

Terry Diehl is a vice president for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.