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Getting Creative With Foreign-Focused CEFs

Wed, 7 Nov 2012

Morningstar's Steve Pikelny discusses his closed-end fund ideas for international fixed-income and equity exposure and the advantages for using CEFs in these areas.

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Video Transcript

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Should investors who are looking to gain some global exposure consider closed-end funds? I'm here with Steve Pikelny, a closed-end fund analyst at Morningstar. We're going to look at some potential options.

Steve, thanks for joining me today.

Steve Pikelny: Thanks for having me.

Glaser: So, let's talk a little bit about why investors might want to look at the closed-end fund structure for investing abroad instead of, say, an open-end fund or an exchange-traded fund or some other option.

Pikelny: Well, the big advantage that closed-end funds have over other investment vehicles is that they have, like the name implies, a closed capital structure. So, that means a fund manager is working with a relatively fixed amount of capital, and they can make their investments which means that they're not forced to go out and find more securities which may be illiquid in an up market and in a down market they will be forced to sell these securities for a potentially unfavorable price. So, this means that the managers can kind of venture into the less liquid markets, a lot of emerging markets and other international markets, and they could also use leverage, which obviously has the potential to boost income and capital gains.

Glaser: Let's take a look at some individual funds then that could potentially, use some of these advantages. What are some of our favorites in this space?

Pikelny: One of our favorites is FAX which is Aberdeen's Asia-Pacific fixed income fund, and that fund's interesting because it invests about half of its assets into the Australian debt market, and Australia has traditionally been a very fiscally conservative country, so there isn't a lot of credit risk there, but at the same time, their bonds do have relatively high yield. And then the other half of the portfolio kind of ventures into non-Japanese, Asian fixed-income markets. So, it goes into China, India, Thailand, Malaysia, and a lot of those countries.

There aren't many options that investors have to kind of gain exposure to this region. Aberdeen also has offices in those actual locations. So, they're not just sitting at a computer somewhere in Philadelphia, trying to infer what's going on in these countries. They're actually on the ground and looking at the stuff. They also have a small leverage ratio. So, that also serves to amplify income.

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Glaser: Is there anything else that would be good for an international income play?

Pikelny: Templeton also has an interesting fund, GIM, which is their global income fund. It also focuses on Asia, but it also focuses in South America, Europe, and North America, and so that's a little bit more diversified. The other interesting thing that that fund does is, it has currency exposures outside of the U.S. dollar. So this means, while it can potentially be a little bit more volatile than some other global-income funds, it also provides some added diversification in the neighborhood of interest rates and currency exposure.

Glaser: So this fund seems to be mostly focused on fixed income. Are there any other asset classes in the closed-end fund structure for investors looking abroad?

Pikelny: Well, I mean if you're looking for real estate, another good fund is IGR, which is run by CBRE Clarion, and this I believe their only closed-end fund offering. They have kind of a broader global real estate portfolio. This fund has a little bit of an interesting back story, because it had IPO at basically the peak of the global real estate market and obviously that wasn't the best timing ever. And since it uses leverage, it kind of had a pretty spectacular downfall from that. But ever since then, the managers kind of reformed their ways. Now the fund occasionally uses a little bit of leverage, but for the most part it's pretty unleveraged. So its return is a little bit less volatile, but they can leverage-off CBRE's kind of global platform looking at real estate. So I think that investors, for the most part are in good hands right now with that.

Glaser: How about on the equity side? Are there any funds that you'd recommend there?

Pikelny: The interesting thing about I guess kind of using closed-end funds for getting into the more granular side of the international equity market is you get a lot of interesting offers. Aberdeen also runs a couple of very specific funds. One of them is the India Fund, which as the name implies, focuses on Indian equities. They also run another fund, ETF, which is their emerging-markets infrastructure and telecom fund.

Because both markets are relatively illiquid, it makes it harder for open-end funds and exchange-traded funds to kind of gain exposure to it, because as we said before, they have to deal with inflows and outflows, but also because these markets just tend to have probably some more profit opportunities because there are fewer people kind of keeping their eyes on it.

Glaser: Steve, thanks for your time with us today.

Pikelny: Sure.

Glaser: For Morningstar, I'm Jeremy Glaser.

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