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Summary Example of one Asian baby thrown out with the bathwater by retail investors. Relatively safe portfolio of bonds, overseen by a reputable manager, with a yield in the high single digits. High potential for alpha through eventual compression of high-teens discount to NAV. Background on Closed-End Funds For those who want exposure to a particular sector or asset class, closed-end funds sometimes represent a cheaper vehicle than alternatives like ETFs and traditional mutual funds. This is because ETFs and conventional mutual funds frequently redeem/issue new shares to ensure that the price per share remains in line with the net asset value of the underlying holdings in the funds. This is not the case for closed-end funds. Rather, the share price of closed-end funds is driven by the market forces of supply and demand, which sometimes creates attractive opportunities to buy stakes at big discounts to NAV. This tends to happen when sentiment for the particular sector on which a closed-end fund focuses becomes negative, causing some investors to sell irrespective of price. This is currently the case for several Asia-focused closed-end funds. I previously wrote about one such opportunity to obtain Chinese equity exposure at a 20%-plus discount. Here, I’ll cover another opportunity to buy debt exposure at a discount. Aberdeen Asia-Pacific Income Fund Overview The Aberdeen Asia-Pacific Income Fund (NYSEMKT: FAX ) was established in 1986 with an investment objective to seek current income through investment in Australian and Asian debt securities. Aberdeen is a reputable closed-end fund manager, which has conducted share buybacks through tender offers for several of their other funds (such as The India Fund, Inc, Aberdeen Chile Fund, Inc, and Aberdeen Greater China Fund, Inc) when they have traded at significant discounts to NAV. The fund currently pays a monthly dividend of 3.5 cents (equating to a ~9.3% yield), and its expense ratio is moderate at 1.09%, excluding interest expense and based on the fiscal year ending October 31, 2014. The fund makes moderate use of leverage, which stood at approximately 22% of gross assets at August 31, 2015. Leverage is of course a double edged sword and could magnify any gains or losses experienced by the underlying assets. As can be seen below, although the fund’s longer term returns have been reasonable, performance has suffered recently amidst general market turbulence in the sector. Source: Aberdeen Asia-Pacific Income Fund Performance Report This lackluster recent performance has spurred investor outflows that have caused FAX to now trade at a ~17% discount to NAV. As shown below, this has happened numerous times in the past when Asian market sentiment turned negative (e.g., 2008, 2000, 1998), but in all cases the discount eventually collapsed when sentiment stabilized. (click to enlarge) Source: CEFConnect Portfolio Composition Based on reported holdings at August 31, 2015, the FAX portfolio is composed of ~44% corporate bonds, ~53% sovereign and supranational bonds, and ~2.6% cash. The vast majority of the portfolio is made up of investment grade (BBB- or higher rated) bonds. To put this in a little perspective, the average annual historical default rate of bonds rated IG by S&P over the past few decades is well-under 0.5%. Source: Aberdeen Asia-Pacific Income Fund Fact Sheet The portfolio is diversified geographically as summarized below, though Australia, China, India and South Korea are the largest constituents. Source: Aberdeen Asia-Pacific Income Fund Fact Sheet Conclusion Due to the Aberdeen Asia-Pacific Income Fund’s current large discount to NAV, investors now have the ability to own a relatively safe portfolio of Asian bonds, overseen by a reputable manager, for ~83 cents on the dollar. Scalper1 News
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