Here we are in the last week of August and the Dow is making 200-point swings. It takes the meaning of volatility to a whole new level.
During this white-knuckle ride there has been some serious dislocation of assets in the credit markets. They've succumb to a "sell first, ask questions later" mindset. It's exactly at times like these when it pays to survey the debt markets and find that gem or two that has been unfairly marked down because of unrelated problems in another sector of the market.
It is my belief (and that of a growing number of other analysts) that the Fed will start to cut rates as soon as next month, and possibly again in October. I believe that such a move will usher in a new period of easing monetary policy.
Clearly the housing data shows the need for an accommodative Federal Reserve, as does the corporate bond market. The accommodation is needed to better finance the slew of acquisition deals announced during the past six months.
During this credit crunch most corporate debt markets got sold off in sympathy to the subprime woes in the mortgage debt market. But the two markets are totally different and there in lies the "dislocation" that prompts opportunity for income investors.
If we assume the Fed will lower interest rates soon, bonds of all types will rally. We've already seen that with the Treasury market and the recent flight to quality. But high-yield bonds also rally -- just later in the cycle as yields come down -- making them more attractive at this time. As rates move down, the economy picks up speed creating demand for corporate bonds as a direct beneficiary of healthier corporate balance sheets.
Pioneer High Income Trust (PHT) is, in my view, the "best of breed" within the high-yield closed-end bond funds. It returned 33% to investors in 2003 when rates bottomed out and 15% in 2004. Even in the face of a tightening Fed during the following two years, PHT returned 11% in 2005 and 22% in 2006.
Pioneer High Income Trust operates as a diversified, closed-end fund. It invests primarily in debt securities, loans and preferred securities. The trust's investment portfolio comprises investments in a wide range of areas including energy, capital goods, commercial service and supplies, transportation, consumer durables and apparel, consumer services, media, retailing, food and staple retailing, healthcare equipment and services, pharmaceuticals and biotechnology, diversified financials, insurance, technology hardware and equipment, telecommunication services and utility sectors.
Management fees are low by industry standards at a paltry 1.01% per year and the fund leverages the portfolio by only 25%, which is also low by industry standards. There is about 27% annual turnover among PHT's holdings and its top holding is in Xerox Corp. That's not exactly subprime mortgage paper, yet the fund's shares have been sold down like subprime debt-related funds.
After 17 hikes in the Fed funds rate, its time to buy a corporate bond fund that has a stellar track record so we can take advantage of what should be a powerful rally in corporate debt instruments when the Fed starts the anticipated lowering of rates this fall.
Pioneer High Income Trust is that fund for our purposes. It has a history of trading with about a 10% premium to its net asset value (NAV). In fact, PHT entered the year trading with a stiff 14% premium to NAV. That's how coveted this fund is among the high-yield funds universe.
Today, PHT is trading at a slight discount to its NAV, which is why I'm recommending buying shares of Pioneer High Income Trust up to $16 per share. Plus, we lock in a 10.6% dividend yield in a $600-million bond portfolio trading 17% off its 52-week high.
I believe our timing here is just right in that if the Fed does begin lowering interest rates and the economy's growth rate does improve due to the stimulus, PHT has a shot at repeating those 2003 numbers -- and that's worth getting excited about. Did I mention it also pays its dividend on a monthly basis?
I'll get into more of the virtues of this incredibly well-managed closed-end fund in the upcoming September 25% Cash Machine newsletter next week, but with this rare event where PHT is trading at a slight discount to is NAV, I want to establish a position at prices under $16 per share and secure that double-digit dividend yield.
Bryan Perry
Editor The 25% Cash Machine