When I buy a position in my portfolio, I often see myself holding it forever, more often than not. Over the past two years, I have been more active than before due to the fairly high valuation of closed-end funds. We are still somewhat elevated but have come down to a more moderate level.
However, I cannot take full credit for my change in investing style. Stanford Chemist showed how powerful a “swap” strategy can be. It can be called “double compound” or “compound income on steroids”. This is a simple strategy of identifying similar funds that show correlated performance. Once you find a pair, you can trade your position between the two, whichever is cheaper. This way you can collect “free shares”.
One such fund that I saw myself owning as a core type of holding was the Cohen & Steers Infrastructure Fund (UTF). However, in 2021, the double-digit premium discouraged me and I abandoned the fund. He spent some time at a double-digit premium, but he only faded from there.
This premium downhill has also accelerated more recently. To be fair, the rest of the market has had an incredibly tough start to 2022 overall. UTF is not the only one to refuse for nefarious reasons.
UTF had entered correction territory, marked by a decline of more than 10% from its 52-week high. The fund’s discount also opened again. So I took the opportunity to add the position back to my list – where I again believe it will remain a key position unless/until the fund’s valuation becomes too rich again. With market volatility these days, it might not take too long. On the other hand, it could take much longer than expected if we are heading into a deeper correction or a bear market.
The final results of the “swap” I had done
I bought the initial open position on Jan 20, followed by another buy on the 21st and finally had a third round buy on the 24th. Kind of a quick or fast track method of cost averaging, if you want.
Interestingly enough, I sold the position on January 12, 2021. This puts the absence of UTFs in my portfolio at just over a year. The shares closed at $26.89 that day. My new cost base is close to $26.27. All in all, I haven’t really gained much ground in terms of reducing my costs with UTF.
However, since I purchased John Hancock Tax-Advantage Dividend Income Fund (HTD) and Reaves Utility Fund (UTG) with proceeds from UTF. It was not a true exchange of exchanges, like the one that Stanford Chemist often highlights. The reason is that I put new capital to work to buy my new position at UTF.
Looking back, however, it was quite a success that I switched from UTF to HTD and UTG. UTG had somewhat similar performance over the January 12-20 period. However, HTD had blown him away. HTD produced significantly more on a price basis due to a sharp contraction in the fund’s discount level. He even got a bonus himself for a brief period. Additionally, HTD has simply outperformed UTF over this period as measured by NAV. On the other hand, UTG has always outperformed on a price basis but languished on a NAV basis.
When I made the swap, it was mostly an even split between having it run in HTD and UTG. Looking back, we can see that the results would have been even better if I had put all the money into HTD.
UTF has reverted to a slight premium at the time of this writing. Again, due to market volatility, it is likely to continue to come and go somewhat violently. HTD suffered a similar fate; as it joined the other two with a bounty, it quickly reversed with the latest market rout.
Curiously, UTG did not experience the same violent movements with its premium/discount. It has maintained a relatively stable premium throughout the past year.
We are clearly not out of the woods yet. Although I’m currently on my UTF position, it’s only thanks to most Fridays (1/28/22 pops in UTF and the market. That could quickly change with the next market opening.
It went from $26.30 to $26.50 in the last 15 minutes or so. It was a good reminder that the market is on edge right now. The VIX is still high at 27.66, according to CNBC. Thanks to this end-of-day rally, this is a steep decline of 2.83, or almost 9.3% in one day.
Overall, volatility looks set to continue for now as the Fed, interest rates and inflation remain the focus. The worst thing for the market is uncertainty. With that, I haven’t taken a “full” stance of UTF yet, so I still have room to add if we see more declines.
Since UTF is an infrastructure fund and owns many utilities, I think it’s a good place to stay invested for the long term. In the short term, we may continue to face headwinds as higher rates may negatively impact utilities. This remains the closest term risk, in my view.
Utilities often compete for income investors’ money. If people can invest in bonds that offer attractive yields, it can take capital out of relatively riskier positions in utility stocks. The utilities sector was the worst performer in 2021, which could indicate that part of it will already be priced in.
At the same time, bonds aren’t exactly the most attractive place to grow short-term capital, either. Since the price of currently available bonds will decline to move to new debt offerings that would theoretically offer higher yields. This leaves an income investor with a tough decision. That’s why I try to stay primarily invested in a diversified portfolio. As an income investor, however, utilities and REITs are a natural fit, and I’d be lying if I didn’t say I’m a bit biased towards those sectors/assets.
The top ten names in UTF’s portfolio remain solidly profitable companies with extremely reliable cash flows. A natural occurrence for the names of essential public services and infrastructure. These are the cash flows that can continue to maintain their own growing dividends. This, in turn, will continue to support UTF’s distribution and capital gains. Holdings are as of December 31, 2022, according to the fund’s factsheet.
It’s not my typical style for an article, but I felt I had some long thoughts to put together on UTF. We will have a new annual report in about a month. At that point, we can dive into the numbers and anything management might have comment on.
An investor could very well have held UTF over the past year; it just helps underscore why valuations matter. Buy-and-hold is a proven strategy that has served long-term investors well. Even still, I consider myself more of a buy-and-hold investor. However, even my “basic” CEF positions can get too expensive.
All this also requires a bit of luck. This took place over a year; it’s not always the case. Sometimes these swap transactions can take days, weeks, months or even years. It just so happened that it turned out to be about a year for this particular case. The broader market correction also helped. Had we not had this latest volatility, it is also likely that it could have remained higher. However, the trend was a premium that was in decline mode after hitting highs in early 2021.