An Opportunity for 26% Returns in Two Years
by Dr. Steve Sjuggerud
October 10, 2006
It’s not often that you get to buy something for 85 cents on the dollar that is definitely, absolutely worth a dollar.
But right now, in one small, overlooked stock-market, you can do just that. Not only can you do this, you will get MONTHLY dividend checks – from each of the six investments I’ll share with you today – that pay about 7% interest a year. Six investments, times 12 payments – that’s 72 interest payments in a year…
It sounds too good to be true. But it is absolutely true, as I’ll show.
This opportunity exists in closed-end funds right now. You don’t hear much about closed-end funds that currently trade on the stock market, because the big banks and brokerage firms can’t make big fees from selling them to you. So there’s no marketing hype. I actually prefer it this way.
Also, closed-end funds are generally too small for large investors to mess with. But that’s good for investors like you and me…
Closed-end funds offer up some interesting profit opportunities… The most interesting feature of closed-end funds to me is that they can trade at a premium or discount to the stocks held in the fund. A little background should help explain…
Closed-end funds became popular in the early 1990s, when foreign stock markets were just opening up. Small emerging-market countries, such as Thailand and Korea, were afraid to completely open their doors to foreign investors. They didn’t want foreigners owning their key industries, so they limited the amount of money that could come into their stock markets from outside the country.
If the authorities in Thailand said, “We will only allow US$100 million to be invested from Americans,” then some big financial institution would start a closed-end fund and raise US$100 million to invest in Thai stocks. After that, no more money could come into the market from American investors. So if an American wanted into Thailand, he had to buy shares of this fund, which traded on a U.S. stock exchange. It was the only way.
Thailand is a particularly extreme example. Back in early 1990, American investors were enthralled with Thailand’s prospects. They bid up the shares of the Thai Capital Fund to a full 100% premium over the actual value of the Thai stocks the fund held. Again, it was the only way into the market. Five years later, investors were so disgusted with Thai stocks, the price of the Thai Capital Fund fell to over a 20% discount to the value of the stocks it held.
Closed-end funds like the Thai Capital Fund can trade at extreme premiums and discounts to the underlying value of the stocks they hold.
Right now, there is one sector that is currently trading at its widest discount in its history. Barron’s lists 26 funds in this category.
I’ve charted the median premium or discount these 17 funds have traded at over their entire lifetimes, which go back to 1993:
THIS SECTOR IS AT AN ALL-TIME DISCOUNT
Fortunately, this particular sector is not like Thailand at all… As you can see from the chart, up until just recently, closed-end funds in this sector have traditionally traded within 5% on either side of the value of the stocks held in the funds, until recently.
So by buying in now, you’re able to buy into this sector at its greatest discount in history.
Sym |
Closed-end fund |
Discount |
Leverage |
Dividend Yield |
NRO |
Neuberger Berman R.E. Securities Fd. |
-14.0% |
28.9% |
6.8% |
SRO |
DWS Scudder RREEF R.E. Fd. II |
-14.9% |
31.5% |
6.7% |
NRI |
Neuberger Berman Realty Inc. Fd. |
-14.7% |
26.2% |
6.0% |
RMR |
RMR R.E. Fd. |
-13.1% |
30.4% |
7.3% |
RIT |
Salomon Smith Barney R.E. Inc. Fd. |
-13.5% |
27.8% |
6.2% |
SRQ |
DWS Scudder RREEF R.E. Fd. |
-13.5% |
27.9% |
6.4% |
|
AVERAGES |
-14% |
29% |
7% |
|
|
| Source: etfconnect.com |
I can’t guarantee that the discount will disappear within any time frame. But I do think that the discount will get smaller. For example, if the stocks the fund owns is flat in two years’ time, but the discount has narrowed to 95 cents on the dollar, then you’ll get a capital gain of 12% (a 10 cent gain on 85 cents). And over two years, you will have collected the 7% dividend each year, bringing your total return to 26%.
Of course, these closed-end funds could go to a premium… but I doubt that will happen.
I’ll let you in on the sector now: It is commercial real estate – properties such as apartments and office buildings.
Commercial real estate is hated right now. I believe that’s a major reason for the discount.
By law, commercial real estate stocks (REITs) pay out nearly all of their rental income to shareholders in the form of dividends. Right now, by buying these closed-end funds at 85 cents on the dollar, we’re able to buy in these stocks at a dividend yield of about 7%.
I’ve chosen six closed-end funds for you to consider, if you’re bold. The monthly returns of these six funds have an 87% correlation to the monthly returns of the Dow Jones U.S. Real Estate Index.
Good investing,
Steve
P.S. While I'm not bold enough to buy U.S. commercial real estate, I think Japanese real estate may the best investment opportunity in the world for the next 15 years.
I'll share more details with you later this week on why I like it and how my subscribers are playing it...
