Examining the credit side of my fixed-income sleeve, I have opted for flexible multi-sector strategies such as the PIMCO Dynamic Income Fund (PDI) and DBL’s sister fund the DoubleLine Income Solutions Fund (DSL). Both funds carry a very high weighting toward emerging market and non-agency MBS. Yet PDI uses a very sophisticated but effective derivative overlay strategy to control interest rate and credit risk, whereas DSL uses more traditional allocations in other sectors such as CLO’s, Agency MBS, bank loans, and corporate high yield.
In my opinion, one of the best qualities of owning CEFs in a Roth IRA is the benefit of leverage to achieve long-term results. Consequently, the funds I have within my bond sleeve have pushed my asset allocation from what would be a 43% weighting in traditional ETFs, to a 57% weighting as a result of underlying CEF leverage. This strategy allows a long-term investor to capitalize on a larger asset base over time without the use of a margin facility.
However, investors should be aware that the lack of traditional fixed-income assets traded at NAV within my retirement portfolio can open it up to significant volatility in a down market. In fact, I am fond of saying that all CEFs will trade as risk assets in a down market. While that adds a layer of risk, I’ve still found the strategy to perform effectively in the midst of volatility as a result of manager expertise and a sensible mix of funds.
In my opinion, the low interest rate environment has created unique opportunities for total return in CEFs. Alongside the correct mix of equities, a Roth IRA can post market beating returns while still maintaining a balanced asset allocation.
This article is brought to you courtesy of Michael Fabian from FMD Capital Management.