You don’t find many closed-end funds around any more. They never were very popular, with most of them trading at big discounts to their net asset value. But there are a few left, and here’s one that’s worth a look if you’re interested in an equity portfolio that pays an outsized yield.
Canoe EIT Income Fund
Price: $11.17
Annual payout: $1.20
Yield: 10.7 per cent
Risk: Moderate to high
The security: This is a closed-end fund that trades on the Toronto Stock Exchange under the symbol EIT.UN. It invests in a portfolio of high-quality U.S. and Canadian stocks, mainly large- and mid-cap companies. Names in the portfolio include Berkshire Hathaway Inc., Bank of Montreal, Brookfield Asset Management Inc., Wells Fargo & Co., Coca-Cola Co., Johnson & Johnson Inc., Microsoft Corp. and Royal Bank of Canada.
A closed-end fund differs from an ETF in that only a limited number of units are issued. Purchases can only be made from existing shareholders or at the time of a secondary offering; the fund Treasury does not issue new units on demand.
Why I like it: It boils down to the yield. It’s rare to find a fund with such a high-quality portfolio that yields almost 11 per cent. That would normally imply a high level of volatility and risk, but this fund has been trading pretty much in the range of $11 to $13 a unit for several years, with just an occasional up or down spike.
Performance: Last year was not a good one in that the fund lost 6.2 per cent (to Dec. 31). But that was better than the S&P/TSX Composite Index, and over the past five years the fund has generated an average annual compounded rate of return of 5.1 per cent, beating the S&P/TSX by a full percentage point.
Key metrics: As of the end of December, 39.5 per cent of the fund was in Canadian stocks, 30.2 per cent in the U.S. market, 4.3 per cent international and a large 25.8-per-cent position in cash. The management expense ratio is high at 2.31 per cent, including issue costs and interest. Stripping out those costs, the MER is 1.63 per cent. In terms of leverage, the fund manager can borrow up to 20 per cent of the value of the fund to purchase additional shares. The fund has $1.3-billion in assets under management. It trades at a slight premium to net asset value.
Distribution policy: Monthly payments have been 10 cents a unit since August, 2009. Don’t expect any increases.
Risks: The high yield suggests this should be viewed as an aggressive investment. But the portfolio, with its large number of blue-chip stocks and a high cash position, suggests it is conservatively managed. Rob Taylor, senior vice-president and portfolio manager at Canoe Financial, has been at the helm since 2013.
Distributions are paid out of a combination of interest, dividends and capital gains, realized and unrealized. It’s important to know that distributions are not guaranteed and could be cut at any time. However, the fund has maintained the current payout level for almost a decade.
Tax implications: The fund is tax-efficient. In 2017, 46.8 per cent of distributions were received as capital gains while 48.5 per cent were deemed to be return of capital (ROC) and therefore not immediately taxable. (The other 4.7 per cent were eligible dividends.) ROC payments are subtracted from your cost base, increasing capital gains liability if and when the units are sold. Note that the tax situation can vary from year to year, so the 2018 results may be somewhat different.
Who it’s for: This is a fund for income investors who are looking for above-average returns and are comfortable with an all-stock portfolio (albeit with lots of cash at present).
How to buy: The units trade on the TSX. Average daily volume is 141,000, so you should have no trouble having your order filled.
Summing up: This is a stable fund for income seekers, but apart from the cash position, it is fully exposed to the stock market. Don’t buy if you want capital gains. They’re not in this fund’s DNA.
Disclosure: The author owns units of this fund.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
Gordon Pape