Market Analysis by covering: Cohen Steers Total Return Realty Closed Fund, Cohen & Steers Quality Income Realty Fund Inc. Read 's Market Analysis on Investing.com
Dollar surges on Middle East conflict; euro, sterling retreatWhat if you run across two of these income generators that seem to be equal in pretty well every way. Can you just buy one or the other? Truth is, sometimes you can and sometimes you can’t, but it’s not always clear when simply closing your eyes and picking one fund is the right move.
That’s because with CEFs, there are a lot of moving parts one needs to pick apart and look at carefully. Let me show you what I mean with two CEFs holding real estate investment trusts —publicly traded “landlords” holding properties ranging from senior-care facilities to malls and warehouses. The beauty of REITs is that they’re “pass through” investments, sending almost all of the rent they collect to shareholders as dividends. And we can get even higher dividends from our REITs when we hold them through CEFs, thanks to these funds’ active management and use of tools like a modest amount of leverage.These two funds are, as the names say, both run by the same sponsor, Cohen & Steers, a company with deep roots in the CEF business, so we can count on a similar management style here. Now, just looking at the headline yields, you might be tempted to just buy RFI and call it a day to squeeze that extra 0.2% in yield. But by the time you read this, it’s possible that both funds will yield exactly the same . So we need a guide to pick between these funds that’s a bit more enduring. Both funds have kept their payouts pretty much static for the last nine years , so that doesn’t help much. as their top-three positions. And the rest of their top-10 positions are nearly identical, too, including the likes of warehouse REITSo, with similar holdings, it’s tough to look at the portfolio and say one is definitely better than the other. The performance story doesn’t tell us much, either.Both funds go back about 24 years, and over that time, both have delivered a total NAV return of 8.8% on average per year. That’s above both funds’ current payouts and too close to each other for either to be “better” on its own. Now let’s talk discounts to net asset value —the key metric for whether these funds are “cheap” or “expensive.” As I write this, RQI trades just below par, with a 0.9% discount to NAV, while RFI is just above, at a 1% premium. Here too, the differences aren’t big enough for this to be, on its own, a deciding factor. Yet again, we are stuck.Notice how RFI’s 1% premium is a bit lower than where it was six months ago, while RQI’s discount was much larger at the end of last year? This means you can buy RFI at its current premium and hold till that premium rises back toward where it was six months back. I see a gain in the premium as likely, as interest rates are likely to be cut further in the months ahead , lowering REITs’ borrowing costs. That’s critical for these funds, as they borrow heavily to finance their properties.This isn’t the first time RFI has given investors such an opportunity. It happens a lot, actually. For instance, look at the chart above, when RFI’s discount cratered in late 2018. It then surged to a 9% premium, giving investors a 52% return in a year. While it’s unlikely that RFI is going to deliver another 50% return in a year, big returns like this are overdue for REITs. But if the next big rise takes time to show up, that’s fine. This 8.1%-yielder is an income giant likely to keep its payouts high. Some special dividends are also on the table here, just like they have been in the past. All of this gives RFI an edge over RQI right now. You’re getting nearly identical assets, along with upside, since the fund is more undervalued relative to its history and to RQI right now.Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. 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