Market Overview

Don't Pass On Opportunities in Closed-End Funds


Don’t Pass On Opportunities in Closed-End Funds


Over the last few quarters, the underlying strength that has been present in stock markets has been undeniable.  But when we look at the financial headlines, it is not surprising to see that commonly traded benchmarks like the Dow Jones Industrials and S&P 500 have received most of the market’s attention.  But when we take a closer look at which types of stocks have performed the best, some surprising results start to become clear.  Specifically, small-cap stocks have posted much better gains during this period and since both the Dow and S&P continue to trade near their all-time highs, it makes sense to look at the potential growth prospects that can be found in small cap selections.  One of the best choices here can be found in the Center Coast MLP & Infrastructure Fund (CEN), which is a closed-end fund that is currently trading at an attractive discount.


Gaining Exposure to MLPs


“The current rally in the S&P 500 has led to a long series of all-time highs with little to be seen in terms of downside corrections,” said Kris Alban, markets analyst at InvestingIQ.  “This makes investing difficult for investors, as stocks continue to trade at elevated levels.”  Fortunately, this is not true in all cases, and closed-end funds often trade at a discount to net asset value (NAV).  The Center Coast MLP & Infrastructure Fund (CEN), places most of its assets focus on master limited partnerships (MLPs).  Portfolio structuring in CEN is a highly attractive feature of the offering and potential gains could be helped greatly by the rising level of energy demand that has been seen in the US and in emerging markets.  As the global economic recovery continues, companies with significant exposure to energy assets should see sustained benefits and rising stock valuations.  CEN clearly falls into this category, and this points to continued upside as long as oil markets continue to trade north of $100 per barrel.


But the overall benefits extend beyond there.  Investment strategy for CEN comes with well-balanced leverage ratios (in the neighborhood of 26%), and this essentially suggests that the fund has the potential to generate sizable returns while maintaining a relatively conservative approach to leveraging.  Most attractive about the fund is its attractive NAV discount and its potential to generate sustainable dividend payouts in coming quarters.  The fund’s NAV discount currently stands at 8.3%, so investing in assets like CEN create value opportunities that are not present in most of the market.  So when we take these advantages in addition to the fact that CEN brings well-diversified exposure to bullish energy markets, there is little reason to expect any real downside or sustainable volatility in the Center Coast MLP & Infrastructure Fund.


Wrong Time To Forget Small Caps


Given the broader trends in the market, small cap stocks make up some of the best options for playing an elevated environment in equities.  In 2013, the Russell 2000 (one of the best gauges of performance in small caps) saw annual gains of nearly 40% when dividend payouts and capital gains are shown in combination.  In contrast, the S&P 500 generated returns of 32.5% and the Dow Jones Industrials saw gains of 29% for the same year.  When all of these factors are taken in combination, it is clear that some of the best investment choices can be found in closed-end funds that fall into the small cap growth category.  CEN is one of the strongest choices in this area, given its diversified positioning and exposure to energy markets.  

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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