When I buy a position in my portfolio, I often see myself holding it forever, more often than not. Over the last couple of years, I've been more active than previously due to closed-end funds becoming quite richly valued. We still remain somewhat elevated but have been coming back down to a more moderate level.
I can't take all the credit for my change of investment style, though; Stanford Chemist has shown how powerful a "swap" strategy can be. It can be referred to as "double-compounding" or "compounding income on steroids." It's a simple strategy of identifying similar funds that show correlating performance. Once you find a pair, you can swap your position between the two, depending on whichever is the cheapest. In that way, you can harvest "free shares."
One such fund that I saw myself holding as a core type of holding was Cohen & Steers Infrastructure Fund (NYSE:UTF). However, in 2021, the double-digit premium turned me off, and I made a switch away from the fund. It spent some time at a double-digit premium, but it only faded from there.
That premium descent has more recently accelerated too. To be fair, the rest of the market has been off to an incredibly rocky start to 2022 overall. It isn't UTF being the sole decliner due to some nefarious reasons.
UTF had entered correction territory, marked by a 10%+ decline from its 52-week high. The fund's discount has also once again opened up. So I took the opportunity to add the position back into my roster - where I once again believe it will remain a core position unless/until the fund's valuation becomes too rich again. With how volatile the market is these days, that might not take too long. On the other hand, it could take substantially longer than one might anticipate if we head into a deeper correction or bear market territory.
The Final Results Of The "Swap" I Had Made
I bought the initial opening position on January 20th, followed up with another buy on the 21st and finally had a third round of buying on the 24th. A bit of a rapid or accelerated dollar-cost averaging method, if you will.
Interestingly enough, I sold the position on January 12th, 2021. That puts UTF absence in my portfolio at just over a year. The shares closed at $26.89 that day. My new cost basis is close at $26.27. On an absolute basis, I didn't really gain that much ground in terms of lowering my cost basis with UTF.
However, since I bought John Hanco*ck Tax-Advantage Dividend Income Fund (HTD) and Reaves Utility Fund (UTG) with the UTF proceeds. This wasn't a true swap trade, the kind that Stanford Chemist often highlights. The reason is that I put new capital to work to purchase my new position in UTF.
Looking back, though, it was a clear success that I shifted out of UTF and into HTD and UTG. UTG performed somewhat similarly over the January 12th to January 20th period. However, HTD had blown it away. HTD delivered substantially more on a price basis due to a large contraction in the fund's discount level. It was even touching a premium itself for a brief period. Additionally, HTD just plain outperformed UTF during that period as measured by the NAV. On the other hand, UTG still outperformed on a price basis but languished on a NAV basis.
When I made the swap, it was mostly an even split between putting it to work in HTD and UTG. In hindsight, we can see that the results would have been even better had I put the cash all into HTD.
UTF has shifted back to a slight premium as of writing this. Again, due to the market volatility, it's likely to continue to shift back and forth somewhat violently. HTD has had a similar fate; while it joined the other two with a premium, it quickly reversed with the latest market rout.
Curiously, UTG hasn't been experiencing the same violent moves with its premium/discount. It has maintained a relatively stable premium throughout the whole last year.
What's Next?
We clearly aren't out of the woods yet. While I'm up at this time on my UTF position, it was only thanks to most of Friday's (1/28/22 pop in UTF and the market. That could quickly change with the next market open.
It ran up from $26.30 to $26.50 in about the last 15 minutes. It was a good reminder that the market is on edge at the moment. The VIX is still elevated at 27.66, according to CNBC. Thanks to that late-day rally, that was a sharp decline of 2.83 or nearly 9.3% in one day.
Overall, volatility seems likely to carry on for now as the Fed, interest rates, and inflation remains center stage. The worst thing for the market is uncertainty. With that, I haven't picked up a "full" position of UTF yet, so I continue to have room to add should we see more declines.
Because UTF is an infrastructure fund and holds a lot of utilities, I think this is a fine place to stay invested over the long term. In the short term, we could continue to face headwinds as higher rates can have a negative impact on utilities. This remains the nearest term risk, in my opinion.
Utilities often compete for income investors' dollars. If folks can invest in bonds that offer attractive yields, that can take some capital away from the relatively riskier utility equity positions. The utility sector was the weakest performer in 2021, so that could indicate that some of it is going to be already priced in.
At the same time, bonds aren't exactly the most attractive place to put capital to work over the short-term either. Since the bonds currently available will decline in price to shift to the newer debt offerings that would theoretically be offering higher yields. It leaves an income investor with a tough call. That's why I try to stay primarily invested in a diversified portfolio. As an income investor, though, utilities and REITs are a natural fit, and I'd be lying if I didn't say I'm a bit biased towards those sectors/assets.
The top ten names in UTF's portfolio remain solidly profitable companies with tremendously reliable cash flows. A natural occurrence for essential utility and infrastructure names. These are the cash flows that can continue to maintain their own growing dividends. That, in turn, will continue to support UTF's distribution and capital gains. Holdings are as of December 31st, 2022, from the fund's Fact Sheet.
Conclusion
This isn't my typical style for an article, but I felt I had some lengthy thoughts to put together on UTF. We will be getting a new Annual Report in a month or so. At that time, we can take a thorough dive into the numbers, and anything management might have comments on.
An investor could have done just fine holding UTF over the last year; this just helps highlight why valuations matter. "Buy-and-hold" is a tried and true strategy that has served investors well over the long term. Even still, I consider myself more of a buy-and-hold investor. However, even my "core" CEF positions can get too pricey.
This all takes some luck too. This played out over a year; that isn't always the case. Sometimes, these swap trades can take days, weeks, months, or even several years. It just so happened to be roughly a year for this particular case. The broader market correction also helped. Had we not gotten this latest volatility, it is also likely that it could have remained more elevated. Although, the trend was a premium that was in decline mode after reaching the peaks early in 2021.
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