Buy, Sell or Hold: Hold On to the TS&W/Claymore Tax-Advantaged Balanced Fund and Look for More Buying Opportunities
By Horacio Marquez
Contributing Editor
Money Morning
On June 29, I recommended buying the TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW). The fund is up about 15% since that recommendation and there’s been a distribution of about 2% of the initial investment. Not bad for sitting in bonds and equities of global mega-caps that pay high dividends.
Since this is a close-ended balanced mutual fund that pays a very attractive yield, the fund can invest between 50% to 60% in municipal bonds and between 40% to 50% in global equities. It also can trade at a premium or a discount to net asset value.
Anyone who invested in June was lucky to get in when there was an anomaly in the market and the fund was trading at about a 20% discount to its net asset value. Today, that discount has narrowed to a still high 13%. This discount, and the very high yield that the fund pays, protect it from market downside much more than regular stocks and municipal bonds.
I generally do not like to recommend buying actively managed funds, because one has to bear the manager’s risk. But I made an exception in this case, because both the asset class that I wanted to invest in and the quality of the manager.
Let me explain.
Municipal bonds are an important, but poorly understood asset class. Investing in municipals requires a thorough knowledge of the bond issuers, their fiscal positions and other key determinants of repayment. It also requires diversification and very careful follow-up and management.
There are few truly good managers in this field, so experience and inside knowledge of this difficult market makes a huge difference. And because of the difficult fiscal situation that many states are going through right now, it is imperative to be right on top of political developments that will impact the finances of these states and the probability of repayment.
It is important to note that state governments and other municipal issuers are not reluctant to use their taxing authority to ensure that they remain in good standing. In fact, I learned long ago that the rate of default was about 1% during the Great Depression. So a well-diversified portfolio would enjoy very high yields and barely suffer in the rare case of a default.
Municipals are paying very juicy yields today, which also benefit from tax exemptions. But in addition, TYW’s municipal bond portfolio is managed by one of the very best municipal managers in the nation: Vincent Giordano.
I met Mr. Giordano back in 1991, when I joined Merrill Lynch Asset Management. He was managing their entire municipal bond area and was one of the leaders of this successful institution at the time. His thorough and intense management was responsible for the tremendous success of the area, which in a couple of decades grew from only $2 billion under management to many tens of billions.
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My office was located close to his, so I was quick to consult him on developments in the fixed income market and I found him to be a treasure of valuable information and analysis, always ahead of the curve.
So, when he retired from Merrill Lynch Asset Management – prior to the sale of that business to Blackrock Inc. (NYSE: BLK) - to start his own fund management operation, I was quick to take note. Having a manager of the caliber of Vincent Giordano is a real advantage.
That’s why you should hold on to our position in TS&W/Claymore Tax-Advantaged Balanced Fund.
I believe there’s a typical profit-taking as the year draws to a close. Leveraged investors must take profits so they don’t carry and show much leverage in their books at the turn of the year. This will turn out to be an opportunity, rather than a problem.
There’s an annual dividend yield of more than 9% at the entry price. And since much of this yield is tax free, the after-tax calculation computes to a yield of about 13% or 14%, depending on your tax bracket.
In this environment of global yield seeking, I doubt that there will be an entry price like the one seen in June. But if an over-reaction in the market, affords that opportunity, I would buy more of this fund with both hands. Liquidity in the markets will likely normalize pretty soon, and for sure by Jan. 2, so take advantage of volatility.
The fund fell 14 cents, or 9.23%, Friday to close at $9.23 a share.
Recommendation: TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW) and start increasing your positions progressively, if it pulls back below $9 a share (**).
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Buy, Sell or Hold: The TS&W/Claymore Tax-Advantaged Balanced Fund is a Diversified Profit Play with a High Yield
