In 2003, some closed-end funds (that is, funds that are publicly-traded, like stocks) have been launched that include preferred stocks and convertible bonds. Such funds offer equity participation, along with high current income.
Other multi-class closed-end funds hold an equal blend of dividend-paying common stocks, real estate investment trusts (REITs), emerging markets sovereign debt, and senior secured bank loans. Such funds seek to deliver income as well as potential growth by combining high-yield equities with debt investments that are less sensitive to interest-rate risk. The search for bond funds that won’t go south if rates head north is apparent in other new offerings. Some “low-duration” closed-end funds will lose relatively little principal if interest rates rise. Low-duration funds might hold:
Senior, secured floating-rate loans;
Mortgage-backed securities; and
Junk bonds.
These are the fixed-income categories that are likely to outperform in an environment of gradually increasing interest rates. For example, floating-rate notes will pay higher yields if rates rise.