Howard, TSC is showing them with a 10.87 dividend yield. That may be something for me to look at for someone who I was helping on an income portfolio. it has been a great performer this year up 29.4% plus an over 10% dividend. It should do well over the next 2 years.
Of course there would be some currency and dividend risk, and Closed end funds almost always trade at a discount.
thanks for the mention
First Australia Prime, First Australia Prime Income is a closed-end, non-diversified management investment company. The portfolio consists primarily of Australian government and semi-government securities. For the FY ended 10/31/98, total investment income totalled $181.2M. Net investment income totalled $159.3M. Net decrease in net assets from operations applicable to Common totalled $154.5M. Net asset value per share totalled $7.33 as of 10/31/98.
Here is a run down on it.
FLooking Down Under for a Closed-End Bond Fund
By Elizabeth Roy
Senior Writer
2/12/99 12:01 PM ET
What do you think of First Australia Prime Income (FAX:NYSE) fund? Goldman Sachs is forecasting a 20% rise in the Australian dollar. If that happens, I believe FAX, which is mostly invested in Australian government bonds, will do well. It has a 20% discount to NAV and yields 12.3%.
-- Robert Kalb
Robert,
You are certainly not alone in your belief that First Australia Prime Income is a very attractive investment -- for a somewhat aggressive investor.
Before I explain why, let me update your numbers. Goldman is forecasting a 16% rise in the value of the Australian dollar this year, to 72 cents from 62 cents at the beginning of the year. Buying Australian dollars was No. 5 on Goldman's foreign exchange department's "Top 10 Trades for 1999" list published Dec. 17.
As for FAX's discount, it's currently about 15.6%, and the yield is 12%.
As you point out, First Australia, which is managed by Sydney-based Equitilink Investment Management, invests mainly in Australian government bonds.
And unlike many other global income funds, it doesn't hedge its currency risk. That's why it's a way to play the Australian dollar. Most of the income the fund generates is Australian dollar-denominated. If the Australian dollar keeps rising against the U.S. dollar, the income the fund generates will translate into larger and larger dollar amounts.
In fact, the fate of the Australian dollar will probably be the single largest determinant of how First Australia performs. The fact that its Australian dollar-denominated assets are government bonds means Australian interest rates also play a big role. But not as big as they used to. When the fund was launched in 1986, the yield on the benchmark 10-year Australian government bond was above 12%. Now it's around 5.30%.
James Blair, head of fixed income at Equitilink, estimates that two-thirds of the fund's return on its Australian dollar assets are now currency-related, up from roughly half during the first 10 years of the fund's life.
So, why bet on a rise in the Australian dollar? "The Australian dollar has a very high correlation with commodity prices," says Mariana Bush, closed-end fund analyst at Everen Securities. In one of the clearest consequences of the Asian financial crisis, commodity prices are in the tank. Their leading index, the Commodity Research Bureau index, made a fresh low yesterday.
The Australian dollar, currently worth about 64 cents, is pretty well beaten down, too, although it diverged from the CRB back in September and started improving. Still, it's now at levels last seen back in April. And before the Asian financial crisis started in July 1997, it fluctuated around 75 cents.
Australian Dollar's Strong Points
The Australian dollar is benefiting or is expected to benefit from four things.
First is the belief that the worst is over in Asia, and as a result, commodity prices soon will start to recover. Calling the Australian dollar "the cheapest currency in the world" according to Goldman's models, Jim O'Neill, the firm's chief currency analyst, says that "with non-Japan Asian growth starting to stabilize, demand for Australian commodities out of places like Korea is likely to improve sharply." Goldman figures the Australian dollar is worth at least 76 cents.
The second basis for a bullish forecast on the Australian dollar is confidence in the Australian economy. O'Neill thinks that after the U.S., it's the strongest economy in the 29-nation Organization for Economic Cooperation and Development. He's forecasting growth in the 3.5% to 4% range for the next two years. (Inflation remains as low as in the U.S., though, up 1.6% year on year, supporting the value of Australian bonds.)
Third, Blair says the Australian dollar has been benefiting from the fact that Australia's key short-term interest rate is now even with the U.S. fed funds rate at 4.75%. Before the Fed's three rate cuts last fall, the Australian cash rate was lower than the fed funds rate at 5%, which put pressure on the Australian dollar.
Finally, the Australian currency has benefited from the rise in the region's most important currency, the Japanese yen, since the summer, even though the Japanese economy continues to languish, Blair says.
Leading Analysts Like FAX
But the potential for a rise in the value of the Australian dollar is only part of the reason why two leading closed-end fund analysts like FAX.
They like the fact that a major strategy change by the fund last fall -- the fund is now able to invest up to 35% of its assets in Asian debt securities -- has boosted its yield while only slightly affecting its average credit quality. The shift should enable the fund to maintain its dividend indefinitely, something that might not have been possible otherwise, because Australian bond yields have come down.
Last October, when yields on risky bonds went through the roof after Russia defaulted on its debt, FAX raised $617 million in a rights offering for investment in Asia. Targeting South Korea and, to a lesser extent, Thailand, the Philippines and China, the managers bought mostly U.S. dollar-denominated sovereign or sovereign-related issues at yield spreads as wide as 700 basis points over Treasuries. Those spreads have since narrowed to roughly 300 basis points over Treasuries, adding to the fund's unrealized capital gains. The Bear Stearns Asia Pacific Index, a good proxy for the Asian portion of the fund, according to Blair, has returned 13.8% over that period.
As of Dec. 31, Blair says, 12.8% of the fund's assets were invested outside Australia. Of the fund's assets, 12.2% were in U.S. dollar-denominated securities, and 7.7% were in Korean issues, which have benefited from the country's upgrade by Standard & Poor's and Fitch IBCA.
"They were almost trying to replicate the original story of the fund," says Kristoph Rollenhagen, Prudential Securities closed-end fund analyst, who upgraded FAX from hold to strong buy after the rights offering. "When it started, Australian interest rates were in the double digits. Now they're in the 4% to 6% range. So they have colossal gains."
Risk Level Has Risen
Potential investors in the fund should understand that the strategy change makes the fund riskier than it was before. It is not a conservative investment. But analysts say the current price of the fund overrates its risk. The investment in Asia lowered the fund's average credit quality, but only to double-A-minus from double-A-plus before the rights offering.
Investors who are steering clear of this fund because they think it has become an emerging-markets debt fund may be making a mistake, analysts say.
Based on its yield, Everen's Bush says, "People are giving it an expected risk closer to an emerging-market debt fund. It's not an emerging-market debt fund."
Rollenhagen adds, "The reason I went to a strong buy is, it is so completely unusual to see such a confluence of numbers on one fund. I would challenge anybody to find me a fund with a AA-minus average credit quality, yielding 12%, for 84 cents on the dollar." Even if the fund's discount doesn't narrow, the analyst asks, "How bad off are you going to be?"
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