Jeff Jonas of Gabelli talks about a closed-end fund that invests in the health-care and consumer staples sectors
A 5% yield is difficult to come by these days, even if income is your only objective. But the Gabelli Healthcare and Wellness Trust has a distribution yield above 5% and also pursues long-term growth.
Jeff Jonas, who co-manages the fund, described his investment strategy and spoke about several representative stocks in an interview.
Seeking higher yields
The fund seeks long-term growth while paying a high dividend, which may make it appealing for those without pensions in retirement.
But where do you shop for yield? Yields on 10-year U.S. Treasury notesTMUBMUSD10Y, -1.29% are less than 2.6%. If you look at preferred stocks with (low) investment-grade ratings, you will probably have to pay a premium for paper yielding 5% or more. Or you could take more risk and go for high-yield (junk) bonds — the SPDR Bloomberg Barclays High Yield Bond ETF JNK, +0.06% has an SEC yield of 5.85%.
But none of those options offer any potential for growing your investment while paying you dividends.
A closed-end fund
The main objective of the $194 million Gabelli Healthcare and Wellness TrustGRX, +0.44% is long-term growth; however, providing income is a “big objective” as well, Jonas said during an interview. The fund’s distribution yield (based on the share price) is 5.38%, according to Morningstar. The dividend is paid quarterly and has been “generally growing over time,” Jonas said.
Unlike a traditional open-ended mutual fund, a closed-end fund has a fixed number of shares that are traded publicly. An open-ended fund’s share price is its net asset value (NAV), calculated by dividing the market value of its holdings by the number of shares at the market close each day. A closed-end fund has an NAV as well, but its share price may higher or lower.
So an advantage of a closed-end fund to a portfolio manager is that he or she has “permanent capital” to invest. The manager doesn’t have to deal with a continual inflow or outflow of money that needs to be invested, or in the case of an outflow, make painful decisions about which investments to sell immediately. If a closed-end fund decides to expand, typically it will make a rights offering to current shareholders; they will be offered a discounted price to buy enough new shares to maintain their ownership percentage of the fund.
To enhance the yield, the Gabelli fund has employed leverage by issuing its own preferred shares.
Health and wellness thesis
When asked why a sector-specific focus on health care might work out well for long-term investors, Jonas cited two trends: “We see are growth in health-care spending (twice as fast as GDP) driven by an aging population and emerging markets spending more on the health of their citizens, and people taking better control over the own health through better exercise and nutrition.”
So the fund is focused on the health-care and the consumer staples sectors, and it is not concentrated, holding 122 stocks as of Dec. 31. The 10 largest positions are listed below.
Jonas said Gabelli has a team of 50 analysts conducting bottom-up research to select stocks, and that the Healthcare and Wellness Trust has a value focus. “We always try to meet with companies directly,” he said.