Income expert picks Western Asset (WEA)

by Carla Paternak, editor High Yield Investing

Western Asset Premier Bond Fund (WEA), a closed-end bond fund, holds a diversified portfolio of mostly investment-grade bonds.

The fund has the highly desirable quality of paying distributions every single month. And, these distributions have consistently risen since 2005.

Recently, payments were raised +10% to $0.11 for the March distribution. At the current rate, WEA yields an enticing 9.3% at today's price ($1.32/$14.20).

While 9% is an awfully high yield for a mostly investment grade portfolio, WEA can afford it. In the first quarter ended March 31st, the fund earned $4.7 million or $0.41 per share in net investment income and only paid out $0.31 per share.

As of March 31st, the fund had $0.89 per share left over in undistributed net investment income (UNII), providing a huge cushion of eight months' worth of payments at the current $0.11 per month rate.

Since its inception in 2002, WEA has simply been a great place to invest. The fund has managed a stellar +8.6% average annual total return since its inception. It returned +70% in 2009 and was only down -24% in the tumultuous markets of 2008. But, of particular note, is WEA's performance recently.

Stock markets throughout the world have tumbled since April as the European debt crisis threatened the worldwide economic recovery and stoked fears of another escalating financial crisis.

The S&P 500 tumbled nearly -20% between late April and early July. But, WEA shares actually increased since the market highs of late April.

In fact, WEA has posted returns of around +5% over the past few months and ranks in the top 5% of the Morningstar multi-sector bond fund category. Why the strong performance?

The answer is that investors fled to the safety of investment grade bonds during the recent market tumult.

WEA offers investors the safety of investment-grade securities while still providing a high yield. The fund does this with diversification.

The fund invests at least 65% in investment-grade rated bonds in various sectors and can invest up to 10% in non-U.S. dollar denominated bonds.

As of March 31st, the portfolio consisted of 68% investment-grade bonds, including 28% rated the highest "AAA" and 98% in U.S. dollar denominated securities.

As an added measure of safety, the portfolio had an effective duration of just 2.64 years which adds a huge measure of protection from rising rates.

WEA invests all over the world in any sector and uses sector rotation, issue selection, and duration management to enhance returns.

Top sector allocations included mortgage-backed securities (32%), investment-grade corporate bonds (26%) and high yield corporate bonds (22%). The fund's portfolio is also 32% leveraged to boost returns.

WEA currently sells at a premium to net asset value (NAV) of around +7%, which is about average for the past year but higher than its five-year average of about even with NAV.

This doesn't mean the fund is overpriced because the world has changed recently and the multi-sector bond fund approach has risen to new prominence that warrants a premium.

Action to Take --> WEA seems to have a good approach to investing for today's markets. The fund does a stellar job of hedging against various fixed income risks while simultaneously providing a high yield.

Learn more about this financial newsletter at Carla Pasternak's High Yield Investing.


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