UTF Fund: Solid 8.7% Yield It’s time to grab an infrastructure CEF.

Utility stocks have been under significant pressure for most of 2023 as the Federal Reserve’s interest rate hikes knocked some much-needed sense from overly optimistic investors. However, the hit to utility stocks has also created an opportunity for investors in late 2023 as the Utilities sector (XLU).) hit rock bottom. So XLU bottomed in early October 2023, well before Federal Reserve Chairman Jerome Powell said in a mid-December press conference that the Fed expected three rate cuts in 2024. In other words, astute utility investors believed the worst of the decline in utility stocks may be over and prepared for a long-term bottom in the interest rate-sensitive sector two months away.

Cohen & Steers Infrastructure Fund (UTF-8) It is a CEF that primarily focuses on infrastructure companies in capital allocation. We aim for “total return with an emphasis on income.” Therefore, CEF’s Target investors are likely to be income investors looking for profits. a secular topic In addition to infrastructure investments, the fund uses leverage (effective leverage: 30.1%) with the intention ofincrease in net profit UTF emphasizes its prudent use of leverage to “potentially increase dividend yields for shareholders.” Therefore, 85% of the financing will be based on a fixed interest rate with an average term of three years. However, given the Fed’s unprecedented interest rate hikes – 15% of its financing will be based on floating rates – markets will need to factor execution risk into their investment strategies.

Given that the Fed announced a rate cut in 2024, we believe this provides confidence in the process of a bottom for UTF in early October 2023, which coincides with a bottom for XLU. great; Markets anticipated the Fed’s pivot well ahead of Powell’s push, reminding investors why they should look forward, not backward, when assessing the most attractive entry level for an investment thesis.

By the time you read this article, UTF has already recovered nearly 26% (including dividend adjustments) from its October lows to its recent December highs. This is well ahead of UTF’s 5- and 10-year total return CAGRs of 8.8% and 8.7%. So even for leveraged CEFs like UTFs, risk/reward is important. According to Morningstar’s moat classification, UTF’s portfolio consists primarily of companies with at least a narrow moat. Therefore, more than 58% of the portfolio belongs to companies with wide and narrow moats. Therefore, I find UTF to still be a solid income-generating investment at reasonable levels to deliver on total return premises. With a TTM distribution yield of 8.65% compared to the 10-day average of 7.7%, we believe UTF’s medium-term recovery thesis remains valid for income-focused investors seeking better performance on a total return basis.

why? As I mentioned earlier, I don’t think the main concern of the UTF thesis lies in the quality of the companies included in the portfolio. The market has discounted UTF along with the decline in utility stocks, as UTF has over 50% exposure to the sector as of the third quarter. Moreover, using leverage is a double-edged sword that can result in more losses than expected. This is especially true when UTFs need to refinance their variable and fixed rate leverage. As a result, UTF may be unable to defend its current distribution payouts if its leveraged investment strategies prove to be less successful than expected. These important factors require further evaluation for investors considering using UTF to gain leveraged exposure to infrastructure stocks.

As seen above, based on my assessment that UTF bottomed in October 2023, I am confident that UTF should regain its composure and resume the continuation of its long-term uptrend.

It is clear to action investors that UTF’s long-term upward trend remains undefeated. The October low was a shrewd bear trap that showed the bottom buyers making a convincing comeback and resolutely defending the low.

We don’t expect UTF to regain its all-time highs anytime soon, but the risk/reward is still favorable thanks to attractive yields. But investors shouldn’t be too aggressive. If UTF surges from the October lows, investors who buy UTF may take profits, which could increase short-term volatility. As a result, a more controlled, staged buying flow is encouraged, allowing investors to buy into steeper near-term declines by engaging with UTF’s potential long-term recovery thesis.

Rating: Start purchasing.

IMPORTANT NOTE: Investors should exercise due diligence and be careful not to rely on information provided as financial advice. Always think independently. Please note that, unless otherwise stated, ratings are not intended to establish specific entry/exit times at the time of writing.

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