Hap (Robert) Sneddon FCSI Aberdeen Asia-Pacific PRM Inc. FAP-T PAST TOP PICK Jul 14, 2014

Closed end fund buying Australian dollar bonds. Have had higher yields in that country over time. Small part of your portfolio.

Bonds have a historical seasonal time in June. Started a bit early this year. Had a bottom in the early part of the year and is currently just poking its head above short-term resistance at $6.14. That will bring in the $7 range and if we get above that and in the $7.80 area, then the sky is the limit. This is made up of 70% government bonds, 17% corporates, pretty high quality and the rest is super nationals. Risk/reward is in your favour. Downside risk is about 6%.

It always worries him when he sees a closed-end fund like this. This is a global bond fund, so you have currency exposure to different currencies, mostly Asia and other emerging markets. What concerns him is that the fund is allowed to use leverage and does so. He really wonders how many investors really understand this. They provide a steady income to investors, but part of that is return of capital, not just income. You have to understand that you are buying a levered fund, and the leverage is reasonably substantial. A rising interest rate would squeeze you. It’s trading at around NAV, but paying out more than the income, so part of the return is return of capital.

The majority of it is Australian dollar bonds. You have to look at the outlook for rates as well as the Australian dollar. His view is neutral on the currency. He believes Australia will outperform Canada in terms of bonds.