Signs of Economic Slowdown Prompt Caution in Specific Funds

Recent indicators suggest the so-called “vibecession” might deepen, highlighting the need for careful assessment of certain funds that are currently overpriced. Below, we identify three funds to consider selling or avoiding in your portfolio.

Let’s delve into the slowdown signals.

A chart from Apollo Global Management shows that the number of Americans only making minimum payments on their credit cards has reached its highest level in over a decade. This trend signals that inflation and slow job growth are increasingly straining household budgets.

Additional evidence supports this conclusion. A Lending Tree survey reveals that the percentage of Americans using “buy now, pay later” services for groceries has more than doubled. Previous warnings from Walmart (WMT) indicated that rising interest rates and ongoing inflation have led many consumers to cut back on spending.

Evaluating Investment Strategies Amid Market Volatility

Typically, mainstream investors react to negative news by selling off their holdings. However, as income-focused investors, we prioritize stable income streams and use such downturns to explore high-yielding investments like closed-end funds (CEFs). Many of these funds offer attractive payouts—over 8% in some cases—that can help support our financial needs during uncertain times.

Historical data illustrates the downsides of panicked selling in response to economic challenges. For instance, those who sold at the first peak in 2013 and waited to reinvest until the share of individuals making minimum payments on debts declined, would have missed out on a substantial 35% return.

Panic Selling Would Have Meant Missing a 35% Return

Missed opportunities would have been common for investors who acted similarly during other peaks identified in the chart.

Three Overvalued Funds We Recommend Selling

In the realm of CEFs, identifying overvalued funds is straightforward. By examining their premiums or discounts to net asset value (NAV), we can assess whether a fund is trading above its intrinsic value. Particularly pronounced premiums indicate potential overvaluation.

CEF Sell Call No. 1: Destiny Tech100 Fund (DXYZ)

Alerted in my February 27 article, DXYZ previously displayed an extraordinary 807% premium to NAV (not a typo). It now sits at a “modest” 490% premium, partly due to a 6.6% decline in its value since my last warning. Keep in mind that its value was down 29% until late April, illustrating extreme volatility.

A Wild Ride for Persistent Losses

DXYZ’s focus on high-risk private companies has generated significant attention, but its nearly 500% premium raises questions about sustainability, especially if market conditions shift toward reduced risk tolerance.

CEF Sell Call No. 2: Gabelli Utility Trust (GUT)

The Gabelli Utility Trust (GUT) is our second recommendation for sale. This fund focuses on utility stocks such as NextEra Energy (NEE) and Duke Energy (DUK). However, its premium to NAV stands at an impressive 71%, and it has provided a meager total return of under 2% over the last three years.

GUT: A High Premium for Meager Returns

Unless GUT can reduce its premium or shift to a discount, it may be prudent to exclude it from your portfolio, despite its 11.2% dividend yield.

CEF Sell Call No. 3: Barings Corporate Investors (MCI)

Barings Corporate Investors (MCI) provides a lower yield of 7.8%, appealing to cautious income investors due to its solid management and long-term performance. However, with a premium hovering at 21%, now is not the time to purchase MCI.

MCI Keeps Getting Pricier …

While its total return over three years, including dividends, appears impressive at 87%, this performance is largely due to the rising premium, not the underlying portfolio, which has appreciated about 23% as of the end of 2024, the last publicly available figure.

… But Its Portfolio Can’t Keep Up