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The Strength Of My Beliefs About The Markets, IGD Edition

05/06/10 08:45:10 AM
by Koos van der Merwe

I believe that the market is in a Wave II correction before the start of a bull run that will last six years, so can we look at investments that carry a higher risk? Look at ING.

Security:   IGD
Position:   Buy

I believe that the bull market, in a Wave III, will be slow without the large volatility we have seen since 1987. The movement will be similar to the market movement from October 1974 until August 1982, simply because investors are scared of the banks, brokers, and in particular hedge funds, which have shown over the past year that they put themselves first, and their clients second, as shown by the recent Goldman Sachs testimony.

So if I am correct, what do you invest in? Simple... look for stocks that you know will recover as the market recovers but will also go back to the basics. Look for stocks that pay a good dividend, offering a yield that is attractive, and above all consistent. I believe we are returning to the days that when a company pays a dividend they are showing health, and should they ever cut that dividend, they are showing weakness. Microsoft, when it first listed in 1986, was a company that did not pay a dividend but argued that by plowing that dividend back into the company, the company would grow, and at that time, they were correct. The market had taken off, leading into the 1987 crash, which looked like a hiccup compared to the bursting of the 2000 bubble.

I believe there are a number of American depository receipts (ADRs) worth considering. They are all closed-end funds of the ING Banking Group. With ING, a bank without a bank, all banking is over the Internet, one way to keep expenses down, and yet they still got into trouble with the recent banking crises to the extent where they have now divorced themselves from their Insurance side and returned to basic 3-6-3 banking. By this I mean if you deposit money, they pay you 3%. If you borrow money they charge you 6%, and the bank manager is on the golf course at 3pm every afternoon.

ING Investments, the manager of the funds, is a part of ING, a global financial institution of Dutch origin offering banking, with investments in more than 50 countries throughout the world. They offer a number of closed-end funds, designed to provide a targeted approach to key sectors and investment strategies. Closed-end funds combine elements of mutual funds and publicly traded stock:

-Like mutual funds, they are diversified, professionally managed portfolios with stated investment objectives.
-Like stocks, they issue a fixed number of shares that are traded daily on an exchange.

So while mutual funds create shares to meet investor demand and price those shares based on the value of the portfolio's securities, closed-end funds, like stocks, have fixed shares that rise and fall in value in response to market demand for the fund itself.

This hybrid structure gives closed-end funds a number of potential advantages over mutual funds:

-Closed-end funds are not required to maintain a cash cushion to cover investor redemptions, so fund managers can invest strictly for performance.
-Closed-end funds typically have lower expense ratios than mutual funds since they do not incur the ongoing costs of creating and redeeming shares.
-Closed-end fund managers don't need to invest or redeem the shareholder dollars flowing in and out of the fund on a daily basis, so they have more flexibility in how much to invest in a particular security and how long to hold it.

ING Funds offers several closed-end funds:

-ING Asia Pacific High Dividend Equity Income Fund (IAE)
-ING Global Advantage and Premium Opportunity Fund (IGA)
-ING Global Equity Dividend and Premium Opportunity Fund (IGD)
-ING Infrastructure, Industrials and Materials Fund (IDE)
-ING International High Dividend Equity Income Fund (IID)
-ING Prime Rate Trust (PPR)
-ING Risk-Managed Natural Resources Fund (IPR)

All these trade on the New York Stock Exchange as ADRs. Bloomberg lists them as paying a yield in excess of 10%, which does make them attractive. A look at the chart, however, does illustrate the risk involved in obtaining this yield.

Graphic provided by: AdvancedGET.
Figure 1 is a weekly chart of IGD, the ING Global Equity Dividend and Premium Opportunity Fund. Note how the price fell from a high of $22.20 in May 2007 to the low of $6.97 by March 2009, with the price currently trading at $11.92, offering a yield of 12.7%. The fund:

-Invests in 65-90 global, common stocks with a history of attractive dividend yields
-Sells call options on selected portfolio securities and indexes to enhance returns and lower volatility
-Buys out-of-the-money put options on selected indexes on a portion of the portfolio value to partially protect portfolio value from significant market declines.

The company issues the following statement:

Total investment return at net asset value is not annualized for periods less than one year. Total investment return at market value measures the change in the market value of your investment assuming reinvestment of dividends and capital gain distributions, if any, in accordance with the provisions of the Fund's dividend reinvestment plan. Total investment return at market value is not annualized for periods less than one year.

So yes, investment in the fund does carry risk, the risk being the investment strategy of the manager and the market in general.

Nevertheless, I believe that the various funds are worth looking at and adding to your portfolio, always keeping the risk in mind.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

Address: 3256 West 24th Ave
Vancouver, BC
Phone # for sales: 6042634214
E-mail address:

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Date: 05/11/10Rank: 5Comment: 

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