Alpha Buying: This 8% Yield Fund Just Got a CEO-Sized Endorsement

Ordinarily, during a market decline like the one we have seen since the tariff announcements on Wednesday afternoon—where the market has dropped ten percent in just a couple of days and opened significantly lower on Monday—we would expect to see a wave of insider buying.

A selloff of this magnitude would typically be a siren call for executives and directors to bring out the checkbooks. However, that has not happened. Not even close.

When you stop and think about it, the lack of insider buying is not all that surprising. The market, even after the hit, still is not cheap, not by any meaningful valuation or earnings metric.

On a trailing twelve-month basis, we are trading at 24 times earnings. Yes, that is off the recent high of almost 30 but it is still well above historical norms. Even when examining projected earnings, valuations remain elevated.

The Shiller CAPE ratio, the inflation-adjusted ten-year earnings metric that is one of the best long-term valuation tools available, is sitting at 31. That figure is down from a recent peak near 35, yet it remains significantly higher than the long-run average.

The market is not cheap.

It is certainly not inexpensive enough to inspire the kind of aggressive insider buying we usually observe when stocks experience a sharp decline. However, the situation extends beyond high price-to-earnings ratios.

The real concern here is uncertainty. Massive, unquantifiable, policy-driven uncertainty.

This is not a typical earnings miss, or a selloff triggered by a surprise from the Federal Reserve. This is a geopolitical disruption, triggered by the Trump administration’s implementation of punitive tariffs, a policy that is not being welcomed by global markets.

Rhetoric continues to escalate. Both sides keep increasing the stakes, threatening a full-blown trade war with no clear resolution in sight.

Executives who are seeing their stock prices fall ten, fifteen, or even twenty percent year-to-date would normally feel the urge to start buying. However, that instinct is being overridden by fear.

Will there be a recession? Will inflation take hold? Could we face both? Might stagflation emerge? Could the tariff tit-for-tat spiral into a scenario as damaging as the 1930 Smoot-Hawley debacle, which severely disrupted global trade and exacerbated the Great Depression?

There are no clear answers. When clarity is absent, insiders hesitate. They are not making purchases because they simply lack visibility. There is no certainty about how this situation will impact their businesses or the broader economy. As a result, they wait.

There is one segment of the market that is showing a different trend over the past few days: the closed-end fund market.

I have had a deep appreciation for this space since the late 1980s, when we were dealing with the aftermath of Drexel Burnham and the collapse of the junk bond market.

Junk bonds rose to prominence in the 1980s, driven by Michael Milken and his team at Drexel. These instruments funded takeovers, corporate expansions, and startups such as MCI. Even the infamous RJR Nabisco deal was partially financed by junk bonds. Eventually, the market collapsed. Many of these bonds suffered significant losses.

By the late 1980s, it became evident that many of these so-called junk bonds were still performing well—generating yields of ten, eleven, twelve, thirteen, even fourteen percent. That level of income caught investors’ attention. Major investment firms such as Putnam, Dean Witter, Pioneer, and others began launching closed-end funds comprised of these bonds.

Closed-end funds are well-suited for environments like this. Unlike traditional mutual funds, they do not issue or redeem shares daily. An IPO raises the capital, and that is it. Shares trade on an exchange, and the number of shares remains fixed.

Closed-end funds are subject to the same psychological swings as the rest of the market. Popular funds will trade for more than the value of the stocks and bonds owned by the funds. Unpopular or neglected funds will often trade at a discount to the value of their holdings.

When the junk bond markets collapsed, we were buying funds at 20% less than the market value of the bonds they owned and yielding north of 15%.

I have been a buyer of discounted closed-end funds ever since with outstanding results. Discounts tend to revert to the mean over time.

The CEO of one closed-end fund decided that he would add to his stake in the fund he helps oversee during last week’s carnage.

The Kayne Anderson MLP/Midstream Fund KYN invests in energy infrastructure assets. Most MLPs own what are known as midstream infrastructure assets. This includes things like pipelines, gathering facilities, and shipping terminals.

The Kayne Anderson MLP fund owns almost all the major players in the North American midstream market. When you own this fund, you own almost every asset involved in moving oil and gas from the field to the refinery to the end destination.

The fund is currently trading at a discount to the value of its assets of about 12.5% and yielding north of 8%.

James Baker, the president and CEO of the fund, likes what he sees. Last week as all things energy were being sold, he stepped up and bought $479,000 worth of shares.

In spite of the green energy pipe dreams, oil and gas demand is still growing and will continue to do so.

As it moves from here to there, we will collect a fee that is paid out as a dividend.

Over time we should see the value of the assets we own increase, giving us a huge total return.