Miller/Howard High Income Equity Fund: A Solid Choice For Low- Interest Rate Environments

April 30, 2015 Updated: April 23, 2016

Miller/Howard High Income Equity Fund:  A Solid Choice For Low- Interest Rate Environments

By all accounts, stock markets have had an impressive run over the last five years.  But these gains have started to stall in the last year and investors are looking for new ways to generate strong returns while valuations in equities are still high.  On top of this, there hasn’t been much movement in the expectations for monetary policy changes at the Federal Reserve.  This means that we are likely to experience a low-interest rate environment for quite some time — and this can make it difficult for investors that are looking for ways to generate income through high-yielding assets.

For these reasons, it makes sense to look at high-quality funds that are able to capitalize on on recent trends and outperform what is likely to be seen in the rest of the market.  One excellent choice is the Miller/Howard High Income Equity Fund (NYSE:HIE), which is a closed end fund designed to generate high levels of current income.  The fund devotes at least 80% of its portfolio to stocks trading on US exchanges that pay elevated and sustainable dividends.  Individual stock selections are made using strategies that require a reliable earnings history, attractive dividend or distribution yields, and increasing distribution growth.  The fund also utilizes covered put and call strategies to round out its unique approach to income generation.  

Sector Exposure

In terms of sector allocation, most of the fund is devoted to REITs (19.2%), MLPs (12.9%), financial stocks (12.8%) and the energy sector (11.3%).  Of particular interest here is the fund’s exposure to energy markets, which have met extreme selling pressure over the last year.  Base prices for assets tied to oil are still trading well below their long-term averages, so there is strong potential for enhanced returns once these markets correct themselves and move back inline with historical trends.  Two of the largest holdings in the fund are Kinder Morgan (NYSE:KMI) and Williams Companies (NYSE:WMB), so as we head into the summer driving season we could start to see upside momentum in the Miller/Howard High Income Equity Fund if we start to see rallies in oil prices.


(Chart Source: Google Finance)

In the chart above, we can see that HIE is trading lower by 10.75% year-to-date.  These declines are significant because they have created a discount in the stock relative to its net asset value (NAV).  “NAV discounts offer some of the best advantages for those looking to invest in closed end funds,” said Bill Jameson, markets analyst at KeyStock.  “These discounts essentially enable investors to buy a pool of assets at sale prices and then to collect the gains as these discounts eventually close.”  With this in mind, it should be noted that the recent drop in HIE has created a discount to NAV that currently stands at 2.54%, and this gives investors the incentive of capital appreciation in addition to the fund’s central focus on income generation.

Performance History

Another positive factor supporting the stock is the fact that Miller/Howard Investments has an established track record in running income investment strategies that consistently outperform the market.  So while it is true that HIE is a relatively new option for income investors, the team at Miller/Howard has more than two decades experience in managing these types of portfolios.  Considering the following chart:


Source: Miller/Howard Investments

Here, we can see that portfolios composed of stable dividend growers tend to soundly outperform strategies that are based on the S&P 500 alone.  At the same time, total risk is reduced as dividend strategies tend to be more stable and encounter less volatility.  With this in mind, it makes a good deal of sense to consider newer instruments like the Miller/Howard High Income Equity Fund.  Attractive NAV discounts, well-positioned sector allocation, and a strong history of income generation support the argument for elevated returns in HIE as we head into the second half of the year.

 

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