BUSINESSWEEK ONLINE : AUGUST 28, 2000 ISSUE
BUSINESSWEEK INVESTOR High Yields with Little Risk Target trusts can offer rich short-term returns Looking for a safe place to park some short-term cash? Consider a target term trust. Some of these trusts, which trade on the New York Stock Exchange, can deliver as much as 10% or 11% with little more risk than Treasury bills or money-market funds, which yield in the 6% neighborhood. Term trusts are actually closed-end funds that invest in bonds and mortgage-backed securities. While most bond funds operate indefinitely, term trusts mimic the behavior of bonds. Instead of maturing, they plan to ''terminate'' at a fixed date. Instead of a redemption at a set price, the term trusts have a ''target'' price, say $10 or $15 per share. In other respects, the trusts behave like closed-end funds. Their prices are set by market forces, not the underlying value of the portfolio, or net asset value. That means they usually trade at a premium or discount to NAV. Many investors buy closed-ends when they trade at a discount but are often frustrated when the discount persists. The beauty of the term trust is that the discount narrows over the fund's remaining life and disappears when it liquidates at NAV. Closing that discount provides the extra yield that makes term trusts so attractive. For instance, BlackRock Target Term Trust trades at 9 11/16, or $9.69, a 1.7% discount to the NAV of $9.86. If there is no change in NAV by expiration, an investor makes a 1.7% gain. If the trust hits its $10 target when it ends on Dec. 31, there'll be a total appreciation of 31 cents a share (as the NAV moves from $9.69 to $10), a 3.2% gain on the original investment. ''That fund has five months left,'' says Merrill Lynch analyst Michael Mazier. Reaching $10 is ''clearly achievable,'' he adds. BEST BETS. That's not all. The trust pays monthly dividends of 2.5 cents a share until expiration. That works out to a 1.3% return over five months. Add the 1.3% yield to the 3.2% gain from reaching the target price, and you get 4.5% for five months. On an annualized basis, says Mazier, it's 11.4%. The Big Board lists 15 term trusts with expirations as far out as 2009, but the surest bets are those ending this year or next. That's because as a trust gets closer to liquidation, managers shorten the maturities and raise the credit quality of its holdings, which reduces interest-rate and default risk. In fact, managers often turn the entire trust into T-bills, says Mazier, because ''they don't want to be stuck holding anything illiquid at termination.'' Buying trusts with more distant termination dates is tempting, since they usually trade at deeper discounts, but it's riskier. Longer-term trusts have longer maturity bonds, which can make the price of the trust shares far more volatile. With longer dated trusts, there's also a greater chance of dividend cuts if rates fall or that the fund misses its target price if interest rates jump in the interim. Although the discount will certainly close upon liquidation, there's no guarantee that the trusts will hit their target prices. That's where management counts. Analyst Michael McGrath of Gruntal & Co. says earlier BlackRock trusts have reached their targets, and TCW Group's record is strong as well. The key to earning high returns from these trusts is in the execution. Share prices for the trusts are as easy to find as stock quotations, but you may have to hunt for the NAVs that help you determine if the fund is selling at a discount. That info is updated daily at the Closed-End Fund Center (www.closed-endfunds.com). Also, it's best to buy these shares in one fell swoop, as the cost of multiple trades can eat into returns. The term trust play involves only one transaction--your purchase. When the trust liquidates, your money comes back. By Lewis Braham _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS High Yields with Little Risk TABLE: Right on Target INTERACT E-Mail to Business Week Online

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