On December 3, 2012 I wrote an article covering Municipal Bond CEF's dividend risk that caused quite a few folks to call our firm, moreso than any article or interview we have done in my 12 years in the investment business. You can read the full article here. I thought it would be helpful, two months later, to search for "above average" muni CEFs.
At CEF Advisors we collect our own data "CEFA's Closed-End Fund Universe" for all U.S. listed CEFs for tracking the industry and making our internal investment decisions. The data used for this article is as of our February 8th, published Monday February 11th to our data clients.
I screened for a Municipal CEF that was simply "better than average" using the following criteria:
- Classified as National Muni (104 peer funds) or State Specific Muni (115 peer-funds) CEFs.
- Not classified as a Build America Bond Fund (taxable).
- Current Discount wider than the peer-group average (-1.80%).
- Relative Discount wider than the peer-group average (-0.02%).
- Positive UNII (Undistributed Net Investment Income).
- UNII Trend Positive (read about the predictive value of this data point here).
- Earnings Coverage Ratio above peer-group average (97%).
- Total Yield above peer-group average (5.4%).
- Volatility (standard deviation of market price) under peer-group average (12.3).
- Liquidity above peer-group average ($465K per day).
- 1-Year NAV Total Return Performance above peer-group average (+11.8%).
After checking across all data points only one fund was left standing-- Nuveen's Municipal Market Opportunity Fund (NMO). This was a surprise, as I expected about 10 funds to live past the screen.
Based on our analysis, I believe NMO has good dividend coverage, reasonable entry point pricing and solid manager performance-- the three primary factors we use in our CEF analysis.
The fund's individual data is summarized below:
- Current Discount to NAV: -3.95%
- Relative Discount: -0.73%
- 1 Year Z-Stat: -0.97
- 1 Year Discount Range: 33.57%
- Total Distribution Yield: 5.4%
- UNII Trend: Positive
- Relative UNII: 8.89%
- Earnings Coverage: 97.01%
- Earnings Trend: Positive
- Average Duration: 12.48
- Ave Credit Quality: A
- Leverage: 37%
- Expense Ratio: 1.84%
- Net Assets: $708M
- Daily Liquidity: $1,059K
- Institutional Ownership: 6.65%
- 1-Year Standard Deviation: 9.6
- 1 Year NAV Total Return Performance: +12.7%
Definitions for our data points can be found here.
Risks or Concerns to Consider:
- Earnings are below 100%. However with positive UNII, UNII Trend and Earnings Trend we are less concerned with this figure being below 100 as it is slightly above the peer group average.
- Duration is slightly higher than we currently prefer (under 10).
- The dividend was cut -5% in December 2012, however, the average fund cut -6% and usually after a cut the fund is less likely to make a cut for about a year in most circumstances.
- The fund has a slightly higher expense ratio than its peers, however, having above peer-group NAV performance, in my opinion, is more important. Good managers tend to make more money.
- Municipal bonds in general, both the underlying bonds themselves and funds that own them, have downside risk when interests rates rise. This is a mathematical fact about bond investing, so should be considered by all bond investors. This is why we suggest staying active at monitoring / managing this part of your portfolio in order to try and keep the income stream constant and help protect investors' principal invested in the sector.
Note: NMO is on our firm's internal buy list, however, we do not plan to purchase any shares until this report has been released for 72 hours. It has, however, been recommend to research or consulting clients as of the article's published date.
The information and statistical data contained herein have been obtained from sources that Closed-End Fund Advisors (CEFA) believes are reliable, but CEFA makes no representation or warranty as to the accuracy or completeness of any such information or data and expressly disclaims any and all liability relating to or resulting from your use of these materials. The information and data contained herein are current only as of the date(s) indicated, and CEFA has no intention, obligation, or duty to update these materials after such date(s). These materials do not constitute an offer to sell or the solicitation of an offer to buy any securities. CEFA may make decisions for its clients in certain of these securities. CEFA and/or their respective officers, employees, and affiliates may at any time hold positions in any of these securities and may from time-to-time purchase or sell such securities.