Over the last few months, the senior loan sector has caught fire. I have been writing about senior loans for quite some time. Here are two articles I wrote back in 2011 on VTA and VVR and another article in early 2012 recommending four other senior loan CEFs.
At the time, both VTA and VVR were trading at 8% discounts to net asset value. But today VVR trades at a 9% premium and VTA trades at NAV.
Aside from the much higher valuations of the senior loan closed-end funds, the underlying senior loan portfolios have also appreciated quite a bit since 2011, and loans that traded at big discounts a few years ago now trade near par. I discussed this in more detail in a Seeking Alpha article two months ago.
Nuveen is one of the leaders in senior loan closed-end funds. They offer five CEFs that focus primarily on senior loans. All five of these funds currently trade at significant premiums over net asset value:
Nuveen Senior Loan CEFs
% Senior Loans
But aside from these five funds, Nuveen also offers other multi-asset funds that have a portion of the portfolio invested in senior loans. One of these funds is the Nuveen Tax-Advantaged Total Return Fund (JTA).
If you believe "the whole is the sum of its parts", then JTA appears to be severely mispriced relative to the other Nuveen funds. It is currently trading at an 8% discount, but its component parts are trading at premiums or near NAV. Let's take a closer look at JTA.
JTA is a multi-asset fund with the objective of achieving a high level of after-tax total return consisting primarily of tax-advantaged dividend income and capital appreciation. It can be a good holding in a taxable account or an IRA.
The fund invests at least 60% of its managed assets in dividend paying stocks that pay qualified dividends. It also invests 15% to 25% in senior loans, as well as 5% to 15% in preferred stocks paying tax-advantaged dividends. The fund uses leverage to enhance returns. JTA uses the senior loans to generate additional income and to reduce the net asset value and income volatility that may be caused by the leveraged structure when short and/or long term interest rates change.
This is a recent asset allocation breakdown:
JTA Asset Allocation Breakdown (as of 01/31/2013)
Equities + Preferreds
Senior Loan & Debt
Cash and Equivalent
In many ways, JTA is a combination of two different funds- a senior loan CEF plus a tax-advantaged equity dividend CEF. Nuveen also offers JTD which is a focused tax-advantaged equity dividend fund. JTD is currently trading at a 5% discount to net asset value.
It seems clear that if JTA traded like it components, it should sell closer to net asset value and not at an 8% discount.
Top Ten Equity Holdings
JP Morgan Chase
Since inception in 2004, JTA has had reasonably good total return performance except for a disastrous year in 2008:
Annual NAV Performance (from 2005)
JTA is currently selling at a discount to NAV of -8.02% compared to the 6 month average discount of -8.36%. Just a few days ago, JTA announced it was raising its quarterly distribution a penny from $0.22 to $0.23.
Here are some other stats on JTA:
Nuveen Tax-Advantaged Total Return Fund
- Total Assets: 239 MM Total Common assets: 171.1 MM
- Annual Distribution Rate= 8.11%
- Last Regular Quarterly Distribution= $0.23 (Annual= $0.92)
- Fund Baseline Expense ratio: 1.43%
- Discount to NAV= -8.02%
- Effective Leverage: 29.6%
- Average Leverage Cost: 1.26%
- Average Daily Volume: 61,500
- Average Daily Dollar Volume: $700,000
Overall, I think JTA is a decent purchase at current levels, although an active trader might try to buy it at a discount of -10%. It is fairly liquid and trades with a narrow bid-asked spread. Its leverage cost of 1.26% is not bad for a fund that is primarily equities.
JTA provides a convenient way for investors with fixed income holdings to lower their interest rate risk, get some exposure to equities and senior loans and take advantage of fairly low cost leverage.