Many income investors in high yielding equity based closed-end funds (CEFs) are probably not aware of the variety of fund families which offer stock based CEFs and so I thought it would be interesting to go over the larger fund families such as BlackRock, Nuveen, Eaton Vance, etc. as well as some of the lesser known fund families to see how their funds are doing in this relentlessly up and up market and which funds may still offer value.
The following tables sort all of the high yielding CEFs by fund family and by their YTD NAV total return performances through May 27, 2013. I like to sort by a fund's NAV performance rather than its market price performance (which is also shown in the tables) because a fund's NAV total return performance is the true apples to apples comparison to its benchmarks. Market price performances can be more a function of popularity rather than actual performance and as most investors in these funds know, that popularity or lack thereof is reflected in the fund's discount or premium market price.
Funds which have seen their NAVs outperform the S&P 500, as reflected by the SPDR S&P 500 (SPY) and which includes quarterly dividends, are shown in green whereas funds which have underperformed are shown in red. Most funds have not been able to match the S&P 500 either because they include international stocks, include fixed income securities or because they use defensive strategies to generate income. As a result, most of these funds would have different benchmarks than the S&P 500 but for the sake of comparison, this is what I am using.
Funds are also color coded to show their primary income strategy. Orange for leveraged funds, light blue for option-income funds, olive green for dividend harvest funds and purple for other strategies. Some funds may use a combination of strategies but all are designed to generate the income or appreciation necessary to cover their large distributions and yields when their income strategy is optimized. So with that, let's start with the largest fund families and work our way down.
The first fund family is from Nuveen... (click to enlarge)
Nuveen offers a variety of equity based CEFs, most of which are either leveraged or use an option-income strategy. Two of the funds (JTA) and (DPO) have outperformed the SPY at the NAV level because of leverage. DPO I have written about recently and I still consider a buy because it only owns the Dow Jones Industrial Average's (DJIA) 30 stocks, which has been the best performing major market domestic index so far in 2013. DPO's NAV can actually outperform the DJIA even with a defensive option-income strategy because it uses swaps to get additional DJIA exposure.
If the markets continue their upswing, leveraged funds in general will do well and even funds that use a defensive option-income strategy like DPO can still outperform at the NAV level. Another option-income fund that uses such a strategy is (JCE). JCE can use leverage in the form of E-mini S&P 500 futures to get enhanced NAV performance and so far in 2013, JCE's NAV total return performance is only slightly lagging the S&P 500. With a relatively wide -6.7% discount, I also consider JCE attractive in a continued bull market environment.
Now if the markets turn negative, something that is arguably overdue, then Nuveen offers some of the most defensive option income funds available to investors as well. (JLA), (JSN) and (JPZ) sell index options against 100% of their US based large-cap stock portfolios and this offers a built-in NAV buffer to the downside each month if the markets turn negative. However, all three of these funds are not what I would consider in a buy range based on their valuations. In a strong up market like we've been in, these funds have limited NAV upside and I would wait until there is more evidence of a market turnaround since it has been shown that their market prices will drop as much as any other fund in the early stages of a market reversal.
One fund that I would be buying here that is still very defensive is (JPG). JPG sells index options on a lower 80% of its all US stock based portfolio which is still high compared to most option-income funds, but at a relatively wide -7.9% discount, JPG offers better value for a very defensive fund.
The second fund family is from Eaton Vance (EV)... (click to enlarge)
Eaton Vance's leveraged funds (EVT), (ETO) and (ETG) have performed very well so far in 2013, just slightly lagging the S&P 500 at the NAV level even with portfolios that include fixed income preferreds and international stocks. On the downside however, the Eaton Vance leveraged funds have also narrowed their discounts substantially and much of the low hanging fruit has already been picked in my opinion. In fact, ETO and ETG in particular have performed so well on their market prices YTD, up 25.8% and 25.7% respectively, that I would consider them fairly valued to even over-valued at this point.
The best opportunities among the Eaton Vance funds in my opinion are clearly (EOI) and (EOS), two funds which historically have underperformed on their NAVs but have turned it around over the past year or so after getting their distributions down to more manageable 8% NAV yield levels. Both EOI and EOS now reflect solid NAV total return performances and in fact show some of the best total return performances of any option-income fund from any fund family.
Like Nuveen, Eaton Vance also offers several very defensive option income funds if the markets ever turned more defensive, which is a big if it seems these days. (ETV), (ETB) and (ETW), like JSN, JLA and JPZ above, may not show great NAV total return performances YTD in a relentlessly up and up market, but just wait until the markets turn more flat to negative and that's when they will start to catch up and show better comparisons. ETV, ETB and ETW all sell index options against roughly 95% of their all stock portfolios which means they bring in a lot of option premium on a monthly basis. With all three funds now offering monthly distributions as well, I still consider these funds must owns to balance portfolios against more aggressive CEFs.
Finally, (ETJ) is an interesting story because it's really suppose to be the most defensive of all of the Eaton Vance funds with its long put option collar strategy. But it appears that ETJ is not adhering to that strategy currently based on its NAV performance. This could be because Eaton Vance has temporarily taken off the "risk managed" portion of the strategy, i.e. not holding long put options, and is waiting for a more definitive turnaround in the market before putting it back on. Historically however, ETJ usually only outperforms in a down or bear market.
Final note on the Eaton Vance funds. Eaton Vance still has a 10% buyback program in place for all of its option-income funds. This should provide a nice backstop on any market weakness and I would encourage investors to keep these funds on their radar screens. It wasn't that long ago that the Eaton Vance CEFs traded at the widest discounts of any fund family, typically well over -10%, even as I encouraged investors to load up on these funds for the turnaround story that I anticipated would take place. Since then, the Eaton Vance funds have seen the best total returns at the market price level of any of the major fund families and I now consider most of their funds fairly priced.
The third fund family is from BlackRock (BLK)... (click to enlarge)
The BlackRock equity CEFs, which are all option-income funds (light blue), have taken over the mantle of the most despised fund family from Eaton Vance. A big reason for this is that the BlackRock funds were late in getting their distributions down to a more manageable 7% to 9% NAV yield level by cutting distributions (reflected in the far right columns of the table) and as a result, their total return NAV performances suffered and investors sold the funds down to the wide discounts they currently reflect today.
However, as is often the case, this presents opportunities for funds which are turning their NAV performances around with more funds at double digit discounts than any other top name CEF fund family, BlackRock now offers some intriguing opportunities.
I recently wrote about (BGR), which ironically was not one of the BlackRock funds which was forced to cut distributions, but was thrown out anyway due to its guilt by association. BGR is a mostly energy focused option-income fund that I pointed out in my article of May 13th, 4 CEFs To Buy could be in a position to raise its distribution when declared either at the end of this week or the first of next week. For a fund that started with a $23.83 inception NAV back in 2005 and is now showing a $28.85 NAV with a relatively low 5.6% NAV yield, I would think BlackRock would like to show one of its option-income funds raising their distribution as opposed to cutting distributions.
Another BlackRock fund that I like now is (BOE), a large and popular fund that was forced to make large distribution cuts twice over the last two years and dropped from a slight premium back in mid 2011 to a current -10.3% discount. I've written a couple times on BOE and have never endorsed the fund until now. With only 45% of its stock portfolio represented in the US, BOE is a nice balance to US based CEFs and is also a play on stronger overseas markets which have lagged the US.
The fourth fund family is from ING (ING)... (click to enlarge)
ING has, by far, the most over-valued funds with several at premiums to only slight discounts. If the funds had the NAV total return performances to back that up, I would say fine, but for the most part, the ING equity CEFs, which are all option-income funds, reflect poor total return NAV performances YTD and all of the funds have cut distributions over the past year (far right column in the table).
I often wonder who buys these funds at premiums when there are so many more attractive funds to choose from but I suppose the ING funds also have quite a bit of NAV upside when the international markets are rallying since all of the ING funds have either international or global stock portfolios. Still, I cannot endorse any of the ING funds based on their valuations and I believe over time, we will even see a couple of these funds forced to cut distributions again.
And finally, the fifth fund family is from Gabelli (GBL)... (click to enlarge)
Gabelli has the most equity based CEFs which are outperforming the S&P 500 at the NAV level (shown in green). This is expected in a strong up market since most of their funds are pure stock, i.e. no fixed-income to reduce volatility, as well as being leveraged. The only funds which do not rely on leverage are their two gold based funds (GGN) and (GNT) which are volatile enough as it is even with their defensive option-income strategies.
Several of the Gabelli funds, namely (GRX), (GAB) and (GDV), I have endorsed many times since early 2012 though I have to now temper my enthusiasm after all of these funds have shown such strong NAV and market price performances since then. Even YTD, the performances have been extraordinary. However, really only GDV offers a compelling valuation now, though if the markets continue to rally, then it should be expected that all of these funds will continue to do well.
Due to the length of this article, I will be back with some of the smaller and less familiar fund families which also offer equity CEFs.