In a recent analysis of some PIMCO and DoubleLine taxable-income closed-end funds, I noted how the sector took a massive across-the-board hit last April. In many cases, the losses in market prices were well out of proportion to NAV reductions, and in the following months market prices continued to fall at a rate exceeding that of losses in NAV. The falling prices saw funds that had consistently sold at a premium fall to sharp discounts, and those that were selling at discount had marked drops in those discounts. In the interest of keeping the size of the article reasonable, I selected PIMCO and DoubleLine funds because they enjoy a record of consistently strong performance and were, in my opinion, likely to experience a more solid recovery as the sector reverted to the mean. I noted that there were other opportunities that could also be appealing to an investor looking to enter this arena and briefly mentioned 6 more. I want to expand that analysis to those 6 funds here: Three from Helios -- Helios High Yield (HHY), Helios Advantage Income (HAV) and Helios High Income (HIH); two from Western Asset -- Western Asset High Income Opp. (HIO), Western Asset High Income (HIX); and Franklin Limited Duration (FTF).
Franklin Limited Duration
Helios Advantage Income
Helios High Yield Fund
Helios High Income
Western Asset High Income Opp
Western Asset High Income
Yields at current prices range from just under 7% for FTF to nearly 10% for HIX. I will note that several have seen recent reductions in their distributions. FTF reduced its distribution from $0.083 to the current $0.073 in April 2013. HIO's distribution went from $0.0415 to $0.0390 in Feb. 2013 and will drop again to $0.0375 with its Sept. 2013 payment. HIX has seen a series of drops from $0.0825 a year ago to $0.075 currently. HAV, HHY and HIH have all enjoyed stable distributions since at least 2009. The reductions may be potentially worrying, but also should result in a more sustainable rate of return going forward.
One of the primary things I look for in buying a CEF is its current premium or discount in relation to its average premium/discount for the past 52 weeks. I want to see it below the 52-week average at a minimum.
52-week average P/D
Basis points from Average
As the table above shows, all three continue to be priced at a discount to NAV and, for each that discount is well below its average discount (or premium in the case of HIX) for the past year.
An often-overlooked metric for CEFs is undistributed net investment income per share (UNII) which can provide insight into the sustainability of the distribution stream. This is a far from perfect metric, and can be difficult for the individual investor to interpret. The published figures are typically months out of date and come with little explanation or history. Some investors simply reject out of hand any fund with negative UNII. I tend to look at UNII in relation to distribution. I'd prefer to see UNII/share in the positive range, obviously, but if a fund makes monthly distributions (as all of these do), I'll accept a negative UNII that doesn't drop below a single month's distribution amount. Ideally, it should be closer to half that. Two of these funds (HAV and HHY) have UNII in the positive range. None has UNII/share more negative than their monthly distributions, and none fails the "no more than 50%" test. HAV leads the pack with UNII/share at 80% of its monthly distribution amount.
UNII per share / Distribution per share
One final point worth noting is that each of these CEFs has turned in a reasonable performance for 1 year total return on NAV, particularly considering the bloodletting in market prices since April which covers about 5 months from that 12-month period.
52 week Total Return (NAV)
Comparing these to the previously analyzed set, we find that none reaches the levels of the two PIMCO funds, PDI (26.26%) and PKO (15.35%) but all four of the five turned in better performances on this metric than the rest of that set.
One last addition: In a comment to my previous article galicianova suggests TSI. A quick look tends to confirm that enthusiasm. TSI is priced at a -9.19% discount, very close to its 52-week low of -9.71% and well off its 52-week average of -1.83%. The chart of its NAV and market prices has followed the familiar trends of the sector. Its distribution of $0.0980 on a current market price of $5.77/share yields 7.47%. Negative UNII is a bit high, but not frighteningly so, at -$0.0790.
As I noted earlier, I tend to think there are opportunities here but one must keep in mind that it will be hard to sustain past performances in the rising interest rate environment ahead. The cautious investor may just want to opt out entirely. The past few sessions have seen market prices begin to pick up as the funds begin to revert to something closer to their mean discount values. With the attractive yields and the current trend indicating some movement off a bottom, it may be timely for some income investors to consider how these CEFs might fit into a portfolio.
In these two articles, I've picked out a baker's dozen of funds that may offer an opportunity to take advantage of the panic selling of a few months ago followed and the delayed correction in the pricing of income CEFs. From the previous set I noted a preference for PDI and PKO. From this set of six, I tend to favor HHY and HAV with their 9+% yields, stable distributions, positive UNII, and current discounts approximately 400 to 500 basis points below their 52-week averages.
As always, I remind readers that I am not a professional and I am most certainly not offering advice. I'm simply sharing my own thoughts, research and conclusions. Anything you may find interesting here will need your own thorough research and due diligence to determine if it may be appropriate for your portfolio.