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We are rapidly approaching the time of year when investors review their portfolios to look for opportunities to realize a short-term capital gains tax loss. Short term tax losses can be used to offset realized capital gains in other securities and up to $3,000 in net losses can be deducted against taxable income.

Nearly every year, at least some CEF sector experiences strong tax loss selling pressure, which widens discounts to NAV coming up to the year end. These CEFs often bounce back strongly in January and February when the selling pressure lets up.

This year, equity CEFs have generally had strong performances and there are not many losses to be had. It is unlikely discounts on equity CEFs will widen considerably due to tax loss selling.

But many fixed income CEF asset classes have suffered losses this year. Investors who may have realized gains on their equity investments can reduce their tax bill by taking tax losses on their fixed income investments. In some cases, they may just swap one fixed income CEF for another to generate a tax loss, but some may reduce their overall exposure to fixed income adding to the selling pressure.

There are many fixed income sectors along with some precious metal funds that will likely experience tax loss selling this year. We may have already seen much of this tax loss selling, since weakness in fixed income and precious metals began earlier this year.

Some of the best opportunities this year to capitalize on the tax loss selling "bounce" in January, may come from the fixed income CEFs initial public offerings that occurred early in the year when fixed income was still a hot asset class. There are two reasons these busted IPOs are ripe candidates for tax loss selling now that they are trading near their all-time low price:

1) Every investor who bought at the IPO is holding the fund at a loss, and most investors who bought in later are also sitting on a loss.

2) The holding period is under one year, so investors can realize short-term capital losses, which are more valuable than long term capital losses.

Because of the large number of tax loss candidates this year, I've decided to publish a series of articles that focus on different asset classes. In this article, I highlight two busted CEF IPOs in the high-yield bond asset class.

I) Apollo Tactical Income Fund (NYSE:AIF)

Inception Date: February, 25, 2013

Inception Price: $20.00

Inception NAV: $19.06

- Invests mainly in senior loans, high-yield corporate bonds and other credit instruments made to companies whose debt is below investment grade.

- Conservative approach to credit selection - focus on collateral coverage, structural seniority, stable companies with positive cash flow and proven management teams.

- Uses tactical allocation between loans and bonds as market conditions change.

- Lower duration than the overall high-yield market

Portfolio Composition (as of 08/31/2013)

First Lien Senior Secured Loans

41.9%

Senior Secured Bonds

13.0%

Second Lien Secured Loans

7.9%

Second Lien Secured Bonds

3.9%

Senior Unsecured Bonds

22.4%

Junior Subordinated Bonds

1.7%

Asset-Backed Securities

9.2%

As often occurs, the market timing of the AIF initial public offering was optimized for the issuer, but not the best time for investors and near the peak level for fixed income prices. But AIF has decent NAV performance since the IPO. The NAV of 19.25 is above the inception NAV, and the fund has also paid out $0.585 in dividends.

Morningstar gives the 6-month NAV return of +2.82%, which compares well with the -1.77% return of the Barclays US AGG Bond index, and the +1.73% return of its high-yield competitors. (On the other hand, the market price return was -13.71%, which explains why this is one of my tax loss "bounce" candidates).

AIF is currently selling at a discount to NAV of -11.17% compared to the 6-month average discount of -7.09%. At the IPO in late February, it sold at a premium of over 4.9%!

Top 5 Industries Breakdown (as of August 31, 2013)

Banking, Finance, Insurance & Real Estate

15.7%

Health Care and Pharmaceuticals

9.4%

Structured Finance

9.2%

Energy: Oil & Gas

9.2%

Services: Business

7.6%

Bond Rating Distribution (08/31/2013)

BB

16.5%

B

71.0%

CCC+ or lower

12.5%

Here are some other stats on AIF:

Apollo Tactical Income Fund

  • Total Assets: 405MM Total Common assets: 269MM
  • Annual Distribution (Market) Rate= 8.25%
  • Last Regular Monthly Distribution= $0.117 (Annual= $1.404)
  • Fund Expense ratio: NA (advisor fee is 1% of managed assets)
  • Discount to NAV= -11.17%
  • Weighted Average Modified Duration: 4.33 years
  • Effective Leverage: 33.4%

II) Ivy High Income Opportunities (NYSE:IVH)

Inception Date: May 29, 2013

Inception Price: $20.00

Inception NAV: $19.06

1) Invests primarily in high-yield corporate bonds and first and second secured loans.

2) Uses bottom-up credit research of individual issuers.

3) Ivy Fund's first entry into the closed-end marketplace. The investment process substantially replicates the investment process of the open-end Ivy High Income Fund. Both funds are managed by Bryan C. Krug who has been with Ivy Funds for twelve years and was named a Rising Star of Mutual Funds by Institutional Investor.

4) Krug is backed up by six skilled credit analysts and the firm's global equity research team.

Portfolio Composition (as of 09/30/2013)

Corporate Bonds

114.3%

Senior Loans

29.3%

Revenue Bonds

0.5%

Cash / Cash equivalent

-44%

The IPO for IVH came out about a week after Ben Bernanke stated in testimony before Congress that the Fed might start to "taper" the bond buying program. Most bond funds were hit hard since then, but IVH has pretty decent NAV performance since its IPO. The NAV of 19.60 is well above the inception NAV, and the fund has paid out $0.25 in dividends.

Morningstar gives the 3-month NAV return of +5.10%, which compares well with the 1.17% return of the Barclays US AGG Bond index, and the +3.80% return of its high-yield competitors. (On the other hand, the market price 3-month return was -11.70%, which explains why this is another tax loss "bounce" candidate).

IVH is currently selling at a discount to NAV of -10.97% compared to the average discount of -7.52% since inception. At the IPO in late May, it sold at a premium of over 4.9%!

Bond Rating Distribution (09/31/2013)

BBB

1.0%

BB

18.6%

B

56.3%

CCC

22.5%

Non-Rated

1.6%

Here are some other stats on IVH:

Ivy High Income Opportunities

  • Total Assets: 468MM Total Common assets: 310MM
  • Annual Distribution (Market) Rate= 8.60%
  • Last Regular Monthly Distribution= $0.125 (Annual= $1.50)
  • Fund Expense ratio: 1.14%
  • Discount to NAV= -10.97%
  • Weighted Average Modified Duration: 4.33 years
  • Effective Leverage: 32.4%
  • Avg Leverage Cost= 0.93%
  • Avg Daily Trading Volume= 83,000 shares

Both AIF and IVH are good candidates to play the tax loss selling "bounce" strategy. They have both performed well on an NAV basis. Investors who are holding the open-end Ivy High Income fund (MUTF:WHIYX) may want to consider a swap into IVH.

Since all of the tax loss selling may not be over yet, a short-term trader may want to wait until Thanksgiving before accumulating shares. But for a longer-term investor who wants to accumulate a larger position, I think the funds have already been beaten up enough so that you may want to gradually start dollar cost averaging into these funds right now.

Disclosure: I am long IVH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Tax Loss Selling Opportunity In Busted Closed-End Fund IPOs- Part I