We are soon approaching the time of year for one of the best trading opportunities: buying stocks in the last few weeks of the year that are artificially depressed by investors selling them for tax reasons. These stocks often experience a nice bounce in January when the selling pressure eases up.
Some of the best opportunities this year to capitalize on the tax loss selling "bounce" strategy may come from the large number of fixed income CEFs' initial public offerings that occurred over the last year when fixed income was a hot asset class:
1) Every investor who bought at the IPO is holding the fund at a loss, and nearly all 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.
I previously wrote an article on two CEF IPOs in the high yield bond class. I am following up today with a second article on two busted CEFs in the senior loan asset class.
Senior loans were a hot asset class earlier this year, but cooled off a bit in May after the Fed's potential tapering announcement. Overall, both funds have been steady performers based on net asset value, but their market prices have dropped because of the widening of the discount.
I) Eaton Vance Floating-Rate Income Plus Fund (EFF)
Inception Date: June 26, 2013
Inception Price: $20.00
Inception NAV: $19.06
1) Invests mainly in senior secured floating-rate loans.
2) The Fund's investment objective is total return, with an emphasis on income.
3) Under normal conditions, the Fund will invest at least 80% in Senior Loans and up to 20% in other debt obligations, common and preferred stock.
4) Very low duration.
Portfolio Composition (as of 08/31/2013)
Since its IPO in late June, EFF has pretty decent NAV performance. The current NAV of 19.44 is above the inception NAV of 19.06, and the fund has paid out an additional $0.299 in dividends.
Morningstar gives the 3-month NAV return of +1.82% which compares well with the +1.50% return of the Barclays US AGG Bond index, and the +1.78% return of its bank loan competition. (On the other hand, the 3-month market price return was -9.26% which explains why this is a tax loss "bounce" candidate!).
EFF is currently selling at a discount to NAV of -7.20% compared to its average discount of -3.38%. At the IPO in late June, it sold at a premium of over 4.9%.
Here are some other stats on EFF:
Eaton Vance Floating-Rate Income Plus
- Total Assets: 230MM (est.) Total Common assets: 131MM
- Annual Distribution (Market) Rate= 6.67%
- Last Regular Monthly Distribution= $0.10 (Annual= $1.20)
- Fund Expense ratio: NA (advisor fee is 0.75% of managed assets)
- Discount to NAV= -7.20%
- Effective Leverage: 37% (est.)
- Avg. Daily Trading Volume= 22,800 shares
II) Ares Dynamic Credit Allocation (ARDC)
Inception Date: Nov 28, 2012
Inception Price: $20.00
Inception NAV: $19.10
1) Invests primarily in:
i) Secured senior loans made primarily to companies whose debt is rated below investment grade.
ii) High yield corporate bonds.
iii) CLO debt securities.
2) Normally at least 80% in senior loans and corporate bonds.
3) Ares Capital Management is the investment adviser. Its investment approach emphasizes capital preservation, low volatility and minimization of downside risk.
Portfolio Composition (as of 09/30/2013)
Fixed Versus Floating (as of 09/30/2013)
The IPO for ARDC came out last November when the 10-year treasury rate was well below 2%. Most bond funds have been hit pretty hard since then, but ARDC has good NAV performance since its IPO. The NAV of 19.43 is above the inception NAV of 19.10, and the fund has paid out $1.17 in dividends.
Morningstar gives its year-to-date NAV return as +7.42% which compares very well with the -1.38% return of the Barclays US AGG Bond index, and slightly exceeds the +7.32% return of its bank loan CEF competitors.
On the other hand, the market price YTD return is -4.57% which explains why this is another tax loss "bounce" candidate.
ARDC is currently selling at a discount to NAV of -7.57% compared to the average discount of -2.22% since inception. At the IPO last November, it sold at a premium of over 4.7%.
Here are some other stats on ARDC:
Ares Dynamic Credit Allocation Fund
- Total Assets: 462MM Total Common assets: 333MM
- Annual Distribution (Market) Rate= 7.80%
- Last Regular Monthly Distribution= $0.117 (Annual= $1.404)
- Fund Expense ratio: 1.14%
- Discount to NAV= -7.57%
- Weighted Average Floating Coupon: 5.28%
- Weighted Average Bond Coupon: 8.79%
- Effective Leverage: 30%
- Avg. Daily Trading Volume= 52,400 shares
Both EFF and ARDC are good candidates to play the tax loss selling "bounce" strategy. They have both performed well on an NAV basis.
Since all of the tax loss selling may not be over yet, a short-term trader may want to wait for further price drops in either of these two issues as we approach year end.
But for a longer-term investor, I think the funds have already been beaten up enough so that you may want to gradually dollar cost averaging into these funds starting now. Significant tax loss selling has occurred in November in recent years and you may miss out on some good bargains if you wait until late December.