- Highest Positive Spread: Nuveen Ohio Dividend Muni Fund (NVJ)
- Lowest Negative Spread: JH Tax Advantaged Global Fund (HTY)
- Focus Stock of the Week: Nuveen Floating Rate Income Fund (JFR)
- Last Week's Focus Stock: Invesco Value Municipal Bond Trust (IIM)
CEF Weekly Review: On average, the 13 closed-end fund (CEF) types registered a share price increase of 1.2% for the week ending 2/3/12. The high-low spread (average percentage price change difference between the highest and lowest fund types) registered this week was broad +4.6% versus +2.2% the previous week. On an aggregate unweighted basis, the weekly average price change for the approximately 600 CEFs in the GrowthIncome database was also up 1.3%.
The PowerShares CEF Income Composite (PCEF), an ETF that invests in taxable income CEFs, increased 0.8% for the week. PCEF is up 6.0% YTD on price appreciation alone. Currently, PCEF's annualized monthly yield is 8.8%. The S&P 500 jumped 2.0% this week with most of the gain coming at the end of the week. The S&P 500 is up a robust 6.9% YTD.
(Click here for YTD CEF Performance. See "Research" Menu; "CEF Weekly Information" tab.)
The Eqcome CEF Fear Index eased for the week on the upside. The average CEF unweighted price increased 1.3% while the average related NAV advanced 1.0%. The VIX dropped 7.7% to 17.10, the lowest it's been in 8 months signaling a relaxed investors' mood towards risk.
CEF Weekly Fund Type Performance: With the exception of LoanPartFnds, all the CEF fund types advanced in terms of average share price. WrldEqFnds surged ahead 3.6% as equity-oriented CEFs beat the average with fixed-income funds falling below. LoanPartFnds, last week leader, sank 1.0% while its respective average NAV advanced 0.7% generating the largest negative PrcNAVSprd of all the CEF fund types.
Quick Read: This week's CEF performance of fund types suggests that investors are willing to accept more risk by tilting towards equity-oriented fund types-as was the case last week. This is confirmed by the low level of the VIX and better economic performance, as referenced by the improvement in unemployment statistics, and temporary euro crisis fatigue.
A Note of Caution: As the equity markets reach an interim peak, we could be setting ourselves up for a temporary pull-back as improving economics are no substitute for solutions to structural fiscal issues both in Europe and here in the U.S. which are only in temporary retreat and require affirmative political action.
Weekly CEF Winners and Losers: The CEFs with the greatest positive PrcNAVSprd for the week were two small Ohio muni funds: Nuveen Ohio Dividend Muni fund and Nuveen Ohio Dividend Advantage Muni Fund (NXI). Eaton Vance Michigan Muni Bond Fund (MIW) also generated a large positive spread. This was against the backdrop of SingleStMuniFnds advancing below the average of the 13 CEF fund types.
For the two Ohio CEFs, price increased 9.4% and 5.5%, respectively, while NAV's each advanced 0.3%. This generated a positive PrcNAVSprd* of 9.2% and 5.2%, respectively. Each recently declared its regular monthly distribution, so the price hikes weren't a function of increased distributions.
Thin Reed: One reason for this performance could be that both Ohio and Michigan have significant exposure to manufacturing and particularly the auto industry which has demonstrated signs of a recovery.
Auto sales in January rose 11% over a year ago to their briskest pace in nearly four years. The annualized sales pace in January was 14.18 million vehicles, up from December's annualized rate of 13.56 million. It was the highest level since May 2008, when the sales rate hit 14.28 million vehicles a year. Additionally, U.S. consumers are paying 11% more for the average new car indicating pent-up demand being unleashed.
Maybe investors felt this was a derivative way to conservatively play the manufacturing and auto recovery as it improves the credit of those states?
The CEF(s) with the greatest negative PrcNAVSprd for the week was the one with the greatest positive spread last week: JH Tax Advantaged Global Fund . HTY's share price plunged 8.1% while its NAV increased 1.1% generating a hefty 9.2% negative PrcNAVSprd. The stock took a header on Tuesday dropping 3.7% on elevated volume of 115,000 shares on three times its 3 month average daily volume.
One of the potential catalysts for the sell-off of HTY is the cut in distribution of another "buy/write" option CEF: Advent/Claymore Enhanced Growth & Income Fund (LCM). LCM cut its quarterly distribution from $0.264 per share to $0.21 per share, a reduction of over 20%.
As mentioned last week, HTY is classified as a member of WrldEqFnds, mostly by the virtue of having "Global" in its moniker, although it is probably a misnomer. Over 50% of its assets are in the U.S. Additionally, HTY employs an option strategy. So, it may be closer to the buy/write CEFs which are included in the OtherFnds type category.
Why HTY stock may get a "dead" cat bounce" this week, I wouldn't recommend it as an investment. (Click here for a hyperlink to the Joe Eqcome's CEF Weekly Insider Report. See "Research" Menu; "CEF Weekly Information" tab.)
CEF Distribution Announcements This Week: The beginning of the month is typically the time distributions are announced.
CEF Focus Stock(s) for the Week: The focus stock for the week is Nuveen Floating Rate Income Fund . JFR, as the name implies, invests in adjustable-rate secured and unsecured senior loans and has three quarters of a billion dollars of total net assets ($773.7 million) while employing leverage of $143 million for an effective rate of around 20%.
JFR's stock price gave up about 2.4% of the previous week's strong gain of 5.0%. There was some heavy volume earlier in the week (Monday and Tuesday) that knocked the stock off its perch.
Since early 2011 JFR has increased its monthly distribution rate four separate times. It is currently generating an annualized monthly rate of 7.3% and it recently announced its most recent distribution of $0.0685 per shares with an ex-distribution date of February the 13th which is far enough out by CEF standards not to materially play into current valuation.
JFR has accumulated approximately $0.10 per share in undistributed net investment income as its average per share earnings has exceeded its distribution rate.
The bulk of JFR's portfolio (90%) is loans to businesses and there is only 11% call exposure each in 2012 and 2013. Additionally, 88.7% are classified as variable rate senior loan interests. The preponderance of the loan turnover will occur in 2014 and 2015. The bulk of the portfolio is in non-investment grade credits with 50% rated "B" or "speculative".
Thesis: Our thesis regarding JFR is that while interest rates are schedule to stay low, the encouraging news regarding the U.S. economy is likely to help improve the credit rating of the underlying credits to which JFR lends and concomitantly the value of its investments. Approximately 30% of JFR's credits are "BB" rated, which is two notches below investment grade. If interest rates are allowed to float higher, this would be the second booster stage for the stock price.
First Trust Portfolios LP in the aggregate own 21.8% of JFR. That position was increased from 18.0% from April of 2010.
Last Week's Focus Stock(s): The focus stock(s) for last week was Invesco Value Municipal Bond Trust . IIM was one of the Invesco advised CEFs that sold-off with regards to a change in its investment policy which dropped the requirement that its bonds must be insured by an insurer with at least an "A" rating.
Overdone? We believed the "sell off" was overdone and a "knee-jerk" reaction to the policy change. The stocks may have been "kicked out" of very conservative portfolio without consideration of the economics.
Average daily volume was 180,000 shares for the 3 days post the announcement for a stock. In comparison, its 3 month average daily volume is 60,800. The stock price dropped 4.6% last week while it's NAV advanced by 0.8%, generating one of the larger negative PrcNAVSprds for the week (5.4%). The Muni ETF (MUB) in comparison was up 2.0% for the week.
IIM stock price was up 4.2% for the week.
[*] All things being equal, price and NAV should move in tandem. A price movement greater than the NAV generates a positive PrcNAVSprd and may be interpreted as negative on a near-term basis and indicate that the stock is overvalued relative to its NAV which in theory is the stock's intrinsic value. The opposite would be true for a negative PrcNAVSprd.