CEF Weekly Review: Focus On Western Asset Investment Grade Defined Opportunity Trust

| About: Western Asset (IGI)

Actionable Items:

  • Highest Positive Spread: BlackRock N.J. Municipal Bonds (NYSEMKT:BLJ)
  • Lowest Negative Spread: Nuveen Ohio Dividend Advantage Muni Fund (NYSEMKT:NXI)
  • Focus Stock of the Week: Western Asset Investment Grade Defined Opportunity Trust (NYSE:IGI)

Last Week's Focus Stock: Nuveen Floating Rate Income Fund (NYSE:JFR)

N.B. Earlier this week we published an article entitled "Tacit Price-Fixing of CEF Expense Ratios?" Our analysis reviewed the relationship between CEFs' expense ratios and their asset size on a number of metrics, as well as the 3-year risk-adjusted total returns. The results were surprising and somewhat counter-intuitive.

CEF Weekly Review: On average, the 13 closed-end fund (CEF) types registered a share price increase of 0.2% for the week ending 2/10/12. The high-low spread (average percentage price change difference between the highest and lowest fund types) registered this week was a narrower +2.0% versus +4.6% 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 0.2%.

The PowerShares CEF Income Composite (NYSEARCA:PCEF), an ETF that invests in taxable income CEFs, increased 0.2% for the week. PCEF is up 6.3% YTD on price appreciation alone. Currently, PCEF's trailing twelve months' yield is 8.3%. The S&P 500 slipped 0.2% for the week with most of the drop coming at the end. The S&P 500 is still up an impressive 6.8% YTD.

CEF Weekly Fund Type Performance: A rapidly deteriorating equities environment late in the week generated the reversal of last week's CEF fund type performance with fixed-income CEFs advancing and equity funds receding. Most of the fund types generated positive PrcNAVSprds as either their average respective share price advanced greater or declined less than their respective NAV.

PrefStkFnds jumped 1.4%; it was a broad base advance. Nuveen Quality Preferred Income Fund 2 (NYSE:JPS) and Nuveen Quality Preferred Income Fund 3 (JHP) were the strongest performers in that fund type advancing on a share price basis 4.7% and 4.4%, respectively for the week.

WrldEqFnds was this week's worst performer after leading the CEF fund types the previous week. It was the only fund type that generated more than a nominal negative PrcNAVSprd.

Weekly CEF Winners and Losers: The CEFs with the greatest positive PrcNAVSprd* for the week were three small New Jersey muni CEFs. BlackRock N.J. Municipal Bonds , Eaton Vance N.J. Municipal Bond Fund (NYSEMKT:EMJ) and BlackRock Municipal Yield Quality Fund (MJI). This performance was similar to last week's when several mid-west muni CEFs surged in price. (See "greatest negative PrcNAVSprd below.)

New Jersey was one of the hardest hit states with regards to the mortgage crisis and the recent settlement may have improved the state's financial outlook. However, New York was also hard hit and its bonds didn't react as positively as N.J. It's unclear to us the specific reason for the surge in N.J. muni bond prices.

The CEF(s) with the greatest negative PrcNAVSprd for the second week in a row is the CEF with the greatest positive spread the previous week. Nuveen Ohio Dividend Advantage Muni Fund shares price declined 4.9% while its NAV slid 0.2% generating a negative PrcNAVSprd of 4.7%. The price decline was approximately half of the previous week's advance of 9.2%.

As noted last week, there were other muni CEFs also investing in Ohio and Michigan that saw significant price increases. We speculated last week that this strong performance may be attributed to both Ohio and Michigan having a significant exposure to manufacturing and particularly the auto industry which has demonstrated signs of a recovery.

(Click here for a hyperlink to the Joe Eqcome's CEF Weekly Insider Report; see "Research" Menu; "CEF Weekly Information" tab.)

Significant Events: Source Capital (NYSE:SOR) announced its common stock quarterly distribution payable on March 15, 2012. This quarter's distribution comes in at $0.70, which is $0.05 lower than last quarter. The company is citing overall market volatility as the culprit for this quarter's distribution decrease.

CEF Focus Stock(s) for the Week: As we've stated here numerous times, we can discount risk, but not uncertainty. Given the roiling turmoil in Europe and its uncertain political resolution along with the U.S. budget negotiations in a campaign environment, we believe-at least in the interim-that rates will remain low and equity markets volatile.

This logic leads us to prefer, at this juncture, high quality corporate bonds. One CEF that deserves review under this scenario is Western Asset Investment Grade Defined Opportunity Trust Inc. . IGI, as the name implies, invests in a majority of assets in investment grade bonds. It is currently trading at an annualized yield of 5.7% and at slight premium of 2.2%. The CEF is scheduled to liquidate in 2024.

IGI has total net assets of $230.8 million and is unleveraged. It has a modest expense ratio of 0.77% and over three-quarters of its bond portfolio is rated investment grade. Approximately a quarter of its portfolio is invested in the banking industry which some see as an improving credit.

Western also manages another CEF called Western Assets Premier Bond Fund (NYSE:WEA). This CEF is about similar size and is leveraged with $72 million in Preferred Shares. While paying an annualized monthly yield of 8.1%, it is trading at a 21% premium.

Last Week's Focus Stock(s): The focus stock(s) for last week was Nuveen Floating Rate Income Fund .

The stock gained a modest 0.4% for the week and traded up after the close on Friday to $11.41 per share. Friday was the last day to capture February monthly distribution as the stock goes ex-dividend on Monday the 13th. We continue to favor this stock.

[*] 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.

Disclosure: I am long PCEF, JFR, LOR. I own a diversified portfolio of CEFs and ETFs and am long stocks in the CEFBig10™ and CEFMuni10™.) The first is a balanced equity-income portfolio (CEFBig10™) and the second a tax-exempt income portfolio (CEFMuni10™).