This report compares several closed-end funds that pay out a high income to shareholders by investing in below investment grade fixed income securities. The funds are all relatively well managed and have reasonable expense ratios. But two of the funds should be avoided currently due to excessive valuation.
Two High Yield CEFs to Consider
1) Putnam High Income Securities (NYSE:PCF)
Total Common Assets: 142 Million
Expense ratio= 0.92%
Annual Distribution Rate (market price) = 6.42%
Corporate Bonds and Notes
Convertible Preferred Stock
Cash / Other assets
Investment Objective: PCF seeks to provide high current income as a primary objective and capital appreciation as a secondary objective. PCF invests primarily in non-investment grade fixed income securities.
CCC and below
Investment Performance NAV Return as of 2/24/2012)
3-Year +23.4% annualized
5-Year +4.77% annualized
10-Year +9.53% annualized
2) Blackrock Senior High Income Fund Inc.(NYSE:ARK)
Total Net Assets: 294.6 Million
Total Common Assets: 234.6 Million
Expense Ratio= 0.93%
Annual Distribution Rate (market price) = 7.32%
Portfolio Breakdown (12/30/2011)
High Yield Bonds
Investment Grade Corporates
Investment Objective: ARK seeks to provide a high level of current income by investing in senior debt obligations of companies and both privately placed and publicly offered corporate bonds and notes.
Investment Performance: NAV Return as of 2/24/2012)
3-Year +28.4% annualized
5-Year +2.09% annualized
10-Year +7.99% annualized
Two High Yield CEFs to Avoid
1) Pimco High Income (NYSE:PHK)
Expense Ratio= 1.04%
Total Net Assets: 1.51 Billion
Total Common Assets: 942 Million
Effective Leverage= 37.55%
Premium over NAV= 66.45%
Annual Distribution Rate= 11.30%
Annual turnover ratio: 89%
Sometimes it may be worthwhile to pay a modest premium over net asset value if you gain access to very low cost leverage or if a fund has very low expense ratio. PHK does have access to low cost leverage, and has a reasonable expense ratio. But it has some other negative features:
- About one third of the "distribution yield" is return of capital. When a fund is selling at a premium, any return of capital is not good because you only receive net asset value. It is a form of negative alpha.
- The annual turnover ratio of 89% is on the high side. PHK is a large fund and likely suffers higher than normal trading costs from slippage and the bid-asked spread.
- The payout yield on the NAV is about 18.85%. This is clearly unsustainable over the long term.
2) Pioneer High Income Trust (NYSE:PHT)
Total Net Assets: 570 Million
Total Common Assets: 376 Million
Expense Ratio= 0.98%
Effective Leverage= 34%
Premium over NAV= 30.3%
Annual Distribution Rate (market price) = 9.45%
Annual turnover ratio: 10%
PHT is run by Andrew Felton who is one of the best high yield asset managers. It is an excellent fund with a good long term performance record.
But the current 30% premium over Nav is simply too high for a prudent investment. The time to buy PHT is when its premium dips below 10%. A buying opportunity occurred last year on August 8 when the premium briefly dipped below 10%. There were also brief buying opportunities in 2008, 2009 and 2010.