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It's Time To Reconsider CA Muni CEFs After The Big Drop

|Includes:Alliance California Municipal Income Fund (AKP), BFZ, CEV, EIA, EVM, MCA, MUC, MYC, NAC, NAC, NBW, NCO, NCP, NKX, NQC, NUC, NVC, PCK, PCQ, PZC, VCV

With the Dow continuously breaking new historical records and S&P 500 very close to the historical record, people start to wonder whether we are ready for a serious pullback. While it may not be a bad idea to pile up some cash, it could be better to put the cash to work with some municipal bond close end funds (CEFs), after the recent sell off. Some of the Muni CEFs are now yielding over 6%. For those who live in California, the tax equivalent yield may be about 10%, which is great if a market correction materializes.

In the past few years, I have invested in most of the CA Muni CEFs with satisfactory returns. Among these couple of dozens CEFs, I like PCK the best, because it yields for me between 7% and 9%, besides the share price increase from about $8 to $11. Even after more than 5% drop from the recent high, it is still up about 10% from the 52-week low, and still yields over 7% at last Friday close. For value investors, however, there are quite a few that are becoming very attractive.

Because the close-end funds trade like a stock, the associated share prices may be higher or lower than their corresponding net asset values (NAVs), therefore the share are traded with a premium or discount, respectively. During the 2008/2009 market crush, all of the muni CEFs were traded at a big discount, creating a huge opportunity for value investors to receive tax-free dividends at astonishing high rates. I often consider the change in the premium and discount of the CEFs just like a pendulum swing. When it goes either way too far, it has to come back because at the end it has to converge to the NAV. With the recent selloff, most of the CA Muni CEFs are selling at discount, with some at or close to the maximum discount in a year. Following table lists the current premium/discount of the CEFs that I follow as compared to the 1Y, 3Y, and 5Y statistics.

California Muni CEFs Current Premium/Discount
Symbol Current 1Y Mean 1Y Stdev 3Y Mean 3Y Stdev 5Y Mean 5Y Stdev
AKP -4.5% 3.2% 3.4% -1.0% 4.2% -4.6% 6.7%
CEV 1.2% 1.4% 1.8% 0.3% 2.2% -2.3% 5.2%
PCK 18.0% 19.0% 1.9% 19.7% 4.7% 16.4% 7.7%
PCQ -0.9% 9.7% 6.0% 5.2% 10.3% 0.6% 18.7%
PZC 6.5% 10.0% 2.7% 7.9% 3.1% 5.7% 5.9%
MUC -4.6% -0.1% 2.1% -3.3% 3.1% -7.4% 6.5%
BFZ -4.5% 0.3% 2.3% -1.9% 2.7% -2.6% 4.8%
MYC -5.8% -0.8% 2.2% -3.2% 2.9% -6.7% 6.0%
MCA -5.6% -2.0% 2.0% -5.2% 3.0% -8.8% 5.9%
NCO -4.7% 0.8% 1.6% -2.0% 3.0% -6.0% 6.5%
NCP -4.2% 1.1% 1.5% -2.3% 3.4% -6.5% 6.5%
NVC -1.8% 2.3% 1.7% 0.0% 2.7% -4.3% 6.7%
NZH -8.0% -1.6% 1.5% -1.8% 1.9% -4.2% 4.5%
NVX -6.4% -0.9% 1.9% -2.5% 2.2% -6.3% 6.0%
NQC -3.9% 1.8% 1.7% -1.8% 3.6% -5.6% 6.3%
NUC 0.2% 3.2% 1.9% 0.0% 3.6% -4.2% 6.9%
NKX -8.0% -1.0% 2.3% -3.9% 3.6% -5.5% 4.4%
VCV -4.6% 2.2% 2.7% 2.8% 2.4% 2.5% 4.4%
EIA -1.3% 2.3% 3.9% 2.8% 3.2% 1.3% 4.7%
EVM -8.4% -3.5% 1.5% 1.0% 3.9% 0.0% 4.7%
NBW -1.9% 2.8% 2.1% -1.6% 3.8% -5.4% 6.1%
Click to enlarge

[Source data from Yahoo Finance]

Apart from PCK, other tickers that has strong performance and resistance to drop include CEV, PZC, and NUC. But I would rather pick those that are down the most, like NCO, NCP, NQC, NKX, and EVM, with more than 3 standard deviation below the one year average (essentially at the most discount in one year).

For selection purpose, I also like to see the current yield and historical total return. Following table describes the current yield, the Morning star rating, the most current three-month, one year, and five-year total return.

California Muni CEFs with current yield and historical total returns
Symbol Current Yield Morningstar 3M Return 1Y Return 5Y Return
AKP 6.10% 3-star -6.13% 3.04% 7.07%
CEV 5.73% 2-star 1.02% 13.02% 8.78%
PCK 7.06% 2-star 0.12% 17.67% 2.92%
PCQ 6.12% 5-star -4.67% 17.90% 7.41%
PZC 6.62% 2-star -2.13% 15.21% 3.38%
MUC 6.12% 3-star -6.23% 10.44% 11.74%
BFZ 6.01% 5-star -6.30% 9.69% 7.25%
MYC 5.98% 4-star -6.23% 9.01% 10.89%
MCA 5.87% 3-star -6.11% 10.18% 11.29%
NCO 6.21% 4-star -7.50% 9.38% 10.66%
NCP 6.41% 3-star -7.06% 8.99% 10.87%
NVC 6.34% 4-star -5.36% 12.31% 12.57%
NZH 6.30% 3-star -7.77% 5.70% 8.25%
NVX 6.25% 3-star -5.44% 7.90% 10.47%
NQC 6.39% 3-star -6.14% 8.88% 10.82%
NUC 6.34% 4-star -6.34% 11.06% 11.94%
NKX 5.97% 3-star -5.81% 3.91% 6.19%
VCV 6.13% 3-star -6.45% 3.40% 6.74%
EIA 5.85% 2-star -4.85% 13.74% 7.80%
EVM 5.58% 2-star -2.87% 3.36% 4.62%
NBW 5.33% n/a -3.09% 7.64% 9.09%
Click to enlarge

[Data from Morningstar.com]

From this table, most of these CEFs are now yielding about or over 6%. For California investors at 33% marginal tax bracket, the effective yield is 10.4%. This is a respectful rate of return, especially at a stock market correction phase.

In conclusion, selective California Muni CEFs may provide good returns after the recent selloff. They may be used to hedge your portfolio if the stock market starts to correct in the near future.

Disclosure: I am long BFZ, MYC, MCA, NVC, NZH, NVX, NUC, NKX.

Stocks: AKP, CEV, PCK, PCQ, PZC, MUC, BFZ, MYC, MCA, NCO, NCP, NVC, NAC, NAC, NQC, NUC, NKX, VCV, EIA, EVM, NBW