Equity Income CEFs: 4-Month NAV Performances

by: Douglas Albo

This article looks at the year-to-date and current statistics of most of the equity based high-yielding Closed-End funds available to investors, where high yield is defined as over 6%. These statistics can be quite revealing and in some cases, quite illogical and I will try and point out some of the more glaring inconsistencies at the end of the article, which may give investors opportunities for investment.

If you have read my previous articles, then you will probably be familiar with how these tables are broken down. I have grouped the funds based on the three main strategies they use to generate income which they pass on to investors in the form of high dividends and yields. The strategies are the Option-Income, the Leveraged and the Dividend Harvest strategies. If you are not familiar with these three strategies than you can read my previous article which discusses each one and what market environment they excel in.

I have highlighted two columns which I believe are the most important to take note of on the following four tables. The first is the Premium/Discount column (red) and the second is the NAV YTD Performance (blue). In the first set of tables, I have sorted the funds based on their Premium/Discount levels and in the second set of tables, they are sorted by NAV YTD Performance. Note: NAV YTD Performance is through April 29, 2011 and includes all dividends for the year as well.

Sorted by Premium/Discount (red)

* CII is the result of a merger between EEF & ECV in Nov. 2008

Sorted by NAV YTD Performance (blue)

A couple of takeaways. The leveraged and dividend harvest strategies tend to have better NAV performances in a strong up market over the option-income funds and that certainly is reflected in the NAV performances YTD, but this is not across the board. I have been stressing the option-income fund strategy this year due to the wider discounts and the higher yields, but mostly because I believe that after a 25-month mostly ramp up market that we've seen, which favors the leveraged and dividend harvest strategies, the option-income fund strategy is due to start outperforming.

Many investors don't realize that because stock and index options are a time depreciating asset to the purchaser of the options, the seller of the stock or index options, such as the covered-call option income funds, will generally do better in most market environments - including flat, slightly up or down and in a strongly down market. The only environment in which the seller of stock or index options won't outperform is a strongly up market, which is exactly what we have been in for the past 25 months and is the reason why most option-income funds have underperformed during this period. Of course, there are other variables at work for each fund such as the performance of the underlying portfolio, the options coverage of the portfolio and the fund's dividend payout, all of which will affect the fund's overall performance.

The other takeaway from these tables has to do with the premium/discount levels of these funds. Because of their heightened risk, leveraged funds tend to trade at wider discounts than option-income funds though even this has been inconsistent. It is extremely rare, for example, to see the Eaton Vance leveraged funds with narrower discounts than their option-income funds. If I am correct about the option-income funds starting to outperform once again, then investors will want to look at funds which have the widest discounts, good NAV performances and sustainable high yields.

One of the reasons why I am a big proponent of the Eaton Vance option-income funds is because many of their funds (not all) fall into this category. What's interesting to note is that all of the 10%+ discounted option-income funds come from Eaton Vance even though many have YTD NAV performances which are better than funds with slight discounts to even premiums.

I would suggest that investors keep an eye towards the option-income funds for opportunities and to lighten up on the leveraged funds if the broader market starts to look vulnerable. After an incredible market run that has gone on longer than I would have anticipated, defense may be the name of the game heading into the summer.

Disclosure: I am long EOS, EOI, ETV, ETW, ETY, IDE, IGD, NFJ, ETB.