The Chemist's CEF Report - February 2018: Rate Worries Stifle Fixed-Income CEFs
Summary
- Rate worries stifle fixed-income CEFs.
- Average premium/discount and z-scores drop massively (particularly fixed-income CEFs), while average distribution yield rises.
- Picks for February are FLC, HYB and NEA.
For the inaugural issue of The Chemist's CEF Report (September 2016), describing the background and rationale of the Report, please click here.
This edition uses data taken from the close of January 30. Previous editions of the Report can be searched using the keyword "cefrep."
Methodology
A database of CEFs was obtained from CEFConnect. All yields are quoted as the yield on price. All z-scores refer to the 1-year z-score, which I consider to be the most useful time duration for profiting from premium/discount reversion. The 1-year z-score is calculated as the difference between the current premium/discount and the 1-year average premium/discount, all divided by the standard deviation of said premium/discount. Positive z-scores indicate that the CEF's current premium/discount is higher than its historical average, while negative z-scores indicate that the current premium/discount is lower than the historical average. Incorporating the standard deviation into the z-score calculation enables comparison between CEFs that may have different magnitudes of absolute premia and discounts.
In the tables, "distance" refers to the distance between the current premium/discount of the fund and its 1-year historical premium/discount. "Coverage" refers to the ratio between a fund's earnings and its distribution, with coverage ratios greater than 100% indicating that the fund is earning more than it pays out in distributions.
Key to table headings:
P/D = premium/discount
Z = 1-year z-score
Dis = distance
Lev = leverage
BE = baseline expense
Cov = coverage
Note: I've renamed "debt" as "fixed income," as CEFs in this broad category invest not only in ordinary bonds but also loans, CLOs, preferred stock, etc.
1. Top 10 highest premia and top 10 highest discounts
(May interest arbitrage investors)
CEFs with the highest discounts are potential buy candidates, while CEFs with the highest premia are potential sell/short candidates. The following data show the 10 CEFs with the highest premia and 10 CEFs with the highest discounts. Yields, z-scores and leverage are shown for comparison.
Top 10 highest premia (equity):
| CEF | Category | P/D | Y | Z | Dis | Lev | BE | Cov |
| (GUT) | US Equity-Utilities | 38.0% | 8.43% | 2.6 | 11.4% | 29.9% | 1.67% | 5% |
| (CRF) | US Equity-General Equity | 12.8% | 17.50% | -0.5 | -5.1% | 0.0% | 1.45% | 8% |
| (DNP) | US Equity-Growth & Income | 11.8% | 7.49% | 0.1 | 0.2% | 26.0% | 1.00% | 26% |
| (CLM) | US Equity-General Equity | 10.7% | 17.85% | -0.5 | -5.0% | 0.0% | 1.30% | 11% |
| (SPXX) | US Equity-Covered Call | 8.5% | 5.46% | 3.5 | 9.7% | 0.0% | 0.93% | 6% |
| (GOF) | US Equity-Growth & Income | 7.3% | 10.36% | 0.2 | 0.4% | 20.9% | 1.61% | 74% |
| (CGO) | Non-US/Other-Global Growth & Income | 6.5% | 7.88% | 0.9 | 4.5% | 28.3% | 1.60% | 18% |
| (HTY) | US Equity-Equity Tax-Advantaged | 6.5% | 9.21% | 0.6 | 2.6% | 0.0% | 1.29% | 17% |
| (FPL) | US Equity-MLP | 6.3% | 9.87% | 2.9 | 5.0% | 24.5% | 1.57% | 0% |
| (FEI) | US Equity-MLP | 4.5% | 9.16% | 0.9 | 1.4% | 25.1% | 1.47% | 0% |
Top 10 highest discounts (equity):
| CEF | Category | P/D | Y | Z | Dis | Lev | BE | Cov |
| (OTCPK:FXBY) | US Equity-General Equity | -30.8% | 0.44% | 0.1 | 0.2% | 0.0% | 2.58% | #DIV/0! |
| (DNI) | US Equity-Growth & Income | -18.8% | 4.34% | -0.8 | -1.1% | 0.0% | 1.54% | 9% |
| (RIF) | US Equity-Real Estate (US) | -18.5% | 7.58% | -0.5 | -0.9% | 28.0% | 1.71% | 34% |
| (CET) | US Equity-General Equity | -18.3% | 3.58% | -2.3 | -1.2% | 0.0% | 0.89% | 3% |
| (GDL) | Non-US/Other-Global Equity | -16.9% | 4.10% | -1.6 | -2.5% | 38.0% | 2.91% | -15% |
| (ASA) | US Equity-Energy/Resources | -16.7% | 0.35% | -3.3 | -4.6% | 0.0% | 1.16% | -42% |
| (CUBA) | Non-US/Other-Latin American Equity | -16.4% | 1.59% | -1.9 | -2.9% | 0.0% | 3.30% | -7% |
| (GAM) | US Equity-General Equity | -15.9% | 2.74% | -0.9 | -0.4% | 14.9% | 1.24% | 0% |
| (BIF) | US Equity-General Equity | -15.9% | 3.54% | 0.5 | 0.6% | 4.0% | 1.37% | 29% |
| (EGIF) | Non-US/Other-Global Growth & Income | -15.1% | 5.25% | -1.2 | -1.5% | 24.3% | 2.29% | 82% |
Top 10 highest premia (fixed income):
| CEF | Category | P/D | Y | Z | Dis | Lev | BE | Cov |
| (DMO) | Taxable Income-Mortgage Bond | 22.4% | 10.64% | 1.4 | 5.6% | 31.1% | 1.77% | 74% |
| (RCS) | Non-US/Other-Global Income | 18.4% | 9.57% | -0.9 | -5.6% | 63.8% | 0.98% | 111% |
| (PGP) | Taxable Income-Multi-Sector | 17.3% | 10.70% | -2.5 | -36.4% | 31.9% | 1.89% | 88% |
| (MZA) | Tax-Free Income-Arizona | 17.1% | 4.47% | 2.1 | 10.4% | 37.4% | 1.00% | 93% |
| (PCQ) | Tax-Free Income-California | 15.7% | 5.77% | -1.6 | -3.8% | 46.5% | 1.17% | 92% |
| (PHK) | Taxable Income-Multi-Sector | 13.2% | 12.68% | -1.2 | -9.9% | 22.2% | 0.96% | 68% |
| (PCN) | Taxable Income-Investment Grade | 9.4% | 8.08% | -0.8 | -1.9% | 18.0% | 1.01% | 83% |
| (PTY) | Taxable Income-Investment Grade | 9.1% | 9.54% | -2.0 | -2.4% | 26.8% | 0.86% | 75% |
| (EDF) | Non-US/Other-Emerging Market Income | 7.7% | 13.36% | -0.5 | -1.5% | 31.7% | 1.76% | 64% |
| (ECC) | Taxable Income-Senior Loan | 7.1% | 13.20% | -1.1 | -7.6% | 31.4% | 6.63% | 83% |
Top 10 highest discounts (fixed income):
| CEF | Category | P/D | Y | Z | Dis | Lev | BE | Cov |
| (NUM) | Tax-Free Income-Michigan | -15.1% | 4.49% | -2.9 | -3.3% | 37.6% | 0.99% | 104% |
| (EVJ) | Tax-Free Income-New Jersey | -15.0% | 4.81% | -2.8 | -3.5% | 37.8% | 1.54% | 101% |
| (NTC) | Tax-Free Income-Connecticut | -14.9% | 4.20% | -1.9 | -2.7% | 36.5% | 1.06% | 107% |
| (EMI) | Tax-Free Income-Michigan | -14.8% | 3.75% | -2.0 | -3.5% | 36.5% | 1.72% | 103% |
| (NQP) | Tax-Free Income-Pennsylvania | -14.8% | 5.05% | -3.2 | -3.3% | 39.7% | 1.00% | 105% |
| (NXJ) | Tax-Free Income-New Jersey | -14.7% | 5.24% | -2.4 | -2.0% | 37.9% | 0.84% | 99% |
| (VPV) | Tax-Free Income-Pennsylvania | -14.4% | 5.29% | -2.1 | -2.2% | 38.5% | 0.93% | 164% |
| (NMY) | Tax-Free Income-Maryland | -14.1% | 4.64% | -2.1 | -2.6% | 37.3% | 1.03% | 100% |
| (EVO) | Tax-Free Income-Ohio | -13.7% | 4.28% | -2.5 | -4.0% | 35.6% | 1.57% | 102% |
| (EMJ) | Tax-Free Income-New Jersey | -13.7% | 4.87% | -2.0 | -3.1% | 39.0% | 1.40% | 102% |
2. Top 10 highest z-scores and top 10 lowest z-scores
(May interest arbitrage investors)
Similar to premia/discounts, CEFs with the lowest z-scores are potential buy candidates, while CEFs with the highest z-scores are potential sell/short candidates. The following data show the 10 CEFs with the highest z-scores and 10 CEFs with the lowest z-scores. Premium/discount, yields and leverage are shown for comparison.
Top 10 highest z-scores (equity):
| CEF | Category | Z | P/D | Y | Dis | Lev | BE | Cov |
| (SPXX) | US Equity-Covered Call | 3.5 | 8.5% | 5.5% | 9.7% | 0.0% | 0.93% | 6% |
| (CBA) | US Equity-MLP | 2.9 | -1.9% | 8.7% | 5.4% | 28.1% | 2.03% | 0% |
| (FPL) | US Equity-MLP | 2.9 | 6.3% | 9.9% | 5.0% | 24.5% | 1.57% | 0% |
| (GUT) | US Equity-Utilities | 2.6 | 38.0% | 8.4% | 11.4% | 29.9% | 1.67% | 5% |
| (CEM) | US Equity-MLP | 2.5 | 2.4% | 8.4% | 5.3% | 29.8% | 1.89% | 0% |
| (CEE) | Non-US/Other-Emerging Market Equity | 2.3 | -8.6% | 2.0% | 3.1% | 0.0% | 1.37% | 15% |
| (ASG) | US Equity-General Equity | 2.2 | 1.2% | 8.1% | 8.0% | 0.0% | 1.35% | -1% |
| (LGI) | Non-US/Other-Global Growth & Income | 2.2 | -8.4% | 7.3% | 2.0% | 9.7% | 1.47% | 20% |
| (BGR) | US Equity-Energy/Resources | 2.1 | -7.1% | 6.3% | 2.1% | 0.0% | 0.97% | 0% |
| (EMO) | US Equity-MLP | 2.0 | -1.9% | 10.0% | 3.6% | 30.2% | 1.95% | 0% |
Top 10 lowest z-scores (equity):
| CEF | Category | Z | P/D | Y | Dis | Lev | BE | Cov |
| (BME) | US Equity-Health/Biotech | -3.3 | -3.1% | 6.6% | -5.1% | 0.0% | 1.21% | 2% |
| (ASA) | US Equity-Energy/Resources | -3.3 | -16.7% | 0.4% | -4.6% | 0.0% | 1.16% | -42% |
| (ETV) | US Equity-Covered Call | -2.5 | -0.7% | 8.8% | -5.6% | 0.0% | 1.09% | 7% |
| (CET) | US Equity-General Equity | -2.3 | -18.3% | 3.6% | -1.2% | 0.0% | 0.89% | 3% |
| (HTD) | US Equity-Equity Tax-Advantaged | -2.2 | -7.1% | 7.4% | -3.7% | 31.6% | 1.20% | 108% |
| (MSP) | US Equity-Covered Call | -2.1 | -7.2% | 8.9% | -2.7% | 0.0% | 0.98% | 1% |
| (GRX) | US Equity-Health/Biotech | -2.0 | -14.0% | 4.9% | -2.0% | 22.0% | 1.60% | -12% |
| (PGZ) | US Equity-Real Estate (US) | -2.0 | -14.4% | 7.9% | -5.1% | 31.3% | 2.02% | 27% |
| (CUBA) | Non-US/Other-Latin American Equity | -1.9 | -16.4% | 1.6% | -2.9% | 0.0% | 3.30% | -7% |
| (ETB) | US Equity-Covered Call | -1.9 | 0.2% | 7.9% | -2.9% | 0.0% | 1.11% | 12% |
Top 10 highest z-scores (fixed income):
| CEF | Category | Z | P/D | Y | Dis | Lev | BE | Cov |
| (ICB) | Taxable Income-Investment Grade | 5.7 | -1.8% | 2.7% | 4.5% | 0.0% | 0.67% | 116% |
| (EVP) | Tax-Free Income-Pennsylvania | 2.2 | -9.2% | 4.1% | 2.1% | 36.8% | 1.67% | 113% |
| (MZA) | Tax-Free Income-Arizona | 2.1 | 17.1% | 4.5% | 10.4% | 37.4% | 1.00% | 93% |
| (JHS) | Taxable Income-Investment Grade | 2.1 | -2.9% | 5.9% | 2.4% | 33.8% | 0.96% | 28% |
| (DHG) | Taxable Income-High Yield | 2.1 | -1.2% | 5.4% | 1.7% | 29.0% | 1.47% | 100% |
| (HFRO) | Taxable Income-Senior Loan | 2.0 | 2.4% | 5.9% | 1.9% | 0.0% | 1.18% | 0% |
| (JMM) | Taxable Income-Mortgage Bond | 1.7 | -6.3% | 5.2% | 1.6% | 20.4% | 1.47% | 93% |
| (WIW) | Taxable Income-Government | 1.5 | -10.4% | 3.8% | 1.0% | 29.4% | 0.95% | 86% |
| (CIF) | Taxable Income-High Yield | 1.5 | 5.8% | 9.1% | 7.3% | 28.2% | 1.50% | 58% |
| (DMO) | Taxable Income-Mortgage Bond | 1.4 | 22.4% | 10.6% | 5.6% | 31.1% | 1.77% | 74% |
Top 10 lowest z-scores (fixed income):
| CEF | Category | Z | P/D | Y | Dis | Lev | BE | Cov |
| (LEO) | Tax-Free Income-National | -5.5 | -5.1% | 5.2% | -7.3% | 35.4% | 1.09% | 128% |
| (NMZ) | Tax-Free Income-High Yield | -5.5 | -1.7% | 5.9% | -2.7% | 37.5% | 1.06% | 100% |
| (JPS) | Taxable Income-Preferreds | -5.3 | -9.7% | 8.0% | -8.2% | 33.1% | 1.26% | 97% |
| (PCK) | Tax-Free Income-California | -4.9 | -1.3% | 5.0% | -16.9% | 43.0% | 1.23% | 133% |
| (NEA) | Tax-Free Income-National | -4.8 | -12.6% | 5.4% | -3.9% | 36.7% | 1.24% | 98% |
| (JPT) | Taxable Income-Preferreds | -4.5 | -5.4% | 6.5% | -5.3% | 19.8% | 0.66% | 97% |
| (FLC) | Taxable Income-Preferreds | -4.4 | -9.0% | 7.3% | -8.7% | 32.9% | 1.20% | 98% |
| (PFD) | Taxable Income-Preferreds | -4.3 | -6.4% | 7.0% | -12.0% | 32.8% | 1.40% | 97% |
| (DSM) | Tax-Free Income-National | -4.3 | -4.4% | 5.3% | -5.4% | 31.6% | 1.06% | 111% |
| (JPI) | Taxable Income-Preferreds | -4.3 | -8.1% | 7.2% | -4.7% | 27.6% | 1.25% | 101% |
3. Top 10 highest yielding CEFs
(May interest buy-and-hold income investors)
Some readers are mostly interested in obtaining income from their CEFs, so the following data presents the top 10 highest yielding CEFs. I've also included the premium/discount and z-score data for reference. Before going out and buying all 10 funds from the list, please read some words of caution: [i] higher yields generally indicate higher risk, [ii] some of these funds trade at a premium, meaning you will be buying them at a price higher than the intrinsic value of the assets (which is why I've included the premium/discount and z-score data for consideration), and [iii] beware of funds paying out high yields from return of capital in a destructive manner.
Top 10 highest yields (equity):
| CEF | Category | Y | P/D | Z | Dis | Lev | BE | Cov |
| (CLM) | US Equity-General Equity | 17.9% | 10.7% | -0.5 | -5.0% | 0.0% | 1.30% | 11% |
| (CRF) | US Equity-General Equity | 17.5% | 12.8% | -0.5 | -5.1% | 0.0% | 1.45% | 8% |
| (DSE) | US Equity-MLP | 13.4% | 1.4% | -0.2 | -0.8% | 36.0% | 1.94% | 0% |
| (NDP) | US Equity-MLP | 12.8% | 1.6% | -0.2 | -0.9% | 24.6% | 1.70% | 0% |
| (ZF) | Non-US/Other-Global Growth & Income | 12.5% | -7.6% | -0.3 | -0.5% | 25.6% | 2.05% | 10% |
| (RIV) | US Equity-Growth & Income | 12.3% | 2.9% | 1.7 | 4.4% | 0.0% | 1.74% | -61% |
| (FMO) | US Equity-MLP | 11.9% | 0.5% | -0.4 | -1.1% | 28.0% | 1.68% | 0% |
| (IFN) | Non-US/Other-Asia Equity | 11.7% | -11.5% | -0.1 | -0.6% | 0.0% | 1.31% | 0% |
| (CEN) | US Equity-MLP | 11.6% | 1.5% | 0.7 | 0.8% | 34.6% | 1.96% | 0% |
| (GGN) | US Equity-Energy/Resources | 11.2% | -1.3% | -0.5 | -1.0% | 10.5% | 1.37% | 3% |
Top 10 highest yields (fixed income):
| CEF | Category | Y | P/D | Z | Dis | Lev | BE | Cov |
| (OXLC) | Taxable Income-Senior Loan | 16.1% | 3.6% | -0.5 | -1.6% | 38.2% | 7.93% | 99% |
| (EDF) | Non-US/Other-Emerging Market Income | 13.4% | 7.7% | -0.5 | -1.5% | 31.7% | 1.76% | 64% |
| (ECC) | Taxable Income-Senior Loan | 13.2% | 7.1% | -1.1 | -7.6% | 31.4% | 6.63% | 83% |
| (PHK) | Taxable Income-Multi-Sector | 12.7% | 13.2% | -1.2 | -9.9% | 22.2% | 0.96% | 68% |
| (EXD) | Taxable Income-Government | 12.6% | -13.1% | -2.1 | -5.0% | 0.0% | 1.43% | 3% |
| (VGI) | Taxable Income-Multi-Sector | 12.5% | -8.2% | -1.8 | -7.5% | 26.1% | 1.74% | 49% |
| (EDI) | Non-US/Other-Emerging Market Income | 11.7% | -0.8% | -1.2 | -3.4% | 32.1% | 1.02% | 74% |
| (NCZ) | Taxable Income-Multi-Sector | 11.1% | 3.2% | 0.1 | 0.2% | 38.2% | 1.37% | 95% |
| (NCV) | Taxable Income-Multi-Sector | 11.0% | 6.0% | 0.8 | 1.8% | 37.9% | 1.32% | 95% |
| (PGP) | Taxable Income-Multi-Sector | 10.7% | 17.3% | -2.5 | -36.4% | 31.9% | 1.89% | 88% |
4. Top 10 best combination of yield and discount
(May interest buy-and-hold income investors)
For possible buy candidates, it is probably a good idea to consider both yield and discount. Buying a CEF with both a high yield and discount not only gives you the opportunity to capitalize from discount contraction, but you also get "free" alpha every time the distribution is paid out. This is because paying out a distribution is effectively the same as liquidating the fund at NAV and returning the capital to the unitholders. I considered several ways to rank CEFs by a composite metric of both yield and discount. The simplest would be yield + discount; however, I disregarded this because yields and discounts may have different ranges of absolute values and a sum would be biased towards the larger set of values. I finally settled on the multiplicative product, yield x discount. This is because I consider a CEF with 7% yield and 7% discount to be more desirable than a fund with 2% yield and 12% discount, or a 12% yield and 2% discount, even though each pair of quantities sum to 14%. Multiplying yield and discount together biases towards funds with both high yield and discount. Since discount is negative and yield is positive, the more negative the "D x Y" metric, the better.
Top 10 best D x Y (equity):
| CEF | Category | P/D | Y | Z | D x Y | Dis | Lev | BE | Cov |
| (RIF) | US Equity-Real Estate (US) | -18.5% | 7.6% | -0.5 | -1.40 | -0.9% | 28.0% | 1.71% | 34% |
| (IFN) | Non-US/Other-Asia Equity | -11.5% | 11.7% | -0.1 | -1.34 | -0.6% | 0.0% | 1.31% | 0% |
| (IRL) | Non-US/Other-Other Non-US Equity | -14.0% | 9.0% | -1.1 | -1.26 | -3.3% | 0.0% | 1.80% | -6% |
| (AWP) | US Equity-Real Estate (Global) | -12.6% | 9.2% | -0.6 | -1.15 | -1.1% | 3.4% | 1.20% | 14% |
| (PGZ) | US Equity-Real Estate (US) | -14.4% | 7.9% | -2.0 | -1.14 | -5.1% | 31.3% | 2.02% | 27% |
| (SPE) | US Equity-General Equity | -12.4% | 8.7% | -0.4 | -1.08 | -2.3% | 27.8% | 1.65% | 1% |
| (LCM) | Non-US/Other-Global Growth & Income | -10.4% | 9.9% | -1.5 | -1.03 | -2.1% | 28.0% | 1.99% | 6% |
| (GLO) | Non-US/Other-Global Growth & Income | -9.7% | 10.6% | -0.6 | -1.03 | -1.4% | 36.8% | 2.27% | -4% |
| (USA) | US Equity-General Equity | -9.0% | 11.1% | 1.3 | -1.00 | 3.0% | 0.0% | 1.08% | 2% |
| (IGR) | US Equity-Real Estate (Global) | -12.4% | 7.8% | -0.4 | -0.96 | -0.2% | 13.1% | 1.07% | 53% |
Top 10 best D x Y (fixed income):
| CEF | Category | P/D | Y | Z | D x Y | Dis | Lev | BE | Cov |
| (EXD) | Taxable Income-Government | -13.1% | 12.6% | -2.1 | -1.65 | -5.0% | 0.0% | 1.43% | 3% |
| (NHS) | Taxable Income-High Yield | -13.7% | 7.6% | -3.4 | -1.04 | -2.8% | 32.2% | 1.24% | 104% |
| (VGI) | Taxable Income-Multi-Sector | -8.2% | 12.5% | -1.8 | -1.03 | -7.5% | 26.1% | 1.74% | 49% |
| (FHY) | Taxable Income-High Yield | -13.2% | 7.7% | -2.1 | -1.01 | -4.3% | 26.7% | 1.65% | 74% |
| (GHY) | Taxable Income-High Yield | -12.9% | 7.6% | -2.7 | -0.98 | -3.0% | 27.2% | 1.25% | 96% |
| (AGC) | Taxable Income-Convertible | -10.3% | 9.3% | -1.6 | -0.96 | -2.3% | 40.9% | 2.09% | 38% |
| (IVH) | Taxable Income-High Yield | -11.4% | 8.3% | -2.7 | -0.95 | -5.9% | 31.4% | 1.60% | 129% |
| (JGH) | Non-US/Other-Global Income | -10.9% | 8.6% | -1.5 | -0.94 | -2.3% | 29.0% | 1.31% | 102% |
| (BWG) | Non-US/Other-Global Income | -13.4% | 7.0% | -0.5 | -0.94 | -0.5% | 35.9% | 1.54% | 105% |
| (ERC) | Taxable Income-Limited Duration | -9.3% | 9.9% | -1.9 | -0.93 | -1.5% | 23.9% | 1.00% | 73% |
5. Top 10 best combination of yield, discount and z-score
(May interest buy-and-hold income investors + arbitrage investors)
This is my favorite metric because it takes into account all three factors that I always consider when buying or selling CEFs: yield, discount and z-score. The composite metric simply multiplies the three quantities together. A screen is applied to only include CEFs with a negative 1-year z-score. As both discount and z-score are negative while yield is positive, the more positive the "D x Y x Z" metric, the better.
Top 10 best D x Y x Z (equity):
| CEF | Category | P/D | Y | Z | D x Y x Z | Dis | Lev | BE | Cov |
| (PGZ) | US Equity-Real Estate (US) | -14.4% | 7.9% | -2.0 | 2.27 | -5.1% | 31.3% | 2.02% | 27% |
| (LCM) | Non-US/Other-Global Growth & Income | -10.4% | 9.9% | -1.5 | 1.55 | -2.1% | 28.0% | 1.99% | 6% |
| (CET) | US Equity-General Equity | -18.3% | 3.6% | -2.3 | 1.51 | -1.2% | 0.0% | 0.89% | 3% |
| (IRL) | Non-US/Other-Other Non-US Equity | -14.0% | 9.0% | -1.1 | 1.39 | -3.3% | 0.0% | 1.80% | -6% |
| (GRX) | US Equity-Health/Biotech | -14.0% | 4.9% | -2.0 | 1.36 | -2.0% | 22.0% | 1.60% | -12% |
| (MSP) | US Equity-Covered Call | -7.2% | 8.9% | -2.1 | 1.36 | -2.7% | 0.0% | 0.98% | 1% |
| (MCN) | US Equity-Covered Call | -8.2% | 9.3% | -1.6 | 1.22 | -2.2% | 0.0% | 0.80% | 1% |
| (NFJ) | US Equity-Covered Call | -11.7% | 6.6% | -1.5 | 1.16 | -2.0% | 0.0% | 0.97% | 10% |
| (HTD) | US Equity-Equity Tax-Advantaged | -7.1% | 7.4% | -2.2 | 1.15 | -3.7% | 31.6% | 1.20% | 108% |
| (GDL) | Non-US/Other-Global Equity | -16.9% | 4.1% | -1.6 | 1.11 | -2.5% | 38.0% | 2.91% | -15% |
Top 10 best D x Y x Z (fixed income):
| CEF | Category | P/D | Y | Z | D x Y x Z | Dis | Lev | BE | Cov |
| (JPS) | Taxable Income-Preferreds | -9.7% | 8.0% | -5.3 | 4.12 | -8.2% | 33.1% | 1.26% | 97% |
| (NHS) | Taxable Income-High Yield | -13.7% | 7.6% | -3.4 | 3.54 | -2.8% | 32.2% | 1.24% | 104% |
| (EXD) | Taxable Income-Government | -13.1% | 12.6% | -2.1 | 3.47 | -5.0% | 0.0% | 1.43% | 3% |
| (NEA) | Tax-Free Income-National | -12.6% | 5.4% | -4.8 | 3.25 | -3.9% | 36.7% | 1.24% | 98% |
| (HYB) | Taxable Income-High Yield | -11.5% | 7.2% | -3.6 | 2.99 | -4.9% | 27.5% | 1.26% | 109% |
| (FLC) | Taxable Income-Preferreds | -9.0% | 7.3% | -4.4 | 2.89 | -8.7% | 32.9% | 1.20% | 98% |
| (FFC) | Taxable Income-Preferreds | -9.0% | 7.4% | -4.1 | 2.73 | -12.2% | 32.8% | 0.80% | 100% |
| (HYT) | Taxable Income-High Yield | -11.6% | 7.7% | -3.0 | 2.69 | -2.4% | 29.6% | 0.90% | 102% |
| (GHY) | Taxable Income-High Yield | -12.9% | 7.6% | -2.7 | 2.64 | -3.0% | 27.2% | 1.25% | 96% |
| (IVH) | Taxable Income-High Yield | -11.4% | 8.3% | -2.7 | 2.56 | -5.9% | 31.4% | 1.60% | 129% |
6. Summary statistics
The average premium/discount of all the CEFs in the database is -6.23%, a huge decrease from -4.71% in the previous month. The following chart shows the average premium/discount over the past 12 months.
Note that I've also included separate histories for equity and fixed-income CEFs in this month's report. This was rather timely because this month marks the first time (since I started tracking equity and fixed income separately) where fixed-income CEFs (-6.39%) have a wider average discount than equity CEFs (-5.96%).
The average distribution yield of all the CEFs in the database is 6.46%, a slight increase from 6.34% in the month prior. Equity CEFs average 7.06% yield, while fixed-income CEFs average 6.12% yield.
The average 1-year z-score of all the CEFs in the database is -1.13, a very large drop from its value of -0.18 a month ago. Equity CEFs have an average z-score of +0.05, while fixed-income CEFs have an average z-score of -1.80.
Commentary
In last month's commentary "The Chemist's CEF Report - January 2018: CEF Showing Signs Of Life," we noted that CEFs showed some signs of life during the last month of the year, after several difficult several months in a row. This recovery proved to be short-lived, however, as rate jitters stifled CEFs once again in January. There was a massive 152 bps decline in average discount, from -4.71% to -6.23%, while average 1-year z-score decreased by nearly 1 standard deviation, from -0.18 to -1.13.
Fears of rising rates hit fixed-income CEFs especially hard. I started tracking equity and fixed income average statistics this month, which was timely because for the first time in a long time, fixed-income CEFs (-6.39%) have a wider average discount than equity CEFs (-5.96%). In fact, the average discount of fixed-income CEFs dropped by a massive 216 bps from last month. In contrast, equity CEFs saw their discounts widen by an average of only 41 bps. Similarly, fixed-income CEFs saw a -1.27 decrease in z-score whereas equity CEFs only had a -0.38 decline. These data clearly show that January has been a particularly unkind month to fixed-income CEFs.
Looking at individual z-scores, there are currently an incredible 57 fixed-income CEFs with z-scores less than -3, and of those 13 have z-scores of less than -4! (The comparable numbers last month are 3 and 1, respectively). Statistically speaking, for a normally distributed random variable there is only a 0.13% probability of exceeding 3 standard deviations on one side (a "3 sigma" event), while for 4 standard deviations ("4 sigma") the probability drops to a minuscule 0.003%, or a 1-in-30000 occurrence. Of course, in real life premium/discount values are not a random variable with a fixed mean, nor are they normally distributed, but hopefully you still get my drift that these are extreme figures.
The following chart shows the movement of some key rates over the last year. As long rates rise, bond portfolios suffer NAV loss, while on the other hand, rising short rates increase leveraged CEF fund expenses, creating a "double whammy" headwind for CEF performance going forward (the 10s2s spread is a particularly relevant metric to look at). Of course, rising rates will eventually lead to higher portfolio yields but this takes a while to play out in the case of a traditional bond portfolio. Senior loan aka floating loan funds can be attractive in a rising rate environment because of the ability to periodically reset the interest rate of the loans. Other ways to lower duration risk are to invest in short duration funds or target term funds. Meanwhile, limiting investments to unleveraged CEFs will eliminate the issue of rising short rates increasing fund expenses, although this does restrict the investment universe somewhat.
It was a tale of two asset classes in January.* Equity markets were extremely strong, with domestic stocks (SPY) and international stocks (ACWX) rising by +5.69% and +5.77%, respectively. In contrast, bonds struggled. Treasuries (TLT) fell by -3.67% and investment grade bonds (LQD) declined by -1.42%, while high-yield bonds (JNK) were nearly flat (-0.12%). A basket of high-yielding CEFs (YYY) dropped by -0.42%. (*As of 10:58AM EST on January 31).
I intend to give a list of my top 3 CEF picks each month, which is based on my consideration of the data as well as my qualitative judgment. Note that me designating a fund as a top pick does not mean I am encouraging subscribers to buy the fund, nor am I necessarily going to include the fund in our portfolios. Moreover, note that some of the picks may have a narrow mandate (e.g. utilities stocks or MLPs), and therefore each investor should consider their own investment objective and risk tolerance before deciding to invest money into any of the picks. Furthermore, note that these are intended to be short/medium-term picks (to take advantage of mean reversion) rather than long-term holds.
For February 2018, my top 3 picks are:
- Flaherty & Crumrine Total Return Fund (FLC): 7.3% yield, -9.0% discount, -4.4 z-score, -8.7% distance, 32.9% leverage, 1.20% baseline expense, 98% coverage.
- New America High Income Fund (HYB): 7.2% yield, -11.5% discount, -3.6 z-score, -4.9% distance, 27.5% leverage, 1.26% baseline expense, 109% coverage.
- Nuveen AMT-Free Quality Municipal Income Fund (NEA): 5.4% yield, -12.6% discount, -4.8 z-score, -3.9% distance, 36.7% leverage, 1.24% baseline expense, 98% coverage.
Picking 3 fixed-income CEFs this month was a no-brainer. I decided to diversify the picks by having no two picks coming from the same sector. For preferred stocks I chose the Flaherty & Crumrine Total Return Fund due to its extreme z-score and distance from historical discount value. It ranked 6th in the "D x Y x Z" top list. For high-yield I chose New America High Income Fund, which ranked 5th in the "D x Y x Z" list, for similar reasons. For munis I picked Nuveen AMT-Free Quality Municipal Income Fund, which has a lower yield compared to the other two picks but its extreme discount and z-score suggests the possibility of a short/intermediate term bounce. NEA ranked 4th in "D x Y x Z," and Douglas Albo also liked the fund in yesterday's blog post "CEFs: Opportunity In NEA & EVN."
For past performance of picks, see "Reflections On Chemist's CEF Report Pick Performance In 2017". Past performance is no guarantee of future results.
This article was originally published to members of the Cambridge Income Laboratory 1 month ago.
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This article was written by
Stanford Chemist is a scientific researcher by training. For the past decade he has been providing analysis and evidence-based ways of generating profitable investments with CEFs and ETFs. He leads the investing group Learn more.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (38)
AMT FREE. Every little bit helps.
So current discount, minus average discount, divided by 2.Thanks Again,Tiger
current discount - average discount, divided by the standard deviation of the discount. may not necessarily be 2, even though it was 2 in that example!
SC have you thought of the best way one/we can track good to great cef's that are lagging "their norm" in div coverage ratio AND a tracking alert for div cuts in general rather than one off tracking?
Hard finding more than 3 % expense and more than 35% discount?..
A fund selling at a 50% discount would be a bad buy if the expenses were 5% per year and there was no prospect of activist rescue.
Would it be a bad buy if the distributions were both sustainable and in the 10% plus range after expenses?
You are right I missed the column. Mea culpa. Your BE column is a better measure of the cost to investors of expenses then gross expenses.
I love these monthly reviews of yours. They act like "report cards" for the CEFs in my portfolio.
