The Chemist's Quality CEF Report - February 2018
Summary
- Only funds with coverage >100% are considered!
- Top lists of discount, yield, D x Y and D x Y x Z are given.
- Some high-yield Quality fund picks are suggested.
For the inaugural issue of The Chemist's Quality CEF Report (September 2017), describing the background and rationale of the Report, please click here. Data were taken from the close of Feb. 11, 2018.
The Chemist's Quality CEF Report is a monthly feature. Previous editions of the Report can be searched using the keyword "cefrep".
What does the "Quality" indicate? Simply put, it means that the distribution coverage is greater than 100%. However, please note these caveats: Firstly, coverage ratios are calculated using earnings data from CEFConnect. No efforts have been made to independently verify the coverage ratios from the individual fund annual/semi-annual reports themselves. Secondly, having a coverage ratio >100% does not guarantee that the fund's distribution is secure. Many funds reduce their distributions periodically in line with market conditions in order to maintain good coverage. Thirdly, a coverage cut-off ratio of 100% is, ultimately, an arbitrary number. A fund with 99.9% coverage will be excluded from the rankings, whereas funds with 100.1% coverage will be considered, even though only a sliver of coverage separates the two.
I hope that these rankings of quality CEFs will provide fertile grounds for further exploration.
Key to table headings:
P/D = premium/discount
Z = 1-year z-score
Dis = distance
Lev = leverage
BE = baseline expense
Cov = coverage
1. Top 10 highest Quality discounts
The following data show the 10 CEFs with the highest discounts and coverage >100%. Yields, z-scores and leverage are shown for comparison.
CEF | Category | P/D | Yield | Z | Lev | BE | Cov |
(EMI) | Tax-Free Income-Michigan | -15.5% | 3.8% | -2.2 | 36% | 1.7% | 105% |
(EVJ) | Tax-Free Income-New Jersey | -14.9% | 4.8% | -2.3 | 38% | 1.5% | 106% |
(VPV) | Tax-Free Income-Pennsylvania | -14.9% | 5.9% | -2.5 | 39% | 0.9% | 147% |
(EMJ) | Tax-Free Income-New Jersey | -14.9% | 5.0% | -2.4 | 39% | 1.3% | 106% |
(NTC) | Tax-Free Income-Connecticut | -14.8% | 4.2% | -1.7 | 36% | 1.1% | 107% |
(NMY) | Tax-Free Income-Maryland | -14.7% | 4.7% | -2.4 | 37% | 1.0% | 100% |
(CEV) | Tax-Free Income-California | -14.7% | 3.9% | -3.0 | 36% | 1.4% | 107% |
(NQP) | Tax-Free Income-Pennsylvania | -14.6% | 5.1% | -2.7 | 40% | 1.0% | 105% |
(NUM) | Tax-Free Income-Michigan | -14.5% | 4.5% | -2.2 | 38% | 1.0% | 104% |
(MIW) | Tax-Free Income-Michigan | -14.5% | 4.4% | -3.4 | 37% | 1.6% | 109% |
(Source: CEFConnect, Stanford Chemist)
2. Top 10 lowest z-scores
CEFs with the lowest z-scores are potential buy candidates. The following data show the 10 CEFs with the lowest z-scores. Premium/discount, yields and leverage are shown for comparison. Only funds with coverage >100% are considered.
CEF | Category | Z | P/D | Yield | Lev | BE | Cov |
(LEO) | Tax-Free Income-National | -4.4 | -6.6% | 5.4% | 35% | 1.1% | 128% |
(AKP) | Tax-Free Income-California | -4.2 | -13.7% | 3.9% | 38% | 0.7% | 115% |
(DSM) | Tax-Free Income-National | -4.1 | -6.1% | 5.5% | 32% | 0.8% | 111% |
(EIM) | Tax-Free Income-National | -3.8 | -11.1% | 4.9% | 40% | 1.1% | 110% |
(HYB) | Taxable Income-High Yield | -3.7 | -13.1% | 7.5% | 27% | 1.3% | 109% |
(PCK) | Tax-Free Income-California | -3.7 | -1.7% | 5.1% | 43% | 1.2% | 133% |
(DMF) | Tax-Free Income-National | -3.6 | -10.0% | 5.1% | 35% | 1.1% | 130% |
(NUO) | Tax-Free Income-Ohio | -3.4 | -13.9% | 4.5% | 37% | 1.0% | 103% |
(MIW) | Tax-Free Income-Michigan | -3.4 | -14.5% | 4.4% | 37% | 1.6% | 109% |
(AFB) | Tax-Free Income-National | -3.3 | -12.6% | 4.4% | 38% | 0.7% | 109% |
(Source: CEFConnect, Stanford Chemist)
3. Top 20 highest Quality yields
Some readers are mostly interested in obtaining income from their CEFs, so the following data presents the top 20 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, some words of caution: [i] higher yields generally indicate higher risk, and [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). Only funds with coverage >100% are considered. To make the charts more manageable, I've split the funds into two groups of 10.
CEF | Category | Yield | P/D | Z | Lev | BE | Cov |
(ACP) | Taxable Income-Senior Loan | 10.3% | -7.3% | -0.3 | 30% | 2.2% | 103% |
(RCS) | Non-US/Other-Global Income | 9.8% | 17.5% | -1.0 | 64% | 1.0% | 111% |
(KIO) | Taxable Income-High Yield | 9.6% | -9.9% | -1.5 | 25% | 2.0% | 102% |
(BGH) | Taxable Income-High Yield | 9.6% | -9.5% | -1.9 | 26% | 1.5% | 112% |
(JGH) | Non-US/Other-Global Income | 8.9% | -11.4% | -1.8 | 29% | 1.3% | 102% |
(IVH) | Taxable Income-High Yield | 8.5% | -11.4% | -2.4 | 31% | 1.6% | 129% |
(HIX) | Taxable Income-High Yield | 8.3% | -11.4% | -2.3 | 26% | 1.2% | 107% |
(PHT) | Taxable Income-High Yield | 8.3% | -11.5% | -2.9 | 29% | 1.0% | 108% |
(ARDC) | Taxable Income-Senior Loan | 8.1% | -11.0% | -2.0 | 29% | 2.0% | 105% |
(FPF) | Taxable Income-Preferreds | 8.0% | -6.5% | -3.2 | 30% | 1.3% | 102% |
(JPC) | Taxable Income-Preferreds | 8.0% | -7.5% | -2.1 | 34% | 1.2% | 106% |
(BGB) | Taxable Income-Senior Loan | 8.0% | -8.2% | -2.0 | 36% | 2.1% | 106% |
(EMD) | Non-US/Other-Emerging Market Income | 8.0% | -11.3% | 0.6 | 22% | 1.2% | 103% |
(HYT) | Taxable Income-High Yield | 8.0% | -11.5% | -2.5 | 30% | 0.9% | 102% |
(PDT) | Taxable Income-Preferreds | 7.8% | 4.8% | 0.1 | 33% | 1.4% | 103% |
(TPZ) | US Equity-Growth & Income | 7.8% | -9.6% | -1.1 | 24% | 1.0% | 210% |
(NHS) | Taxable Income-High Yield | 7.8% | -13.0% | -2.2 | 32% | 1.2% | 104% |
(BGX) | Taxable Income-Senior Loan | 7.8% | -8.1% | -1.6 | 36% | 2.0% | 107% |
(HTD) | US Equity-Equity Tax-Advantaged | 7.8% | -8.1% | -2.5 | 32% | 1.2% | 108% |
(AIF) | Taxable Income-High Yield | 7.7% | -11.0% | -1.8 | 35% | 2.4% | 107% |
(Source: CEFConnect, Stanford Chemist)
4. Top 10 best combination of Quality yield and discount
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 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. Only funds with >100% coverage are considered.
CEF | Category | P/D | Yield | Z | D x Y | Lev | BE | Cov |
(JGH) | Non-US/Other-Global Income | -11.4% | 8.9% | -1.8 | -1.0 | 29% | 1.3% | 102% |
(NHS) | Taxable Income-High Yield | -13.0% | 7.8% | -2.2 | -1.0 | 32% | 1.2% | 104% |
(HYB) | Taxable Income-High Yield | -13.1% | 7.5% | -3.7 | -1.0 | 27% | 1.3% | 109% |
(BWG) | Non-US/Other-Global Income | -13.5% | 7.2% | -0.6 | -1.0 | 36% | 1.5% | 105% |
(IVH) | Taxable Income-High Yield | -11.4% | 8.5% | -2.4 | -1.0 | 31% | 1.6% | 129% |
(PHT) | Taxable Income-High Yield | -11.5% | 8.3% | -2.9 | -1.0 | 29% | 1.0% | 108% |
(KIO) | Taxable Income-High Yield | -9.9% | 9.6% | -1.5 | -1.0 | 25% | 2.0% | 102% |
(HIX) | Taxable Income-High Yield | -11.4% | 8.3% | -2.3 | -0.9 | 26% | 1.2% | 107% |
(HYT) | Taxable Income-High Yield | -11.5% | 8.0% | -2.5 | -0.9 | 30% | 0.9% | 102% |
(VLT) | Taxable Income-High Yield | -12.5% | 7.3% | -2.9 | -0.9 | 26% | 1.1% | 101% |
(Source: CEFConnect, Stanford Chemist)
5. Top 10 best combination of Quality yield, discount and z-score
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. Only funds with >100% coverage are considered.
CEF | Category | P/D | Yield | Z | D x Y | Lev | BE | Cov |
(HYB) | Taxable Income-High Yield | -13.1% | 7.5% | -3.7 | 3.6 | 27% | 1.3% | 109% |
(PHT) | Taxable Income-High Yield | -11.5% | 8.3% | -2.9 | 2.8 | 29% | 1.0% | 108% |
(VLT) | Taxable Income-High Yield | -12.5% | 7.3% | -2.9 | 2.6 | 26% | 1.1% | 101% |
(IVH) | Taxable Income-High Yield | -11.4% | 8.5% | -2.4 | 2.3 | 31% | 1.6% | 129% |
(HYT) | Taxable Income-High Yield | -11.5% | 8.0% | -2.5 | 2.3 | 30% | 0.9% | 102% |
(AKP) | Tax-Free Income-California | -13.7% | 3.9% | -4.2 | 2.3 | 38% | 1.3% | 115% |
(HYI) | Taxable Income-High Yield | -11.2% | 7.4% | -2.7 | 2.2 | 0% | 0.7% | 100% |
(NHS) | Taxable Income-High Yield | -13.0% | 7.8% | -2.2 | 2.2 | 32% | 1.2% | 104% |
(VPV) | Tax-Free Income-Pennsylvania | -14.9% | 5.9% | -2.5 | 2.2 | 39% | 0.9% | 147% |
(MIW) | Tax-Free Income-Michigan | -14.5% | 4.4% | -3.4 | 2.2 | 37% | 1.6% | 109% |
(Source: CEFConnect, Stanford Chemist)
Top picks?
I try to emphasize that the Cambridge Income Laboratory is not primarily about "picks".
Same with last month, high-yield and muni CEFs are most represented in the "D x Y x Z" top list. These funds look particularly attractive:
- New America High Income Fund (HYB): 7.5% yield, -13.1% discount, -3.7 z-score, 27% leverage, 1.3% baseline expense, 109% coverage
- Pioneer High Income Trust (PHT): 8.3% yield, -11.5% discount, -2.9 z-score, 29% leverage, 1.0% baseline expense, 108% coverage.
- Ivy High Income Opportunities Fund (IVH): 8.5% yield, -11.4% discount, -2.4 z-score, 31% leverage, 1.6% baseline expense, 129% coverage.
All of the three above funds are high-yield funds. To take a look at why I think these funds are attractively priced, consider the below chart showing the NAV and price returns of the three CEFs over the last 3 months. In terms of NAV, the three funds have dropped by between -0.38% to -1.11%; however, their prices have declined by -3.85% (for PHT) all the way down to -9.51% (for HYB). This indicates that the price drop is simply due to a decrease in the premium/discount of the CEF rather than a serious drop in the underlying portfolio NAV of the funds.
Note that I will not be keeping track of top pick performance in the Quality CEF edition, unlike in the main report.
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