Weekly Review: High-Yield CEFs

Summary

• Review of where high-yield closed-end funds and their benchmark ended last week.
• Recap of news related to the sector.
• Comparison among the funds using several important metrics.
• Pair trade idea for those interested.

Introduction

The opportunities in closed-end funds over the last few months caught the eye of many investors. Most of these products are designed to provide a steady stream of income, usually on a monthly or quarterly basis, as opposed to the biannual payments provided by individual bonds. And this feature continues to attract market participants even when the overall market looks unstable.

In spite of CEFs being mostly of interest to income investors, we have found our path to approaching them as active traders and we are constantly monitoring them. As a testament to this, you will be kept up to date with Weekly Reviews such as this one.

The Benchmark

^{Source: Barchart, iBoxx $ High Yield Corp Bond iShares}

The main index for high yield closed-end funds is the iShares iBoxx $ High Yield Corp Bond (HYG). The past week did not surprise us with any directional changes. The benchmark is still trading in a range and if we see a breakdown past the $85 level it could potentially enter a downtrend.

The High Yield sector generally has low correlation with other sectors in the fixed income market. Along with lesser sensitivity to interest rate risk, an allocation to high yield bonds may provide us with benefits in terms of portfolio diversification. Additionally, investments in these products have historically offered similar returns to equity markets, but with lower volatility.

Below you can find a statistical comparison between iShares iBoxx $ High Yield Corp Bond (HYG) and iShares 20+ Year Treasury Bond ETF (TLT):

^{Source: Author's database}

The News

^{Source: Yahoo News, High Yield Closed-End Funds News}

As you can see from the table above, several funds declared their monthly distribution rates over the past week. On Friday, Prudential Sht Duration Hi Yld (ISD), published its unaudited investment results for the quarter ended February 28, 2018.

Invesco Advisers, announced officer changes for their closed-end funds. From high-yield sector this will affect Invesco High Income II:(VLT)

Dreyfus High Yield Strategies: (DHF) declared their monthly portfolio holdings, as of end of February 2018.

Review Of High-Yield CEFs

1. Lowest Z-Score:

^{Source: CEFConnect.com}

Above are the funds, which are statistically undervalued. The Z-score is an indicator of how many times the Discount/Premium deviates from its mean for a specific period. The observation provides us with potential "Buy" candidates, based on that characteristic and respectively attractive Discount.

Neuberger Berman High Yield St (NHS) is taking the fifth position in our sample. Last time, this fund was not even in the top ten table.

^{Source: CEFConnect.com, Neuberger Berman High Yield St:(NHS)}

2. Highest Z-Score:

^{Source: CEFConnect.com}

On the other hand, we have only Putnam High Income Securities (PCF) with a significant statistical edge. In spite of this, the fund is still trading at a Discount, so there is still no reason to review it as potential "Short".

MFS Intermediate High Income (CIF) is a fund which I followed over the last few weeks and it was a "Sell" candidate. The fund managed to narrow the spread between price and net asset value, аs we expected.

^{Source: CEFConnect.com, MFS Intermediate High Income:(CIF)}

3. Biggest Discount:

^{Source: CEFConnect.com}

This week, Prudential Global Short Dur Hi (NYSE:GHY) is again our leader, followed by Neuberger Berman High Yield St (NHS), which has also crossed the border of 14% Discount.

If you are looking to add new CEFs to your portfolio, the combination of a Z-score less than -2 and a Discount greater than 10% is always a good foundation. The current market environment has opened up many opportunities in this sector. Of course, before taking some position you will need a deeper analysis of the fund's characteristics.

4. Highest Premium:

^{Source: CEFConnect.com}

The situation is about the same as last week – only two closed-end funds trade at a Premium, however, there is no statistical reason to discuss them as potential "Sells."

5. Highest 5-year Annualized Return On NAV:

^{Source: CEFConnect.com}

The raw data above shows the high yield closed-end funds with the best returns on net asset value for the past five years. Probably this is the most important metric that investors care about, yet timing also plays an important role. To close in on a good bargain you need to incorporate all of the statistical and fundamental information available. That is why it is important to include Discount/Premium, Z-score and a look at the portfolio while hunting. Based on the ranking above, I may review EAD, HYT, HYB as potential "Buy" candidates.

6. Lowest 5-year Annualized Return On NAV:

^{Source: CEFConnect.com}

Statistical Comparison & Potential Trades

Usually, I am trying to provide reviews of potential "Buys" and respectively "Shorts." Due to the lack of enough interesting "Sells," I will keep your attention only on the closed-end funds where you can consider taking a "Long" position.

My first choice for today is Wells Fargo Adv Inc Opp (NYSE:EAD). Except that it is sitting among the funds with the highest return on NAV, we found a statistical reason as well. It may seem that it is constantly traded at this level of Discount, but Z-score indicates for a standard deviation of -2.10.

^{Source: CEFConnect.com, Wells Fargo Adv Inc Opp:(EAD)}

^{Source: CEFConnect.com, Wells Fargo Adv Inc Opp:(EAD)}

^{Source: Author's database}

Above is the statistical comparison of the main index HYG and EAD for the last 200 days. As it is stated, the correlation between them is 0.80 points.

Today's second fund is AllianceBernstein Glb High Inc (AWF). This CEF does not have one of the highest returns, but has a relative statistical edge to be included in my review.

^{Source: CEFConnect.com, AllianceBernstein Glb High Inc:(NYSE:AWF)}

^{Source: CEFConnect.com, AllianceBernstein Glb High Inc:(AWF)}

^{Source: Author's database}

Here, the data reveals a low correlation of only 0.33 points. The portfolio credit quality is primarily "BB" rating. The investments are well diversified in different ratings and many countries. The main part of the assets is from issuers located in the United States: 59.89%.

^{Source: CEFConnect.com, AllianceBernstein Glb High Inc}:^(AWF)

Conclusion

The high-yield sector does not provide us with significant arbitrage opportunities at present. Most of the CEFs are traded at discounts and it is difficult to find reasonable short candidates. The recent sell-off in the market has played its role by pushing the sector further down.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EAD over 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.