Weekly Review: High-Yield CEFs

About: Neuberger Berman High Yield Strategies Fund (NHS), Includes: DHY, EAD, GHY, HIO, HNW, HYG, MPV, PCF, PHT, TLT
by: Arbitrage Trader

Review of where high-yield closed-end funds and their benchmark ended the week.

Comparison with the iShares 20+ Year Treasury Bond ETF and spread review.

Recap of news related to the sector.

Comparison among the funds using several important metrics.

Pair trade idea for those interested.


The opportunities in closed-end funds over the past 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 approach 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 the one below.

The Benchmark

Source: Barchart, iShares iBoxx $ High Yield Corporate Bond ETF

The main index for high-yield closed-end funds is the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG). Over the past week, we saw five green bars and an increase of $0.47. If the benchmark keeps this positive trend, we can expect a test of the resistance level around $85.75 per share. Since the beginning of the year, we observe trading in a price range, and most probably only a fundamental change in the environment can be a reason for a new directional trend.

Before starting the review, I would like to introduce several advantages of the high-yield bonds and respectively closed-end funds, which invest in this asset class. They are corporate bonds rated below BBB- or Baa3 by established credit rating agencies, but they can play an important role in your portfolio. As the high-yield sector generally has a low correlation to other sectors of the fixed-income market, along with less sensitivity to interest rate risk, an allocation to high-yield bonds may provide portfolio diversification benefits. In addition, high-yield bond investments have historically offered similar returns to equity markets, but with lower volatility.

Statistical Comparison And Spread Review Of The Sector

The spread is simply the compensation a bond investor receives over the risk-free rate, which in this case is the U.S. Treasury rate. On a weekly basis, we notice a decrease of 0.19%. As we can see, the current levels are significantly lower compared to the ones of the financial crisis.

Source: YCharts, US High Yield Master II Option-Adjusted Spread

Below, you can find a statistical comparison between the iShares iBoxx $ High Yield Corporate Bond ETF and the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT). As discussed, we observe a low correlation between these two sectors. It is only 0.31 points for the last 200-day period:

Source: Author's software

The News

Source: Yahoo News, High Yield Closed-End Funds News

Over the past week, the sector did not surprise us with any news. Two of the fund announced their regular distributions:

The Pioneer High Income Trust (NYSE:PHT) has declared $0.0650 per common share, and the Pioneer Diversified High Income Trust (NYSEMKT:HNW) announced a distribution of $0.0950 per share.

The Prudential Global Short Duration High Yield Fund (NYSE:GHY) announced its unaudited investment results for the quarter ended April 30, 2018:

Source: Yahoo News, Prudential Global Short Duration High Yield Fund

Review Of High-Yield CEFs

1. Lowest Z-Score

Source: CEFConnect.com

The above sample represents the most statistically undervalued closed-end funds in the sector. Based on the Z-score indicator, the table provides us with interesting "Long" opportunities. I would suggest combining of the statistical edge with a discount of more than 10% in order to pick some fund for review.

The Neuberger Berman High Yield Strategies Fund (NYSEMKT:NHS) is our new leader with a Z-score of -1.80 points. Аlthough we are observing a positive performance from the main benchmark of the sector, we cannot say that there is some significant increase of the Z-scores in the sector.

Source: CEFConnect.com, Neuberger Berman High Yield Strategies Fund

2. Highest Z-Score

Source: CEFConnect.com

The Z-score is an indicator of how many times the Discount/Premium deviates from its mean for a specific period. The purpose of the above observation is to provide us with potential "Sells", but as we can see, it is a challenge to find statistical edge among the participants of the ranking. I will restrain myself from considering any involvement in them because it does not make sense to use the Z-score if its value is between 0 and 1 point

Yes, the Putnam High Income Securities Fund (NYSE:PCF) has the needed statistical edge, but it is trading at a discount, and this is the reason why I am not going to review it.

3. Biggest Discount

Source: CEFConnect.com

If you are seeking new potential "Buys" for your portfolio, probably you may find it reasonable to start from this table. The current market environment has opened up many opportunities in the sector. A Z-score less than -1.5, combined with a discount of more than 12%, sounds like a strong foundation for deeper research. Of course, before taking some position, you will need to go further with your analysis of the fund's characteristics.

Definitely, the performance of the Neuberger Berman High Yield Strategies Fund caught my attention. The fund is a weekly leader by Z-score and has the biggest discount. To be honest, almost all of the above participants are interesting and deserve to have some time spent on them.

4. Highest Premium

Source: CEFConnect.com

If you want to choose a fund for a hedging reaction of your "Long" positions, I should admit that it will be a difficult task. Currently, we do not have funds traded at a premium which satisfy our requirements. The Babson Capital Participation Investors (NYSE:MPV) looks like the only possible choice, but be aware of its relatively low average daily volume.

Source: CEFConnect.com, Babson Capital Participation Investors

5. Highest 5-year Annualized Return On NAV

Source: CEFConnect.com

The above funds deliver reasonable returns on net asset value. If we combine the data with fair discounts and statistical logic, you may decide to review the Credit Suisse High Yield Bond Fund (NYSEMKT:DHY) or the Wells Fargo Advantage Income Opportunities Fund (NYSEMKT:EAD).

Be careful with the Barings Corporate Investors (NYSE:MCI) and the Babson Capital Participation Investors. The offered returns are above the average, but their low average daily volume should be also taken into consideration.

6. Lowest 5-year Annualized Return On NAV

Source: CEFConnect.com

On the other hand, we have the closed-end funds with the lowest return on net asset value. I think you can spend some time to analyze the Western Asset High Income Opportunity Fund (NYSE:HIO). It has an attractive discount and is one of the two funds which are non-leveraged.

7. Highest Distribution Rate

Source: CEFConnect.com

Most of the investors want to see what the actual distribution performance of the fund is based on its price. The above table provides us with information about the highest distribution rate in the sector. Additionally, I included another important metric: the annualized distribution rate on the net asset value. The ranking is more static, and on a weekly basis we do not see so many changes.

8. Lowest Distribution Rate

Source: CEFConnect.com

9. Lowest Effective Leverage

Source: CEFConnect.com

Most of the funds in the sector use a leverage, but I believe this should not surprise us. Аnyway, we still have two funds which are not leveraged and four which use a leverage below 10%.

Statistical Comparison And Potential Trade

If you follow our Weekly Review on a regular basis, you probably notice that after our sector discussion, I try to choose interesting candidates for you and to analyze them in more details. My general idea was to form a pair trade opportunity for you, but based on the current conditions, it is a challenge to suggest some "Short" candidates.

Throughout the review, we found one fund which has the lowest Z-score and the highest discount. Based on that, I am going to review NHS as a potential "Buy" candidate. Its return on net asset value is not among the highest ones, but with a discount of 14.59%, the closed-end fund deserves our attention.

Source: CEFConnect.com, Neuberger Berman High Yield Strategies Fund

Source: CEFConnect.com, Neuberger Berman High Yield Strategies Fund

The fund has an average daily volume of 55,000 shares per day, so you do not need to worry about its liquidity. The portfolio information is showing us that the quality meets the requirements that most of us want to see. The main distribution is between "B" and "BB" ratings. The assets from issuers located in the United States are 79.90%, and the Healthcare sector has the biggest weight.

Source: CEFConnect.com, Neuberger Berman High Yield Strategies Fund

Source: CEFConnect.com, Neuberger Berman High Yield Strategies Fund

Two months ago, the dividend was decreased, and the current distribution is $0.0658 per share.

Source: CEFConnect.com, Neuberger Berman High Yield Strategies Fund

From a technical analysis perspective, the fund is trading in a range, and we may find a support level around $10.87. Additionally, you may find interesting the information about the correlation between NHS and HYG.

Source: Barchart, Neuberger Berman High Yield Strategies Fund

Source: Author's software


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. If we see a break of the support or the resistance of the current trading range, we expect significant changes in the funds' statistical characteristics.

Based on the data that I have reviewed, NHS can be a potential addition to your portfolio.

Note: This article was originally published for our subscribers on 6/10/2018, and some figures and charts may not be entirely up to date.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NHS 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.