Term CEF Ladder Finale: Recap And Final Thoughts

by: History and Finance

This is the eighth and final installation in a series of articles discussing the concept of a Term CEF Ladder.

Updated data for all 45 Term CEFs in the CEFConnect database is provided.

Final version of the fundamental worksheet covers 38 Term CEFs (excludes only equity and state municipal bond closed-end funds).

All funds covered in the series are organized into a "ladder" by liquidation date for reference.

The first article in this series, which framed our investment objective and introduced the idea of a Term CEF Ladder, can be found here. Next in line were Mortgage Bond, Senior Loan, and High-Yield CEFs. A discussion in the comments section of our HY CEF article prompted me to pen a second article on assorted Corporate Bond CEFs, which among other things compared the liquidation strategies of several CEFs with 2018 termination dates. Convertible Bond and Preferred Stock funds were the next topic. The last individual sector article, our longest, was featured as a Seeking Alpha Editors' Pick and covered National Municipal bond funds.

This article will be much shorter. I first present updated versions of the master and fundamental Term CEF worksheets. Next, data is organized into a comprehensive "Term CEF Ladder" containing all the individual funds we have examined. I envision this section as a reference tool. I conclude with a few brief thoughts on what I have learned while writing this series.

Sheet #1: Master Term CEF Worksheet:

Term CEF List - 062018

(Source: CEFConnect, Fidelity, Morningstar, Fund Fact Sheets, Author's Own Spreadsheet)

Sheet #2: Fundamental Worksheet:

Fundamental CEF Worksheet - 062018

(Source: CEFConnect, Fidelity, Morningstar, Fund Fact Sheets, Author's Own Spreadsheet)

Comprehensive Term CEF Ladder:

2018 Term Dates: (BPK) [National Muni]; (JHA) [High Yield Corporate]; (KMM) [Global Income]; (KST) [Global Income]

2019: (JHD) [High Yield]; (JLS) [Mortgage]

2020: (BKK) [National Muni]; (JHY) [High Yield]; (JMT) [Mortgage]

2021: (EHT) [High Yield]; (JHB) [High Yield]; (MTT) [National Muni]; (NHA) [National Muni]

2022: (BGIO) [Global Debt]; (BSL) [Senior Loan]; (DMO) [Mortgage]; (EFL) [Senior Loan]; (FIV) [Senior Loan]; (JCO) [High Yield]; (JEMD) [Emerging Markets Debt]; (JPT) [Preferred Stock]

2023: (IHIT) [Mortgage/CMBS]; (NID) [National Muni]; (NIQ) [National Muni]

2024: (CBH) [Converts / High Yield]; (DCF) [Loans / High Yield]; (GDO) [IG Corporate]; (IGI) [IG Corporate]; (IHTA) [Mortgage/CMBS]; (JPI) [Preferred Stock]; (MMD) [National Muni]

2025: (HYI) [High Yield]

2026: N/A

2027: (BGB) [Senior Loan]

2028: (ETX) [National Muni]

2029: (XFLT) [Senior Loan/CLO Debt/CLO Equity]

2030: (ACV) [Converts/HY/Equity]; (BTT) [National Muni]; (CCD) [Converts]

* Note: this ladder excludes state municipal bond and equity funds.

Summary And Conclusion:

A few major themes emerged while I was writing this series. First, when choosing a Term CEF, one must be careful to avoid asset/liability mismatches. To avoid extension risk, owners of Term CEFs should monitor portfolio manager commentary to ensure fund assets are being managed with the termination date in mind. We saw examples of divergent manager behavior with respect to planning for fund liquidation across asset classes, but especially among corporate and municipal bond fund managers.

Second, the current environment is a tough one for all closed-end funds (not just funds with termination dates). A common theme is that increasing called bond activity continues to crimp CEF portfolio income. At the same time, closed-end funds are facing rising leverage costs due to increasing short-term rates. This trend does not seem likely to reverse anytime soon.

Third, there does seem to be a correlation between the time remaining to the termination date and the average fund discount. That is, funds with 2018 term dates show lower average discounts than 2019 funds, and funds with 2019 term dates show lower average discounts than funds with 2020 term dates. The effect seems to disperse the farther into the future we go. Funds with longer termination dates did not seem to gain much benefit from the existence of the liquidation feature.

This point leads us to a (perhaps very obvious) conclusion - Term CEFs do not trade like bonds. Liquidation does not seem to be priced in (pull-to-par effect) until several years prior to the termination date. Continuing on this thought, a reader pointed out that a fund like BTT (11.8yr effective duration, 4.00% distribution yield) will require a catalyst to close its ~9% discount to NAV. The existence of a 2030 liquidation date is clearly not sufficient to anchor BTT's market price.

When I began writing this series, I originally thought that purchasing a series of funds with ascending termination dates could approximate a "leveraged bond ladder." I was hoping that scheduled term dates would lead to a less volatile market price relative to NAV. While it's true that none of these funds show extremely massive discounts (the largest is 10.1% as of the time of this writing), it is also clear that many of these funds are facing headwinds and have the potential to be quite volatile going forward (especially those with longer durations/term dates).

Therefore, my personal strategy will be to look for short-term dislocations among funds with relatively near-term liquidation dates and limited asset/liability mismatches. That is, if a solidly-structured 2019-2022 fund undergoes a temporary downdraft relative to NAV, it could be a good candidate for a medium-term tactical trade.

For longer-duration CEFs, I see no need to limit security selection to the list of funds with termination dates. I will certainly continue to monitor longer Term CEFs as they season to see how each manager performs. All else equal, I still believe the existence of a scheduled liquidation date is a net positive for shareholders - it is an option whose value grows as the termination date is approached (assuming a fund is trading at a discount to NAV).

To conclude, I would like to thank the crew at Seeking Alpha for giving me a forum to express some of my ideas. I would also like to thank my readers, many of whom gave great feedback which helped hone my thoughts. I am not sure when I will be able to publish again, as I recently accepted a job as a portfolio manager with a large wealth management firm and will start later this month. I am unsure what their policy will be on articles such as these.

Until next time - good luck, good health, and happy investing!

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.