The Chemist's CEF Report - June 2018: CEFs Recovering

|
Includes: APF, AVK, BGX, BQH, BST, BTO, BXMX, CAF, CCA, CCD, CEN, CET, CEV, CHY, CLM, CRF, CUBA, CXH, DDF, DIAX, DMO, DNI, DNP, DPG, ECC, EDF, EDI, EGIF, EHI, EMD, EMF, EOI, EOS, EVJ, EXD, FAM, FAX, FDEU, FMY, FPL, FSD, FT, FTF, FXBY, GAM, GCV, GDL, GGO, GLO, GOF, GRF, GUT, HQL, IGA, INF, INSI, IRL, ISD, JGH, JHS, JRS, MFV, MHE, MMU, MMV, MNE, MSF, MVT, MXF, MZF, NAZ, NBO, NCV, NCZ, NDP, NHF, NHS, NPN, NQP, NUM, NXJ, OXLC, PCF, PCM, PCN, PCQ, PFL, PFN, PGP, PHK, PML, PTY, QQQX, RCS, RIF, RIV, SPXX, SWZ, THQ, THW, VGI, ZF, ZTR
by: Stanford Chemist
Summary

Premium/discounts and z-scores recover for the second month in a row, and are highest since January.

Spread among CEF valuations increasing for the 5th month in a row.

Picks for this month are NHF, FDEU, and FSD.

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 June 4, 2018. 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

Changes to this month's report

I've changed two things in this month's report. First, I added the names of the funds (in addition to the tickers) to make it easier for members to learn unfamiliar names and tickers. Second, I've renamed the categories using my own simplified labels rather than CEFConnect's sometimes unnecessarily lengthy labels. For example, "Non-US/Other-Global Growth & Income" is now more simply "Global Growth & Income". These changes do have the effect of making the tables larger though, which is something that I'm trying to avoid. Are the changes helpful or not? Let me know in the comments section below!

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):

Ticker

Fund

Category

P/D

Y

Z

Dis

Lev

BE

Cov

(DNP)

DNP Select Income

U.S. Growth & Income

23.07%

7.10%

2.6

8.63%

26%

1.00%

26%

(CRF)

Cornerstone Total Return

U.S. General Equity

20.45%

18.37%

0.8

3.31%

0%

1.22%

2%

(CLM)

Cornerstone Strategic Value

U.S. General Equity

18.04%

18.70%

0.9

3.07%

0%

1.20%

1%

(GUT)

Gabelli Utility Trust

U.S. Utilities

17.14%

10.31%

-1.7

-12.30%

30%

1.23%

-5%

(QQQX)

Nuveen NASDAQ 100 Dynamic Over

Covered Call

14.99%

6.13%

2.1

10.16%

0%

0.94%

1%

(SPXX)

Nuveen S&P Dynamic Overwrite

Covered Call

12.64%

5.95%

1.5

9.55%

0%

0.92%

6%

(GOF)

Guggenheim Strategic Opp Fund

U.S. Growth & Income

11.29%

10.26%

1.9

3.88%

21%

1.61%

63%

(RIV)

RiverNorth Opportunities Fund

U.S. Growth & Income

11.08%

11.80%

2.0

8.68%

0%

1.76%

-51%

(BST)

BlackRock Science and Technolo

Global Equity

10.48%

4.56%

2.5

13.13%

0%

0.89%

-5%

(GCV)

Gabelli Convertible & Income

U.S. Growth & Income

8.42%

7.82%

1.3

6.78%

24%

1.46%

-3%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433545368707.png

Top 10 highest discounts (equity):

Ticker

Fund

Category

P/D

Y

Z

Dis

Lev

BE

Cov

(OTCPK:FXBY)

Foxby Corp

U.S. General Equity

-24.50%

0.44%

2.2

5.18%

0%

2.62%

#DIV/0!

(DNI)

Dividend and Income Fund

U.S. Growth & Income

-20.54%

4.85%

-1.4

-2.07%

0%

1.77%

9%

(RIF)

RMR Real Estate Income Fund

U.S. Real Estate

-18.78%

7.46%

-0.6

-1.25%

28%

1.83%

3%

(CET)

Central Securities Corporation

U.S. General Equity

-17.83%

3.72%

-0.4

-0.82%

0%

0.75%

9%

(EGIF)

Eagle Growth & Income Opportun

Global Growth & Income

-17.66%

5.73%

-1.4

-2.89%

24%

2.23%

71%

(GDL)

GDL Fund

Global Equity

-17.29%

4.31%

-1.3

-2.57%

38%

1.75%

-20%

(GRF)

Eagle Capital Growth

U.S. General Equity

-16.18%

6.83%

-1.3

-3.49%

0%

1.22%

1%

(CUBA)

Herzfeld Caribbean Basin

Latin American Eequity

-16.13%

1.73%

-1.4

-1.15%

0%

3.30%

-6%

(NHF)

NexPoint Strategic Opps Fund

U.S. Growth & Income

-15.69%

10.85%

-3.0

-7.18%

15%

1.89%

6%

(GAM)

General American Investors

U.S. General Equity

-15.55%

2.84%

-0.1

-0.04%

15%

1.32%

11%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433545980368.png

Top 10 highest premia (fixed income):

Ticker

Fund

Category

P/D

Y

Z

Dis

Lev

BE

Cov

(RCS)

PIMCO Strategic Income Fund

Global Income

31.39%

8.93%

1.1

7.58%

64%

0.98%

92%

(PGP)

PIMCO Global StocksPLUS & Inc

Multisector Income

26.86%

10.70%

-0.8

-12.40%

32%

1.89%

79%

(PTY)

PIMCO Corporate & Income Opps

Investment Grade

25.92%

8.42%

3.5

12.90%

30%

0.86%

77%

(PHK)

PIMCO High Income Fund

Multisector Income

24.89%

11.81%

1.0

6.55%

24%

0.96%

65%

(PCN)

PIMCO Corporate & Income Strgy

Investment Grade

19.69%

7.58%

2.9

7.22%

22%

1.01%

86%

(PCQ)

PIMCO CA Municipal Income

California Munis

18.49%

5.74%

0.0

0.86%

47%

1.16%

117%

(DMO)

Western Asset Mortgage Def Opp

Mortgage Bonds

13.92%

10.47%

-0.9

-3.32%

31%

1.76%

16%

(PCM)

PCM Fund

Mortgage Bonds

13.77%

8.12%

1.6

3.05%

38%

1.55%

93%

(PML)

PIMCO Municipal Income II

National Munis

12.07%

5.93%

1.4

3.53%

38%

1.06%

113%

(NCV)

AGIC Convertible & Income

Multisector Income

10.53%

11.24%

3.1

4.48%

38%

1.28%

82%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433546874375.png

Top 10 highest discounts (fixed income):

Ticker

Fund

Category

P/D

Y

Z

Dis

Lev

BE

Cov

(EVJ)

EV NJ Municipal Income

New Jersey Munis

-15.70%

4.86%

-1.2

-2.41%

38%

1.54%

106%

(NBO)

Neuberger Berman NY Inter Muni

New York Munis

-15.61%

4.09%

-1.9

-3.36%

40%

1.31%

113%

(MNE)

BlackRock Muni NY Intermed. Du

New York Munis

-15.47%

3.79%

-1.8

-3.84%

38%

1.23%

109%

(CEV)

EV CA Municipal Income

California Munis

-15.46%

3.88%

-1.6

-3.04%

36%

1.44%

107%

(NQP)

Nuveen PA Quality Muni Income

Pennsylvania Munis

-15.44%

5.10%

-1.6

-2.64%

40%

1.00%

103%

(NXJ)

Nuveen NJ Quality Muni Income

New Jersey Munis

-15.26%

5.31%

-1.5

-1.67%

39%

1.01%

98%

(MMV)

EV MA Municipal Income

Massachusetts Equity

-15.20%

3.74%

-1.6

-3.20%

33%

1.27%

113%

(BQH)

BlackRock NY Municipal Bond

New York Munis

-15.16%

4.20%

-1.7

-4.70%

39%

1.37%

108%

(NUM)

Nuveen MI Quality Muni Income

Michigan Munis

-15.12%

4.19%

-1.2

-2.11%

38%

1.00%

108%

(CCA)

MFS California Municipal Fund

California Munis

-15.04%

4.50%

-1.7

-6.29%

41%

1.76%

-121%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433547395937.png

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):

Ticker

Fund

Category

Z

P/D

Y

Dis

Lev

BE

Cov

(DDF)

Delaware Inv Div & Inc

U.S. Growth & Income

3.1

-3.04%

10.35%

5.60%

30%

1.14%

27%

(GGO)

Gabelli Go Anywhere Trust

U.S. Growth & Income

3.0

3.59%

3.93%

13.77%

41%

2.47%

-70%

(EOI)

EV Enhanced Equity Income

Covered Call

2.8

3.24%

6.66%

6.87%

0%

1.11%

8%

(DIAX)

Nuveen Dow 30 Dynamic Overwrit

Covered Call

2.8

5.05%

6.30%

8.44%

0%

0.93%

7%

(CAF)

MS China A Share

Asia Equity

2.8

-7.57%

4.45%

6.40%

0%

1.76%

0%

(IGA)

Voya Global Adv & Premium Opp

Covered Call

2.7

-4.28%

7.73%

2.97%

0%

0.99%

4%

(EOS)

EV Enhanced Equity Income II

Covered Call

2.7

4.58%

5.98%

6.05%

0%

1.10%

-3%

(DNP)

DNP Select Income

U.S. Growth & Income

2.6

23.07%

7.10%

8.63%

26%

1.00%

26%

(BST)

BlackRock Science and Technolo

Global Equity

2.5

10.48%

4.56%

13.13%

0%

0.89%

-5%

(SWZ)

Swiss Helvetia Fund

Other Non-U.S. Equity

2.5

-7.76%

1.05%

1.48%

0%

1.40%

-11%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433547960496.png

Top 10 lowest z-scores (equity):

Ticker

Fund

Category

Z

P/D

Y

Dis

Lev

BE

Cov

(NHF)

NexPoint Strategic Opps Fund

U.S. Growth & Income

-3.0

-15.69%

10.85%

-7.18%

15%

1.89%

6%

(FDEU)

First Trust Dynamic Europe Equ

Other Non-U.S. Equity

-2.5

-8.09%

8.76%

-4.06%

25%

1.60%

11%

(JRS)

Nuveen Real Estate Income

U.S. Real Estate

-2.1

-5.85%

9.27%

-3.45%

30%

1.35%

18%

(MSF)

MS Emerging Markets

Emerging Market Equity

-1.9

-13.37%

0.34%

-1.77%

1%

1.60%

-11%

(MXF)

Mexico Fund

Latin American Eequity

-1.8

-12.68%

4.15%

-0.21%

0%

1.58%

14%

(APF)

MS Asia Pacific

Asia Equity

-1.7

-14.35%

0.86%

-1.46%

0%

1.36%

5%

(HQL)

Tekla Life Sciences Investors

U.S. Health/Biotech Equity

-1.7

-5.10%

8.48%

-3.22%

0%

1.25%

-4%

(EMF)

Templeton Emerging Markets

Emerging Market Equity

-1.7

-12.40%

7.24%

-1.68%

0%

1.45%

0%

(GUT)

Gabelli Utility Trust

U.S. Utilities

-1.7

17.14%

10.31%

-12.30%

30%

1.23%

-5%

(BTO)

JH Financial Opportunities

U.S. Financials Equity

-1.6

-0.71%

3.78%

-2.73%

15%

1.63%

7%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433548664172.png

Top 10 highest z-scores (fixed income):

Ticker

Fund

Category

Z

P/D

Y

Dis

Lev

BE

Cov

(PTY)

PIMCO Corporate & Income Opps

Investment Grade

3.5

25.92%

8.42%

12.90%

30%

0.86%

77%

(CHY)

Calamos Convertible & High

Multisector Income

3.1

4.75%

9.71%

3.86%

32%

1.23%

49%

(PFL)

PIMCO Income Strategy Fund

Multisector Income

3.1

9.51%

8.77%

5.80%

24%

1.13%

78%

(NCV)

AGIC Convertible & Income

Multisector Income

3.1

10.53%

11.24%

4.48%

38%

1.28%

82%

(PCN)

PIMCO Corporate & Income Strgy

Investment Grade

2.9

19.69%

7.58%

7.22%

22%

1.01%

86%

(BGX)

Blackstone/GSO LS Credit Inc.

Senior Loan

2.6

-2.55%

7.37%

3.72%

36%

1.73%

111%

(CCD)

Calamos Dynamic Conv & Income

Multisector Income

2.6

1.46%

9.35%

3.78%

31%

1.51%

41%

(PFN)

PIMCO Income Strategy Fund II

Multisector Income

2.6

6.07%

8.97%

3.67%

23%

1.06%

78%

(PCF)

Putnam High Income Securities

High Yield

2.5

-4.21%

3.66%

2.60%

0%

1.19%

81%

(MZF)

Managed Duration InvGrade Muni

National Munis

2.5

-1.85%

3.36%

5.26%

37%

1.18%

70%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-1528143354946438.png

Top 10 lowest z-scores (fixed income):

Ticker

Fund

Category

Z

P/D

Y

Dis

Lev

BE

Cov

(FMY)

First Trust Mortgage Income

Mortgage Bonds

-2.9

-11.49%

5.39%

-2.83%

7%

1.20%

47%

(MHE)

Massachusetts Tax-Exempt Trust

Massachusetts Equity

-2.7

-3.05%

4.08%

-3.34%

37%

1.11%

107%

(NPN)

Nuveen PA Municipal Value Fund

Pennsylvania Munis

-2.4

-5.38%

3.70%

-5.55%

4%

0.99%

102%

(NAZ)

Nuveen AZ Quality Muni Income

Arizona Munis

-2.3

-9.12%

4.11%

-7.29%

37%

1.02%

105%

(JHS)

JH Income Securities

Investment Grade

-2.2

-8.04%

5.14%

-2.96%

33%

0.99%

35%

(CXH)

MFS Investment Grade Muni

National Munis

-2.1

-11.53%

4.95%

-4.27%

28%

1.25%

96%

(MMU)

Western Asset Managed Muni

National Munis

-2.1

-6.07%

5.49%

-5.44%

29%

1.19%

99%

(INSI)

Insight Select Income Fund

Investment Grade

-2.1

-9.19%

4.34%

-3.44%

0%

0.74%

36%

(MVT)

BlackRock MuniVest Fund II

National Munis

-2.0

-5.11%

5.40%

-5.79%

38%

0.91%

105%

(FSD)

First Trust High Inc Long/Shrt

High Yield

-2.0

-13.41%

8.58%

-4.91%

20%

1.18%

78%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433550616133.png

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, 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):

Ticker

Fund

Category

Y

P/D

Z

Dis

Lev

BE

Cov

(CLM)

Cornerstone Strategic Value

U.S. General Equity

18.70%

18.04%

0.9

3.07%

0%

1.20%

1%

(CRF)

Cornerstone Total Return

U.S. General Equity

18.37%

20.45%

0.8

3.31%

0%

1.22%

2%

(MFV)

MFS Special Value Trust

U.S. Growth & Income

17.19%

0.34%

-1.5

-6.07%

0%

1.37%

17%

(NDP)

Tortoise Energy Independence F

MLPs

14.10%

2.23%

0.0

0.49%

25%

1.68%

0%

(CEN)

Center Coast MLP & Infras

MLPs

13.27%

1.72%

0.0

-0.04%

35%

2.04%

0%

(ZF)

Virtus Total Return Fund Inc.

Global Growth & Income

13.22%

-2.76%

1.1

2.51%

26%

1.92%

31%

(ZF)

Virtus Total Return Fund Inc.

Global Growth & Income

13.08%

-2.76%

1.1

2.51%

26%

1.92%

31%

(ZTR)

Virtus Global Div & Inc Fund

U.S. Growth & Income

12.51%

0.18%

-0.4

-1.39%

28%

1.43%

23%

(FPL)

First Trust New Opps MLP & En

MLPs

12.16%

3.39%

0.0

0.12%

25%

1.57%

0%

(ZTR)

Virtus Global Div & Inc Fund

U.S. Growth & Income

12.15%

0.18%

-0.4

-1.39%

28%

1.43%

23%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433551336865.png

Top 10 highest yields (fixed income):

Ticker

Fund

Category

Y

P/D

Z

Dis

Lev

BE

Cov

(OXLC)

Oxford Lane Capital Corp

Senior Loan

15.38%

4.56%

0.3

1.24%

38%

8.26%

-92%

(EDF)

Stone Harbor Emerging Mkts FI

Emerging Market Income

15.31%

10.24%

0.1

0.79%

32%

1.85%

66%

(EDI)

Stone Harbor Emg Mkts Total In

Emerging Market Income

13.52%

0.22%

-0.7

-1.05%

32%

1.96%

80%

(ECC)

Eagle Point Credit Company LLC

Senior Loan

13.20%

8.47%

-0.9

-5.59%

31%

3.29%

74%

(EXD)

EV Tax-Advantaged Bond&Option

Government Bonds

11.84%

-6.87%

-0.4

0.53%

0%

1.45%

3%

(PHK)

PIMCO High Income Fund

Multisector Income

11.81%

24.89%

1.0

6.55%

24%

0.96%

65%

(NCZ)

AGIC Convertible & Income II

Multisector Income

11.46%

7.46%

2.4

3.16%

38%

1.29%

84%

(NCV)

AGIC Convertible & Income

Multisector Income

11.24%

10.53%

3.1

4.48%

38%

1.28%

82%

(FTF)

Franklin Limited Duration Inco

Limited Duration

10.89%

-6.39%

-0.6

-0.35%

24%

1.20%

33%

(VGI)

Virtus Global Multi-Sector Inc

Multisector Income

10.77%

-2.90%

-1.2

-3.97%

26%

1.75%

57%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433551614728.png

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 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):

Ticker

Fund

Category

P/D

Y

Z

D x Y

Dis

Lev

BE

Cov

(NHF)

NexPoint Strategic Opps Fund

U.S. Growth & Income

-15.69%

10.85%

-3.0

-1.70

-7.18%

15%

1.89%

6%

(RIF)

RMR Real Estate Income Fund

U.S. Real Estate

-18.78%

7.46%

-0.6

-1.40

-1.25%

28%

1.83%

3%

(IRL)

New Ireland Fund

Other Non-U.S. Equity

-14.08%

9.44%

-0.5

-1.33

-1.26%

0%

0.00%

-6%

(LCM)

Advent Claymore Enh Grth & Inc

Global Growth & Income

-11.54%

10.77%

-1.4

-1.24

-2.36%

28%

0.49%

6%

(GRF)

Eagle Capital Growth

U.S. General Equity

-16.18%

6.83%

-1.3

-1.11

-3.49%

0%

1.22%

1%

(INF)

Brookfield Glo List Infr Inc

Global Equity

-13.37%

8.02%

-1.2

-1.07

-1.53%

27%

1.89%

-2%

(DPG)

Duff & Phelps Global Utility

U.S. Utilities

-10.75%

9.60%

-0.5

-1.03

-0.57%

28%

1.53%

13%

(GLO)

Clough Global Opportunities

Global Growth & Income

-9.47%

10.86%

-0.5

-1.03

-0.99%

37%

2.27%

-4%

(EGIF)

Eagle Growth & Income Opportun

Global Growth & Income

-17.66%

5.73%

-1.4

-1.01

-2.89%

24%

2.23%

71%

(DNI)

Dividend and Income Fund

U.S. Growth & Income

-20.54%

4.85%

-1.4

-1.00

-2.07%

0%

1.77%

9%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-1528143355244195.png

Top 10 best D x Y (fixed income):

Ticker

Fund

Category

P/D

Y

Z

D x Y x Z

Dis

Lev

BE

Cov

(FSD)

First Trust High Inc Long/Shrt

High Yield

-13.41%

8.58%

-2.0

2.30

-4.91%

20%

1.18%

78%

(EMD)

Western Asset Emerg Mkts Debt

Emerging Market Income

-13.99%

8.86%

-1.6

1.98

-1.67%

22%

1.21%

99%

(FMY)

First Trust Mortgage Income

Mortgage Bonds

-11.49%

5.39%

-2.9

1.80

-2.83%

7%

1.20%

47%

(EHI)

Western Asset Global High Inc

Global Income

-12.48%

7.96%

-1.7

1.69

-1.63%

25%

1.25%

102%

(FAX)

Aberdeen Asia-Pacific Income

Global Income

-11.96%

9.35%

-1.4

1.57

-2.74%

29%

1.14%

52%

(ISD)

Prudential Sht Duration Hi Yld

High Yield

-13.44%

7.24%

-1.6

1.56

-2.80%

24%

1.00%

72%

(FT)

Franklin Universal Trust

Multisector Income

-13.94%

5.77%

-1.9

1.53

-1.36%

23%

1.12%

103%

(JGH)

Nuveen Global High Income

Global Income

-11.79%

9.16%

-1.4

1.51

-2.70%

30%

1.34%

93%

(FAM)

First Trust/Aberdeen Global

Global Income

-12.35%

8.66%

-1.4

1.50

-1.77%

27%

1.84%

86%

(NHS)

Neuberger Berman High Yield St

High Yield

-14.27%

7.22%

-1.4

1.44

-2.52%

32%

1.24%

115%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-1528143355442836.png

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):

Ticker

Fund

Category

P/D

Y

Z

D x Y x Z

Dis

Lev

BE

Cov

(NHF)

NexPoint Strategic Opps Fund

U.S. Growth & Income

-15.69%

10.85%

-3.0

5.11

-7.18%

15%

1.89%

6%

(FDEU)

First Trust Dynamic Europe Equ

Other Non-U.S. Equity

-8.09%

8.76%

-2.5

1.77

-4.06%

25%

1.60%

11%

(LCM)

Advent Claymore Enh Grth & Inc

Global Growth & Income

-11.54%

10.77%

-1.4

1.74

-2.36%

28%

0.49%

6%

(EMF)

Templeton Emerging Markets

Emerging Market Equity

-12.40%

7.24%

-1.7

1.53

-1.68%

0%

1.45%

0%

(THW)

Tekla World Healthcare Fund

U.S. Health/Biotech Equity

-9.11%

10.79%

-1.5

1.47

-2.34%

20%

1.54%

6%

(GRF)

Eagle Capital Growth

U.S. General Equity

-16.18%

6.83%

-1.3

1.44

-3.49%

0%

1.22%

1%

(EGIF)

Eagle Growth & Income Opportun

Global Growth & Income

-17.66%

5.73%

-1.4

1.42

-2.89%

24%

2.23%

71%

(DNI)

Dividend and Income Fund

U.S. Growth & Income

-20.54%

4.85%

-1.4

1.39

-2.07%

0%

1.77%

9%

(THQ)

Tekla Healthcare Oppos Fund

U.S. Health/Biotech Equity

-10.58%

8.03%

-1.6

1.36

-1.60%

20%

1.50%

11%

(INF)

Brookfield Glo List Infr Inc

Global Equity

-13.37%

8.02%

-1.2

1.29

-1.53%

27%

1.89%

-2%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433553988657.png

Top 10 best D x Y x Z (fixed income):

Ticker

Fund

Category

P/D

Y

Z

D x Y x Z

Dis

Lev

BE

Cov

(FSD)

First Trust High Inc Long/Shrt

High Yield

-13.41%

8.58%

-2.0

2.30

-4.91%

20%

1.18%

78%

(EMD)

Western Asset Emerg Mkts Debt

Emerging Market Income

-13.99%

8.86%

-1.6

1.98

-1.67%

22%

1.21%

99%

(FMY)

First Trust Mortgage Income

Mortgage Bonds

-11.49%

5.39%

-2.9

1.80

-2.83%

7%

1.20%

47%

(EHI)

Western Asset Global High Inc

Global Income

-12.48%

7.96%

-1.7

1.69

-1.63%

25%

1.25%

102%

(FAX)

Aberdeen Asia-Pacific Income

Global Income

-11.96%

9.35%

-1.4

1.57

-2.74%

29%

1.14%

52%

(ISD)

Prudential Sht Duration Hi Yld

High Yield

-13.44%

7.24%

-1.6

1.56

-2.80%

24%

1.00%

72%

(FT)

Franklin Universal Trust

Multisector Income

-13.94%

5.77%

-1.9

1.53

-1.36%

23%

1.12%

103%

(JGH)

Nuveen Global High Income

Global Income

-11.79%

9.16%

-1.4

1.51

-2.70%

30%

1.34%

93%

(FAM)

First Trust/Aberdeen Global

Global Income

-12.35%

8.66%

-1.4

1.50

-1.77%

27%

1.84%

86%

(NHS)

Neuberger Berman High Yield St

High Yield

-14.27%

7.22%

-1.4

1.44

-2.52%

32%

1.24%

115%

https://static.seekingalpha.com/uploads/2018/6/4/49181399-15281433554118373.png

6. Summary statistics

The average premium/discount of all the CEFs in the database is -5.91%, a slight increase from -6.02% in the previous month. Equity CEF discounts narrowed by 2 bps to -4.95%, while fixed income CEF discounts narrowed by 19 bps to -6.42%.

The average distribution yield of all the CEFs in the database is 6.70%, a slight decrease from 6.78% in the month prior. Equity CEFs average 7.81% yield, while fixed income CEFs average 6.10% yield.

The average 1-year z-score of all the CEFs in the database is -0.44, a moderate increase from -0.54 a month ago. Equity CEFs have an average z-score of +0.05, while fixed income CEFs have an average z-score of -0.71.

Commentary

In last month's commentary "The Chemist's CEF Report - May 2018: Fixed Income CEFs Continue To Get Cheaper Vs. Equity CEFs" we noted that fixed income CEFs continued to get cheaper relative to equity CEFs, at least in terms of average premium/discount values.

This month saw an abatement of the trend. Equity CEF discounts narrowed by 2 bps to -4.95%, while fixed income CEF discounts narrowed by 19 bps to -6.42%, meaning that the spread between equity CEFs and fixed income CEFs has also narrowed slightly, from 1.64% last month to 1.47% this month (equity CEFs more expensive).

Overall, CEF valuations appear to be recovering. The average discount has narrowed for the second month in a row, and its current value of -5.91% is the the highest since January 2018 (-4.71%). The current average 1-year z-score of -0.44 is also the highest since January 2018 (-0.18).

Let's now take a look at the premium/discount standard deviation [SD] chart again. We see that there has been a continual increase in the SD of the universe of databases, indicating increasing spread in valuations of CEFs. I have felt this anecdotally, with several groups of funds appearing to become extremely overvalued (e.g. Nuveen's option income CEFs) while others languish at wide discounts.

Here's the premium/discount history for the four Nuveen option CEFs, which are all at 5-year highs. Nuveen S&P 500 Dynamic Overwrite Fund (SPXX) and Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX) look particularly overvalued, but I would also not be a buyer of Nuveen S&P 500 Buy-Write Income Fund (BXMX) or Nuveen Dow 30 Dynamic Overwrite Fund (DIAX) either. Seeking Alpha contributor Douglas Albo has a recent article on these funds here.

Chart

SPXX Discount or Premium to NAV data by YCharts

The PIMCO taxable CEF complex is also becoming slightly overvalued as a group, although the lack of replacement funds makes their high valuations somewhat less inexplicable. (PHK, PGP and RCS are not shown below for clarity).

Chart

PTY Discount or Premium to NAV data by YCharts

The 10-2 spread continues to linger at lows, although still above the floor of 0.41% reached in April. On this basis, I expect that fixed income CEFs will continue to face headwinds in terms of their premium/discount valuation. In contrast, with stock markets roaring to new highs again, equity CEF valuations may remain extended for a while.

Chart

10-2 Year Treasury Yield Spread data by YCharts

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 June 2018, my top 3 picks are:

  • NexPoint Strategic Opportunities Fund (NHF): 10.85% yield, -15.69% discount, -3.0 z-score, -7.18% distance, 15% leverage, 1.89% baseline expense, 6% coverage.
  • First Trust Dynamic Europe Equity Income Fund (FDEU): 8.76% yield, -8.09% discount, -2.5 z-score, -4.06% distance, 25% leverage, 1.60% baseline expense, 11% coverage.
  • First Trust High Income Long/Short Fund (FSD): 8.58% yield, -13.41% discount, -2.0 z-score, -4.91% distance, 20% leverage, 1.18% baseline expense, 78% coverage.

NHF and FDEU are the top two D x Y x Z equity funds. NHF's dilutive rights offering recently closed (see NHF's Rights Offering Analysis), and I hope that its valuation will recover after the overhang subsides. We own NHF in all three of our model portfolios.

Chart

NHF data by YCharts

FDEU is a leveraged European equity fund that uses an option income strategy (about 30% coverage). I am not sure of any specific trigger causing its discount to widen to -8.09% (1-year z-score: -2.5), which is -4.06% lower than its 52-week average discount.

Chart

FDEU data by YCharts

The third pick is the high-yield CEF, FSD, which is ranked 1st in the fixed income D x Y x Z list. This is the third month in a row that this CEF has been picked, and it continues to get cheaper. While I have doubts about its long-term performance with its long/short strategy, it may be viable as as a short term mean reversion play.

Chart

FSD data by YCharts

For past performance of picks, see "Reflections On Chemist's CEF Report Pick Performance In 2017". Past performance is no guarantee of future results.

Disclosure: I am/we are long the portfolio securities. 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.