The Chemist's CEF Report - August 2018: Equity CEFs Starting To Come Down To Earth?

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Includes: ACV, ACWX, AEF, AOD, ASG, BGB, BGR, BHV, BQH, BST, BTZ, BWG, CAF, CCA, CCD, CEN, CET, CEV, CGO, CHI, CHY, CLM, CRF, CUBA, DDF, DMO, DNI, DNP, ECC, EDD, EDF, EDI, EEA, EGF, EGIF, EHT, EMD, EOD, EXD, FAM, FAX, FEO, FFA, FPL, FSD, FTF, FXBY, GAM, GCV, GDL, GDV, GFY, GGN, GHY, GOF, GPM, GUT, HNW, IAE, IGD, IHD, IIF, INF, IRL, JCE, JDD, JMLP, KMF, KST, KYE, LQD, MCR, MHE, MNE, MPA, MUJ, NBO, NBW, NCV, NCZ, NDP, NHS, NIE, NSL, NTG, NUM, NXJ, OPP, OXLC, PCI, PCN, PCQ, PDI, PEO, PGP, PHK, PPR, PTY, QQQX, RCS, RIF, RIV, RMT, SOR, SPY, TDF, TLI, TLT, TYG, VGI, VVR, YYY, ZF, ZTR
by: Stanford Chemist
Summary

Equity CEFs show a sharp decline in valuation this month.

Coverage and 1-year NAV columns moved to the middle of the tables.

Picks for August are NSL, HNW and KYE.

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 August 1, 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

Last month, we added a column for the 1-year NAV total return metric to our tables. However, the tables were getting to be quite large and some members found it difficult to access the coverage column that was located at the far right of the tables.

To remedy this, in this month's report I have moved both the "coverage" column and the "1Y NAV" column to the middle of the table so that these two popular metrics can be easily seen by members without having to scroll across the entire length of the table.

Are these changes helpful, and do you have any further suggestions? 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

Cov

1Y NAV

Dis

Lev

BE

(DNP)

DNP Select Income

U.S. Growth & Income

17.59%

7.13%

0.5

28%

2.22%

2.01%

26%

1.00%

(GUT)

Gabelli Utility Trust

U.S. Utilities

16.17%

10.31%

-1.4

-5%

1.50%

-11.88%

30%

1.75%

(ASG)

Liberty All-Star Growth

U.S. General Equity

15.73%

7.03%

2.5

-2%

17.04%

14.54%

0%

1.22%

(GOF)

Guggenheim Strategic Opp Fund

U.S. Growth & Income

14.54%

10.02%

1.9

63%

7.75%

6.00%

21%

1.61%

(GCV)

Gabelli Convertible & Income

U.S. Growth & Income

13.48%

7.38%

1.8

-3%

10.02%

8.84%

24%

1.91%

(CGO)

Calamos Global Total Return

Global Growth & Income

12.66%

8.27%

1.8

16%

8.86%

5.90%

30%

1.59%

(CRF)

Cornerstone Total Return

U.S. General Equity

10.81%

19.79%

-1.1

2%

19.25%

-5.41%

0%

1.20%

(CLM)

Cornerstone Strategic Value

U.S. General Equity

8.95%

20.10%

-1.2

1%

18.60%

-5.08%

0%

1.19%

(DDF)

Delaware Inv Div & Inc

U.S. Growth & Income

6.90%

9.24%

3.0

27%

8.59%

13.76%

30%

1.14%

(BST)

BlackRock Science and Technolo

Global Equity

6.60%

5.26%

0.9

-4%

31.15%

6.97%

0%

1.07%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192782406294.png

Top 10 highest discounts equity:

Ticker

Fund

P/D

Y

Z

Cov

1Y NAV

Dis

Lev

BE

(OTCPK:FXBY)

Foxby Corp

-28.80%

0.45%

0.2

#DIV/0!

10.80%

0.36%

0%

2.51%

(DNI)

Dividend and Income Fund

-22.34%

4.91%

-1.8

9%

-10.44%

-3.25%

0%

1.43%

(RIF)

RMR Real Estate Income Fund

-18.84%

7.27%

-0.5

0%

-7.84%

-0.75%

28%

1.90%

(CUBA)

Herzfeld Caribbean Basin

-18.80%

1.75%

-1.6

-6%

-2.31%

-3.15%

0%

3.30%

(GDL)

GDL Fund

-18.50%

4.37%

-1.4

-20%

-0.97%

-3.00%

38%

1.74%

(CET)

Central Securities Corporation

-17.78%

3.70%

0.2

9%

14.16%

-0.66%

0%

0.73%

(EGIF)

Eagle Growth & Income Opportun

-17.42%

5.66%

-1.0

71%

1.38%

-1.86%

24%

2.07%

(CAF)

MS China A Share

-16.91%

5.56%

-1.2

0%

6.76%

-2.56%

0%

1.75%

(GAM)

General American Investors

-16.61%

2.75%

-1.9

11%

12.68%

-1.00%

15%

1.23%

(PEO)

Adams Natural Resources

-16.25%

2.47%

-1.6

34%

15.74%

-1.30%

1%

0.77%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192783811195.png

Top 10 highest premia fixed income:

Ticker

Fund

Category

P/D

Y

Z

Cov

1Y NAV

Dis

Lev

BE

(PGP)

PIMCO Global StocksPLUS & Inc

Multisector Income

41.36%

9.63%

0.5

79%

9.00%

5.33%

32%

1.89%

(RCS)

PIMCO Strategic Income Fund

Global Income

34.93%

8.78%

1.6

92%

5.01%

10.99%

64%

0.98%

(PHK)

PIMCO High Income Fund

Multisector Income

33.03%

11.16%

2.1

65%

8.66%

14.32%

24%

0.96%

(PCQ)

PIMCO CA Municipal Income

California Munis

24.67%

5.45%

1.2

93%

1.98%

6.34%

47%

1.15%

(PCN)

PIMCO Corporate & Income Strgy

Investment Grade

21.04%

7.50%

2.1

86%

5.93%

7.71%

22%

1.01%

(PTY)

PIMCO Corporate & Income Opps

Investment Grade

20.15%

8.64%

1.6

77%

10.12%

5.59%

30%

0.86%

(PDI)

PIMCO Dynamic Income Fund

Multisector Income

12.86%

8.04%

2.7

117%

12.16%

6.76%

45%

2.13%

(NCV)

AGIC Convertible & Income

Multisector Income

12.08%

11.03%

2.4

82%

4.45%

4.91%

38%

1.21%

(EDF)

Stone Harbor Emerging Mkts FI

Emerging Market Income

11.96%

15.52%

0.9

66%

-2.27%

2.49%

32%

1.84%

(BHV)

BlackRock VA Municipal Bond

Virginia Munis

10.82%

4.53%

0.1

88%

0.71%

0.41%

40%

1.78%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192784615035.png

Top 10 highest discounts fixed income:

Ticker

Fund

Category

P/D

Y

Z

Cov

1Y NAV

Dis

Lev

BE

(CCA)

MFS California Municipal Fund

California Munis

-16.24%

4.58%

-1.4

112%

0.72%

-6.12%

41%

1.76%

(NUM)

Nuveen MI Quality Muni Income

Michigan Munis

-15.93%

4.23%

-1.2

102%

0.86%

-2.20%

38%

1.00%

(NXJ)

Nuveen NJ Quality Muni Income

New Jersey Munis

-15.88%

5.02%

-1.4

101%

3.13%

-1.67%

39%

0.98%

(MNE)

BlackRock Muni NY Intermed. Du

New York Munis

-15.81%

3.81%

-1.5

105%

0.21%

-3.23%

38%

1.23%

(GHY)

PGIM Global Short Dur Hi

High Yield

-15.73%

7.27%

-1.6

76%

3.97%

-3.23%

27%

1.25%

(BQH)

BlackRock NY Municipal Bond

New York Munis

-15.67%

4.24%

-1.3

104%

0.27%

-4.31%

40%

1.37%

(NBW)

Neuberger Berman CA Inter Muni

California Munis

-15.55%

4.29%

-1.6

98%

1.21%

-4.68%

41%

1.28%

(NBO)

Neuberger Berman NY Inter Muni

New York Munis

-15.54%

4.09%

-1.4

107%

0.15%

-2.36%

40%

1.31%

(CEV)

EV CA Municipal Income

California Munis

-15.47%

3.90%

-1.1

96%

-0.36%

-2.24%

36%

1.44%

(MUJ)

BlackRock MuniHoldings NJ Qty

New Jersey Munis

-15.38%

4.87%

-1.8

107%

3.02%

-5.29%

40%

0.90%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192785215213.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

Cov

1Y NAV

Dis

Lev

BE

(RMT)

Royce Micro Cap Trust

U.S. General Equity

3.2

-4.65%

6.89%

4%

19.53%

5.25%

11%

0.62%

(DDF)

Delaware Inv Div & Inc

U.S. Growth & Income

3.0

6.90%

9.24%

27%

8.59%

13.76%

30%

1.14%

(GPM)

Guggenheim Enhanced Equity Inc

Covered Call

2.6

2.08%

10.92%

2%

10.43%

3.68%

31%

1.37%

(NIE)

AGIC Equity & Convertible Inc

U.S. Growth & Income

2.5

-5.33%

6.61%

5%

16.44%

3.41%

0%

1.06%

(GDV)

Gabelli Dividend & Income

U.S. Tax-Advantaged Equity

2.5

-4.56%

5.55%

-1%

10.50%

2.34%

23%

1.38%

(JCE)

Nuveen Core Equity Alpha

U.S. General Equity

2.5

1.41%

7.30%

7%

11.87%

3.04%

0%

1.02%

(ASG)

Liberty All-Star Growth

U.S. General Equity

2.5

15.73%

7.03%

-2%

17.04%

14.54%

0%

1.22%

(IGD)

Voya Glb Eqty Div & Prem Opps

Covered Call

2.4

-0.90%

9.54%

14%

2.55%

4.20%

0%

1.22%

(BGR)

BlackRock Energy & Resources

U.S. Energy/Resources Equity

2.3

-4.03%

6.02%

59%

17.85%

3.89%

0%

1.29%

(FFA)

First Trust Enhanced Equity In

Covered Call

2.3

-0.55%

6.99%

6%

9.04%

4.98%

0%

1.13%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192785602086.png

Top 10 lowest z-scores equity:

Ticker

Fund

Category

Z

P/D

Y

Cov

1Y NAV

Dis

Lev

BE

(JMLP)

Nuveen All Cap Energy MLP Opps

MLPs

-3.2

-6.79%

9.58%

0%

2.37%

-5.80%

25%

1.69%

(SOR)

Source Capital Inc

U.S. General Equity

-3.0

-12.00%

2.48%

16%

7.76%

-1.88%

0%

0.90%

(EEA)

European Equity Fund

Other Non-U.S. Equity

-2.8

-13.41%

0.67%

-16%

5.77%

-3.07%

0%

1.41%

(IAE)

Voya Asia Pacific High Dividen

Asia Equity

-2.5

-12.62%

8.70%

6%

-1.94%

-3.04%

0%

1.32%

(AOD)

Aberdeen Total Dynamic Dividen

Global Equity Dividend

-2.5

-12.33%

7.74%

117%

10.09%

-2.77%

9%

1.15%

(KYE)

Kayne Anderson Energy TR

MLPs

-2.4

-10.15%

10.48%

0%

-3.42%

-3.62%

30%

2.10%

(JDD)

Nuveen Diversified Div & Inc

Global Growth & Income

-2.3

-7.68%

5.95%

20%

2.93%

-5.75%

32%

1.40%

(AEF)

Aberdeen Emerg Mkt Equity Inc

Latin American Eequity

-2.3

-13.73%

6.67%

-1%

10.98%

-4.77%

0%

2.00%

(KMF)

Kayne Anderson MidstreamEnergy

MLPs

-2.2

-10.47%

9.16%

0%

-2.52%

-3.63%

30%

2.14%

(NTG)

Tortoise MLP Fund

MLPs

-2.2

-5.47%

10.85%

0%

-3.52%

-9.00%

33%

1.76%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192785983171.png

Top 10 highest z-scores fixed income:

CEF

Fund

Category

Z

P/D

Y

Cov

1Y NAV

Dis

Lev

BE

(CHI)

Calamos Convertible Opps & Inc

Multisector Income

2.8

9.50%

9.41%

49%

9.07%

7.40%

32%

1.23%

(CCD)

Calamos Dynamic Conv & Income

Multisector Income

2.8

4.47%

8.99%

41%

10.81%

5.96%

31%

1.50%

(PDI)

PIMCO Dynamic Income Fund

Multisector Income

2.7

12.86%

8.04%

117%

12.16%

6.76%

45%

2.13%

(PCI)

PIMCO Dynamic Credit Income

Multisector Income

2.5

1.13%

8.14%

95%

11.86%

4.67%

45%

2.10%

(NCV)

AllianzGI Divers Inc & Convert

Multisector Income

2.4

3.72%

8.27%

10%

14.97%

6.46%

30%

1.61%

(ACV)

AGIC Convertible & Income

Multisector Income

2.4

12.08%

11.03%

82%

4.45%

4.91%

38%

1.21%

(CHY)

Calamos Convertible & High

Multisector Income

2.4

10.46%

9.30%

49%

9.14%

8.34%

32%

1.23%

(KST)

Deutsche Strategic Income

Global Income

2.3

-2.14%

4.24%

110%

0.82%

1.60%

26%

1.69%

(BGB)

Blackstone/GSO Strategic Cred

Senior Loan

2.2

-5.34%

7.88%

94%

5.93%

1.25%

36%

2.02%

(PCN)

AGIC Convertible & Income II

Multisector Income

2.1

7.26%

11.33%

49%

4.44%

2.39%

38%

1.24%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192786894088.png

Top 10 lowest z-scores fixed income:

CEF

Fund

Category

Z

P/D

Y

Cov

1Y NAV

Dis

Lev

BE

(EHT)

EV High Inc 2021 Target Term

High Yield

-3.1

-4.49%

5.96%

87%

2.30%

-2.48%

25%

1.02%

(GFY)

Western Asset Variable Rate

Multisector Income

-2.8

-10.02%

5.66%

95%

5.32%

-2.97%

23%

1.25%

(NSL)

Nuveen Senior Income

Senior Loan

-2.7

-10.72%

6.53%

101%

5.93%

-5.64%

37%

1.44%

(PPR)

Voya Prime Rate Trust

Senior Loan

-2.6

-12.37%

5.85%

86%

3.27%

-2.88%

28%

1.63%

(MHE)

Massachusetts Tax-Exempt Trust

Massachusetts Equity

-2.5

-5.53%

4.18%

102%

0.37%

-5.21%

39%

1.12%

(VVR)

Invesco Senior Income

Senior Loan

-2.3

-12.42%

5.45%

102%

5.22%

-2.54%

29%

1.60%

(TLI)

Western Asset Corporate Loan

Senior Loan

-2.3

-11.50%

6.37%

95%

4.06%

-4.07%

32%

1.42%

(DMO)

Western Asset Mortgage Def Opp

Mortgage Bonds

-2.2

6.73%

10.12%

16%

13.18%

-8.72%

31%

1.61%

(EGF)

BlackRock Enhanced Gov Fund

Mortgage Bonds

-2.2

-5.58%

3.86%

61%

0.01%

-0.92%

14%

1.18%

(MPA)

BlackRock MuniYield PA Quality

Pennsylvania Munis

-2.2

-13.35%

5.02%

96%

1.65%

-3.82%

40%

0.88%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192787564495.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

Cov

1Y NAV

Dis

Lev

BE

(CLM)

Cornerstone Strategic Value

U.S. General Equity

20.10%

8.95%

-1.2

1%

18.60%

-5.08%

0%

1.19%

(CRF)

Cornerstone Total Return

U.S. General Equity

19.79%

10.81%

-1.1

2%

19.25%

-5.41%

0%

1.20%

(ZF)

Virtus Total Return Fund Inc.

Global Growth & Income

13.56%

-5.49%

-0.5

10%

-5.47%

-1.02%

26%

1.92%

(CEN)

Center Coast MLP & Infras

MLPs

13.45%

-1.69%

-0.9

0%

-5.96%

-3.33%

35%

2.12%

(NDP)

Tortoise Energy Independence F

MLPs

13.40%

3.57%

0.7

0%

6.90%

2.31%

25%

1.69%

(RIV)

RiverNorth Opportunities Fund

U.S. Growth & Income

13.24%

0.21%

-0.9

41%

3.76%

-3.80%

0%

1.74%

(EOD)

Wells Fargo Adv Glo Div Opp

Global Equity Dividend

11.95%

-8.53%

-1.8

11%

-1.01%

-1.86%

14%

1.17%

(GGN)

GAMCO Glb Gold Natural Res&Inc

U.S. Energy/Resources Equity

11.86%

1.20%

0.9

7%

0.41%

1.75%

11%

1.29%

(FPL)

First Trust New Opps MLP & En

MLPs

11.70%

1.52%

-0.3

0%

-9.80%

-1.81%

25%

1.60%

(ZTR)

Virtus Global Div & Inc Fund

U.S. Growth & Income

11.59%

4.84%

1.0

23%

-3.00%

2.61%

28%

1.56%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192788496914.png

Top 10 highest yields fixed income:

Ticker

Fund

Category

Y

P/D

Z

Cov

1Y NAV

Dis

Lev

BE

(EDF)

Stone Harbor Emerging Mkts FI

Emerging Market Income

15.52%

11.96%

0.9

66%

-2.27%

2.49%

32%

1.84%

(OXLC)

Oxford Lane Capital Corp

Senior Loan

14.59%

9.82%

1.3

0%

11.40%

5.68%

38%

4.35%

(EDI)

Stone Harbor Emg Mkts Total In

Emerging Market Income

13.33%

3.19%

1.2

80%

-2.66%

2.46%

32%

1.94%

(ECC)

Eagle Point Credit Company LLC

Senior Loan

13.09%

10.02%

-0.5

74%

12.84%

-2.79%

31%

3.29%

(NCZ)

AGIC Convertible & Income II

Multisector Income

11.33%

7.26%

2.1

49%

4.44%

2.39%

38%

1.24%

(PHK)

PIMCO High Income Fund

Multisector Income

11.16%

33.03%

2.1

65%

8.66%

14.32%

24%

0.96%

(VGI)

Virtus Global Multi-Sector Inc

Multisector Income

11.12%

-6.14%

-1.6

57%

-6.23%

-6.49%

26%

1.74%

(NCV)

AGIC Convertible & Income

Multisector Income

11.03%

12.08%

2.4

82%

4.45%

4.91%

38%

1.21%

(FTF)

Franklin Limited Duration Inco

Limited Duration

10.60%

-3.02%

1.9

33%

0.45%

2.80%

24%

0.76%

(OPP)

RiverNorth/DoubleLine Strategi

Multisector Income

10.42%

-6.41%

-0.2

68%

1.15%

-0.15%

24%

1.27%

https://static.seekingalpha.com/uploads/2018/7/4/49181399-15306981398339581.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

Cov

1Y NAV

D x Y

Dis

Lev

BE

(IRL)

New Ireland Fund

Other Non-U.S. Equity

-15.25%

10.29%

-0.8

1%

-7.34%

-1.57

-1.72%

0%

1.99%

(RIF)

RMR Real Estate Income Fund

U.S. Real Estate

-18.84%

7.27%

-0.5

0%

-7.84%

-1.37

-0.75%

28%

1.90%

(LCM)

Advent Claymore Enh Grth & Inc

Global Growth & Income

-12.03%

10.80%

-1.6

4%

1.52%

-1.30

-2.04%

28%

2.05%

(IIF)

MS India Investment

Asia Equity

-10.78%

10.92%

0.0

0%

-4.79%

-1.18

-0.03%

0%

1.43%

(TDF)

Templeton Dragon Fund

Asia Equity

-13.44%

8.74%

-0.6

1%

10.72%

-1.17

-0.88%

0%

1.34%

(IHD)

Voya Emerging Market High Div.

Emerging Market Equity

-12.10%

9.36%

-2.1

3%

-0.38%

-1.13

-6.15%

0%

1.43%

(IAE)

Voya Asia Pacific High Dividen

Asia Equity

-12.62%

8.70%

-2.5

6%

-1.94%

-1.10

-3.04%

0%

1.32%

(DNI)

Dividend and Income Fund

U.S. Growth & Income

-22.34%

4.91%

-1.8

9%

-10.44%

-1.10

-3.25%

0%

1.43%

(INF)

Brookfield Glo List Infr Inc

Global Equity

-13.86%

7.87%

-0.7

-2%

1.24%

-1.09

-1.32%

27%

1.88%

(FEO)

First Trust/Aberdeen Emerging

Global Growth & Income

-11.04%

9.87%

-1.0

18%

-4.28%

-1.09

-1.99%

6%

1.62%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192792064505.png

Top 10 best D x Y fixed income:

Ticker

Fund

Category

P/D

Y

Z

Cov

1Y NAV

D x Y

Dis

Lev

BE

(EMD)

Western Asset Emerg Mkts Debt

Emerging Market Income

-14.17%

8.84%

-1.4

99%

-3.41%

-1.25

-1.43%

21.7%

1.20%

(FAX)

Aberdeen Asia-Pacific Income

Global Income

-12.75%

9.77%

-1.5

48%

-4.38%

-1.25

-2.93%

29.5%

1.14%

(FSD)

First Trust High Inc Long/Shrt

High Yield

-13.89%

8.59%

-1.4

75%

0.39%

-1.19

-4.13%

19.8%

1.18%

(HNW)

Pioneer Diversified High Inc

High Yield

-14.77%

7.94%

-1.6

109%

1.76%

-1.17

-4.35%

30.6%

1.47%

(AGC)

Advent Claymore Cnvt Secs&Inc

Convertibles

-11.55%

10.09%

-1.2

28%

1.77%

-1.17

-1.74%

40.9%

2.09%

(GHY)

PGIM Global Short Dur Hi

High Yield

-15.73%

7.27%

-1.6

76%

3.97%

-1.14

-3.23%

27.2%

1.25%

(EDD)

MS Emerging Markets Domestic

Emerging Market Income

-13.11%

8.71%

-0.2

39%

-5.92%

-1.14

-0.60%

31.8%

1.75%

(FAM)

First Trust/Aberdeen Global

Global Income

-13.68%

8.29%

-1.6

92%

-3.40%

-1.13

-2.28%

27.4%

1.83%

(BWG)

BrandywineGLOBAL-Gl Inc opps

Global Income

-14.03%

8.01%

-0.7

102%

-6.78%

-1.12

-0.58%

36.7%

1.53%

(NHS)

Neuberger Berman High Yield St

High Yield

-15.25%

7.27%

-1.5

115%

0.90%

-1.11

-2.96%

32.2%

1.24%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192792545207.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

Cov

1Y NAV

D x Y x Z

Dis

Lev

BE

(IAE)

Voya Asia Pacific High Dividen

Asia Equity

-12.62%

8.70%

-2.5

6%

-1.94%

2.74

-3.04%

0%

1.32%

(KYE)

Kayne Anderson Energy TR

MLPs

-10.15%

10.48%

-2.4

0%

-3.42%

2.55

-3.62%

30%

2.10%

(AOD)

Aberdeen Total Dynamic Dividen

Global Equity Dividend

-12.33%

7.74%

-2.5

117%

10.09%

2.39

-2.77%

9%

1.15%

(IHD)

Voya Emerging Market High Div.

Emerging Market Equity

-12.10%

9.36%

-2.1

3%

-0.38%

2.38

-6.15%

0%

1.43%

(KMF)

Kayne Anderson MidstreamEnergy

MLPs

-10.47%

9.16%

-2.2

0%

-2.52%

2.11

-3.63%

30%

2.14%

(AEF)

Aberdeen Emerg Mkt Equity Inc

Latin American Eequity

-13.73%

6.67%

-2.3

-1%

10.98%

2.11

-4.77%

0%

2.00%

(JMLP)

Nuveen All Cap Energy MLP Opps

MLPs

-6.79%

9.58%

-3.2

0%

2.37%

2.08

-5.80%

25%

1.69%

(LCM)

Advent Claymore Enh Grth & Inc

Global Growth & Income

-12.03%

10.80%

-1.6

4%

1.52%

2.08

-2.04%

28%

2.05%

(DNI)

Dividend and Income Fund

U.S. Growth & Income

-22.34%

4.91%

-1.8

9%

-10.44%

1.97

-3.25%

0%

1.43%

(EOD)

Wells Fargo Adv Glo Div Opp

Global Equity Dividend

-8.53%

11.95%

-1.8

11%

-1.01%

1.83

-1.86%

14%

1.17%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192792415268.png

Top 10 best D x Y x Z fixed income:

Ticker

Fund

Category

P/D

Y

Z

Cov

1Y NAV

D x Y x Z

Dis

Lev

BE

(MCR)

MFS Charter Income

Global Income

-10.63%

8.96%

-2.0

49%

1.11%

1.90

-1.87%

18%

0.69%

(NSL)

Nuveen Senior Income

Senior Loan

-10.72%

6.53%

-2.7

101%

5.93%

1.89

-5.64%

37%

1.44%

(PPR)

Voya Prime Rate Trust

Senior Loan

-12.37%

5.85%

-2.6

86%

3.27%

1.88

-2.88%

28%

1.63%

(HNW)

Pioneer Diversified High Inc

High Yield

-14.77%

7.94%

-1.6

109%

1.76%

1.88

-4.35%

31%

1.47%

(FAX)

Aberdeen Asia-Pacific Income

Global Income

-12.75%

9.77%

-1.5

48%

-4.38%

1.87

-2.93%

29%

1.14%

(BTZ)

BlackRock Credit Alloc Income

Investment Grade

-14.03%

6.62%

-2.0

101%

0.48%

1.86

-2.90%

22%

0.86%

(GHY)

PGIM Global Short Dur Hi

High Yield

-15.73%

7.27%

-1.6

76%

3.97%

1.83

-3.23%

27%

1.25%

(EXD)

EV Tax-Advantaged Bond&Option

Government Bonds

-14.29%

7.06%

-1.8

5%

-8.10%

1.82

-6.07%

0%

1.44%

(FAM)

First Trust/Aberdeen Global

Global Income

-13.68%

8.29%

-1.6

92%

-3.40%

1.81

-2.28%

27%

1.83%

(EMD)

Western Asset Emerg Mkts Debt

Emerging Market Income

-14.17%

8.84%

-1.4

99%

-3.41%

1.75

-1.43%

22%

1.20%

https://static.seekingalpha.com/uploads/2018/8/1/49181399-15331192792828774.png

6. Summary statistics

The average premium/discount of all the CEFs in the database is -6.29%, a slight decrease from -5.94% in the previous month. Equity CEF discounts widened by 83 bps to -5.89%, while fixed income CEF discounts widened by 9 bps to -6.52%.

The average distribution yield of all the CEFs in the database is 6.62%, a slight decrease from 6.67% in the month prior. Equity CEFs average 7.69% yield, while fixed income CEFs average 6.03% yield.

The average 1-year z-score of all the CEFs in the database is -0.47, a moderate decrease from -0.32 a month ago. Equity CEFs have an average z-score of -0.23, while fixed income CEFs have an average z-score of -0.60.

Commentary

In last month's commentary "The Chemist's CEF Report - July 2018: Treasury Yield Spread Continues To Narrowing," we remarked that the gap between equity CEFs and fixed income CEFs (equity CEFs being more expensive) had narrowed for the second month in a row. I wrote:

However, my own feeling is that the unusually high valuation of equity CEFs is temporary rather than long-lived, so investors should lean towards being sellers of overvalued equity CEFs rather than being buyers.

That prediction turned out to be timely. Equity CEFs saw a big decrease in valuation this month, dropping 83 bps from -5.06% to -5.89%, and the gap with fixed income CEFs has narrowed to 0.63%, the lowest since February.

Examples of equity funds that have lost significant premium last month include Nuveen Nasdaq 100 Dynamic Overwrite Fund (QQQX), down -6.80% in market price last month, and RiverNorth Opportunities Fund (RIV), down -7.13% last month, even while their NAVs were flat or increasing. This serves as (yet) another reminder that buying funds at a significant premium runs a real risk of experiencing capital loss if the premium reverses. Remember, one can always rotate out of an overvalued CEF into an undervalued CEF, keep collecting the distributions (just from a different fund), and rotate back when the valuation difference reverts, allowing one to "compound income on steroids."

Chart

QQQX

data by

YChartsThe standard deviation (a measure of spread) of the CEFs in the database edged up this month again, and remains at a 12-month high. This is good news for the more active CEF investors among us because it means that there's a wider variance in valuation of the funds, with some being highly overvalued while others are highly undervalued, opening up the possibility for CEF rotation trades.

In the broader markets, this month saw a resurgence in U.S. stocks (SPY) which gained +4.02% this month, while international stocks (ACWX) rebounded with a +2.81% gain. High-yield bonds (NYSEARCA:LQD) (+1.74%) and corporate bonds (LQD) (+1.32%) both saw decent gains, and the only loser among the major asset classes were treasuries (NYSEARCA:TLT) with a -1.47% decline. A basket of high-yielding CEFs (NYSEARCA:YYY) returned +1.54%.

Chart

SPY Total Return Price

data by

YCharts

The 10-2 treasury spread plunged to as low as 0.23% in the middle of last month, before rebounding to its current level of 0.33% (a few bps higher than at the start of last month).

I've remarked a few times that leveraged muni funds are harder hit by narrowing spreads than say high-yield bond funds, but why is this? Take a look at the movement of the yields of the 3-month LIBOR, a commonly used funding benchmark, and the US High Yield Master II index. The 3-month LIBOR has increased by about 100 bps over the past year, from about 1.30% to 2.34%, while the effective yield of the High Yield Master II index has increased by about 90 bps, from about 5.40% to 6.31%. This means that for a leveraged high yield bond fund, the spread between the rate at which interest is earned and the rate at which interest expenses are paid has declined from 4.10% to 3.97% over the past year, a -3.2% decrease in relative percentage terms.

Chart

3-Month LIBOR based on US Dollar

data by

YCharts

In contrast, the BVAL 10-year muni benchmark yield has gone up by only 87 bps, from 1.87% last year to 2.51% today. A leveraged muni fund borrowing at 3-month LIBOR has therefore seen a decline in spread from 0.57% last year to 0.17% today, a -70% decrease in relative percentage terms. Mathematically speaking, the percentage decrease is greater when a small number is subtracted from an already small number (the muni/LIBOR spread) compared to when a small number is subtracted from a larger number (the high-yield/LIBOR spread). This is why muni CEFs have been the hardest and most frequent cutters of distributions over the past year.

If in the near future. the 3-month LIBOR rate (currently 2.34%) exceeds the benchmark muni rate (2.51%), it may be possible for a situation to exist where leverage becomes counterproductive for muni funds, since funds will be paying more in interest expenses on the debt used to fund the leverage, than the interest earned from the leveraged assets themselves. Will CEF managers attempt to delever when this situation arises? Given that management fees are usually charged on total assets, I wouldn't hold my breath...

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 August 2018, my top 3 picks are:

  • Nuveen Senior Income Fund (NSL): 6.55% yield, -11.27% discount, -2.8 z-score, -5.64% distance, 18% leverage, 0.69% baseline expense, 101% coverage.
  • Pioneer Diversified High Income Trust (HNW): 7.91% yield, -14.52% discount, -1.5 z-score, -4.35% distance, 31% leverage, 1.47% baseline expense, 109% coverage.
  • Kayne Anderson Energy Total Return Fund (KYE): 10.17% yield, -10.47% discount, -2.4 z-score, -3.62% distance, 30% leverage, 2.10% baseline expense, 0% coverage.

These funds were all picked out from the top D x Y x Z lists.

NSL, a $267 million senior loan fund from Nuveen, has seen a significant divergence in its price (-7.39%) and NAV (+1.02%) over the last month, and its current discount value of -11.27% is -5.64% below its 52-week average discount. NSL ranked 2nd in the fixed income D x Y x Z list.

The poor price performance may be due to the fact that NSL has had to cut its distribution twice in the last 12 months, which is a little surprising since rising rates should have benefited the floating rate debt in NSL's portfolio. Its current coverage is 101%, so the current distribution is covered, but only just.

NSL has actually outperformed the senior loan category peer group over the recent time periods (3 month, 6 month, 1 year and 3 years), although it lags over 5 years. It then outperforms the peer group over 10 years and since inception. Overall, this appears to be a good time to buy NSL should one desire more senior loan exposure.

HNW is a diversified high income CEF with $140 million in AUM from Pioneer Investments (now part of Amundi). It ranked 4th in the fixed income D x Y x Z list. While its categorizes in the "high yield leveraged" category in CEFConnect, it actually contains a diversified portfolio of income instruments. According to their latest factsheet, the 3 largest sector weights were bank loans (aka senior loans) at 27.6%, high yield bonds at 26.5%, and event-linked bonds at 17.4%. An event-linked bond (also known as catastrophe bonds) "is a type of bond whose interest and principal payments are determined based on the non-occurrence of certain events that can cause extraordinary losses, such as earthquakes and hurricanes."

The last 3 months has also seen a divergence between the price and NAV of HNW.

HNW's current discount of -14.52% is nearly as wide as it was during the late 2015/early 2016 oil-induced credit crisis (which was itself a multi-year low, not seen since the Great Recession).

HNW reduced its distribution just once last year, but it was a massive cut of -17.4% (from $0.1150 to $0.0950 monthly). The current coverage is 109% so the 7.91% yield appears to be safe for now, with all the usual caveats.

The last pick is a $403 million energy fund from Kayne Anderson, KYE, which ranked 2nd in the equity D x Y x Z list. While KYE is categorized by CEFConnect as an "MLP" fund, it actually holds fewer than 25% in MLPs in order to maintain RIC status, with most of its other allocation going to midstream companies.

This fund has also seen a divergence in its price and NAV returns over the past several months, and its valuation metrics are attractive, with its current discount of -10.47% significantly below its 1, 3 and 5-year historical averages. Note that since KYE is a structured as a RIC and not as a C-corp (which "pure" MLP CEFs are structured as), it does not suffer from tax drag arising from the accrual of deferred tax liabilities. As a result, its -10.47% discount is really just a -10.47% discount (and not any wider).

Chart

KYE data by YCharts

For past performance of picks, see "Chemist's CEF Report Picks 2018 H1 Performance: 6 Out Of 6 Over Benchmark." Past performance is no guarantee of future results.

Note: This report was released to members of CEF/ETF Income Laboratory 1 month ago, so data may be out of date. Please check latest data before investing.

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.