The Chemist's CEF Report - September 2018: Equity And Fixed Income CEF Valuations Back To Par

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Includes: ACV, ACWX, AEF, AKP, AOD, APB, ARDC, ASG, BGB, BGR, BHV, BIF, BQH, BST, BTZ, BUI, BWG, CAF, CCA, CCD, CEN, CET, CEV, CGO, CHI, CHY, CLM, CRF, CUBA, DDF, DMO, DNI, DNP, DPG, DSE, ECC, EDD, EDF, EDI, EEA, EFR, EGF, EGIF, EHT, EMD, EMO, EOD, EVG, EXD, EXG, FAM, FAX, FEI, FEN, FEO, FFA, FPL, FSD, FT, FTF, FXBY, GAM, GCV, GDL, GDV, GFY, GGN, GGZ, GHY, GOF, GPM, GUT, HIX, HNW, HPI, HPS, HTY, HYB, IAE, IGD, IHD, IIF, INF, IRL, JCE, JDD, JMF, JMLP, JMT, JNK, JPT, JRO, JSD, JTA, KMF, KST, KYE, LDF, LQD, MCR, MHE, MNE, MPA, MUJ, NBO, NBW, NCV, NCZ, NDP, NHS, NIE, NKG, NSL, NTG, NUM, NXJ, OPP, OXLC, PCI, PCM, PCN, PCQ, PDI, PEO, PGP, PHK, PHYS, PPR, PTY, PZC, RCS, RIF, RIV, RMT, SMM, SOR, SPY, SRF, SWZ, TDF, TLI, TLT, TYG, VGI, VPV, VTA, VVR, YYY, ZF, ZTR
by: Stanford Chemist
Summary

Equity and fixed income CEF valuations are back to par.

10-2 spread continues to narrow.

Picks for September are KMF, NSL and IHD.

For the inaugural issue of The Chemist's Closed-End Fund Report (September 2016), describing the background and rationale of the Report, please click here.

This edition uses data taken from the close of August 31, 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

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

17.30%

7.07%

0.4

28%

0.79%

1.38%

26%

1.00%

(GUT)

Gabelli Utility Trust

U.S. Utilities

16.27%

10.24%

-1.2

4%

1.37%

-10.73%

30%

1.75%

(GOF)

Guggenheim Strategic Opp Fund

U.S. Growth & Income

14.98%

9.96%

1.6

50%

8.01%

5.71%

0%

1.28%

(CGO)

Calamos Global Total Return

Global Growth & Income

14.68%

8.00%

1.7

16%

9.88%

6.73%

30%

1.59%

(CRF)

Cornerstone Total Return

U.S. General Equity

14.08%

19.36%

-0.5

5%

19.58%

-2.26%

0%

1.20%

(GCV)

Gabelli Convertible & Income

U.S. Growth & Income

13.97%

7.26%

1.6

0%

13.56%

7.64%

24%

1.91%

(CLM)

Cornerstone Strategic Value

U.S. General Equity

10.71%

19.89%

-0.8

5%

19.46%

-3.36%

0%

1.19%

(DDF)

Delaware Inv Div & Inc

U.S. Growth & Income

9.44%

8.88%

2.4

26%

13.30%

14.69%

31%

1.14%

(ASG)

Liberty All-Star Growth

U.S. General Equity

9.21%

6.98%

1.1

-2%

27.70%

6.49%

1%

1.22%

(NDP)

Tortoise Energy Independence F

MLPs

7.91%

13.79%

2.2

0%

14.74%

6.74%

25%

1.69%

Top 10 highest discounts equity:

Ticker

Fund

Category

P/D

Y

Z

Cov

1Y NAV

Dis

Lev

BE

(OTCPK:FXBY)

Foxby Corp

U.S. General Equity

-31.65%

0.46%

-1.0

#DIV/0!

14.91%

-2.35%

0%

2.51%

(DNI)

Dividend and Income Fund

U.S. Growth & Income

-22.91%

4.85%

-1.7

9%

-7.35%

-3.27%

0%

1.43%

(RIF)

RMR Real Estate Income Fund

U.S. Real Estate

-19.79%

6.91%

-1.0

33%

0.11%

-1.50%

31%

1.90%

(CUBA)

Herzfeld Caribbean Basin

Latin American Eequity

-19.13%

1.82%

-1.8

-9%

-3.97%

-2.98%

0%

2.66%

(GDL)

GDL Fund

Global Equity

-18.77%

4.34%

-1.3

-8%

0.62%

-2.74%

38%

1.74%

(EGIF)

Eagle Growth & Income Opportun

Global Growth & Income

-17.29%

5.55%

-0.7

71%

5.05%

-1.22%

24%

2.07%

(CET)

Central Securities Corporation

U.S. General Equity

-16.85%

3.53%

0.3

20%

22.36%

0.26%

0%

0.73%

(SRF)

Cushing Energy Income Fund

MLPs

-16.41%

5.21%

-1.3

0%

23.99%

-1.88%

11%

3.14%

(GGZ)

Gabelli Global Small & Mid Cap

Global Equity

-16.35%

0.00%

-0.6

#DIV/0!

1.15%

-0.94%

21%

1.72%

(GAM)

General American Investors

U.S. General Equity

-16.08%

2.66%

-0.7

-1%

15.77%

-0.39%

15%

1.23%

Top 10 highest premia fixed income:

Ticker

Fund

Category

P/D

Y

Z

Cov

1Y NAV

Dis

Lev

BE

(PHK)

PIMCO High Income Fund

Multisector Income

38.29%

10.86%

2.1

65%

8.06%

18.35%

24%

0.96%

(RCS)

PIMCO Strategic Income Fund

Global Income

36.91%

8.69%

1.6

86%

4.50%

12.25%

64%

0.97%

(PGP)

PIMCO Global StocksPLUS & Inc

Multisector Income

33.71%

10.31%

-0.2

70%

8.77%

-1.62%

32%

1.48%

(PCQ)

PIMCO CA Municipal Income

California Munis

24.82%

5.47%

1.0

84%

0.93%

5.88%

51%

1.15%

(PCN)

PIMCO Corporate & Income Strgy

Investment Grade

22.85%

7.43%

1.8

86%

5.39%

8.26%

22%

1.01%

(PTY)

PIMCO Corporate & Income Opps

Investment Grade

22.52%

8.66%

1.3

77%

9.39%

7.03%

30%

0.86%

(EDF)

Stone Harbor Emerging Mkts FI

Emerging Market Income

22.13%

16.11%

3.0

55%

-15.02%

11.91%

33%

1.84%

(PZC)

PIMCO CA Municipal Income III

California Munis

13.91%

4.96%

2.2

112%

0.64%

7.93%

50%

1.17%

(PDI)

PIMCO Dynamic Income Fund

Multisector Income

13.31%

8.05%

2.1

108%

9.64%

6.48%

45%

-2.02%

(PCM)

PCM Fund

Mortgage Bonds

12.30%

8.35%

0.3

90%

8.60%

0.91%

38%

1.43%

Top 10 highest discounts fixed income:

Ticker

Fund

Category

P/D

Y

Z

Cov

1Y NAV

Dis

Lev

BE

(BQH)

BlackRock NY Municipal Bond

New York Munis

-15.46%

4.24%

-1.0

107%

-0.56%

-3.49%

40%

1.37%

(MNE)

BlackRock Muni NY Intermed. Du

New York Munis

-15.39%

3.80%

-1.0

106%

-0.79%

-2.24%

38%

1.23%

(NBO)

Neuberger Berman NY Inter Muni

New York Munis

-15.36%

4.08%

-0.9

107%

-1.22%

-1.67%

40%

1.31%

(MUJ)

BlackRock MuniHoldings NJ Qty

New Jersey Munis

-15.34%

4.88%

-1.5

110%

1.61%

-4.33%

40%

0.90%

(NUM)

Nuveen MI Quality Muni Income

Michigan Munis

-15.32%

4.22%

-0.7

103%

-0.23%

-1.13%

38%

1.00%

(FT)

Franklin Universal Trust

Multisector Income

-15.27%

5.67%

-1.4

103%

1.72%

-1.76%

23%

1.09%

(CCA)

MFS California Municipal Fund

California Munis

-15.04%

4.64%

-0.9

109%

-0.26%

-3.98%

41%

1.76%

(NXJ)

Nuveen NJ Quality Muni Income

New Jersey Munis

-14.94%

4.97%

-0.4

102%

1.62%

-0.42%

39%

0.98%

(NKG)

Nuveen GA Quality Muni Income

Georgia Munis

-14.92%

4.06%

-1.1

97%

-0.99%

-4.75%

39%

1.08%

(EXD)

EV Tax-Advantaged Bond&Option

Government Bonds

-14.85%

7.20%

-1.8

5%

-9.88%

-6.13%

0%

1.44%

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

(LDF)

Latin American Discovery Fund

Latin American Eequity

3.7

-2.17%

0.75%

8%

-16.45%

9.53%

0%

1.54%

(GGN)

GAMCO Glb Gold Natural Res&Inc

U.S. Energy/Resources Equity

2.7

6.28%

12.22%

8%

-6.21%

6.54%

11%

1.29%

(SWZ)

Swiss Helvetia Fund

Other Non-U.S. Equity

2.6

-4.32%

2.50%

14%

2.52%

4.14%

0%

1.35%

(DPG)

Duff & Phelps Global Utility

U.S. Utilities

2.5

-7.95%

9.09%

5%

-0.83%

2.49%

28%

1.59%

(JTA)

BlackRock Util, Infra & Power

U.S. Utilities

2.4

3.69%

6.98%

35%

0.13%

3.98%

0%

1.09%

(BUI)

Nuveen Tax-Adv Total Return

U.S. Tax-Advantaged Equity

2.4

-0.37%

7.95%

11%

6.54%

3.62%

32%

1.37%

(DDF)

Delaware Inv Div & Inc

U.S. Growth & Income

2.4

9.44%

8.88%

26%

13.30%

14.69%

31%

1.14%

(EXG)

EV Tax-Managed Global Fund

Covered Call

2.3

4.20%

9.43%

11%

9.65%

4.02%

0%

1.07%

(APB)

Asia Pacific Fund

Asia Equity

2.3

-3.28%

2.14%

-5%

1.32%

2.05%

0%

1.85%

(NDP)

Tortoise Energy Independence F

MLPs

2.2

7.91%

13.79%

0%

14.74%

6.74%

25%

1.69%

Top 10 lowest z-scores equity:

Ticker

Fund

Category

Z

P/D

Y

Cov

1Y NAV

Dis

Lev

BE

(BIF)

Boulder Growth & Income

U.S. General Equity

-4.0

-15.44%

3.65%

19%

14.13%

-0.09%

0%

1.32%

(SMM)

Salient Midstream & MLP Fund

MLPs

-2.8

-15.41%

6.70%

0%

5.30%

-6.02%

25%

2.14%

(PHYS)

Sprott Physical Gold Trust

Commodities

-2.7

-1.53%

0.00%

#DIV/0!

-9.51%

-0.91%

0%

0.44%

(KMF)

First Trust MLP and Energy Inc

MLPs

-2.6

-5.18%

9.51%

0%

-0.14%

-6.48%

25%

1.48%

(FEI)

Kayne Anderson MidstreamEnergy

MLPs

-2.6

-12.95%

9.20%

0%

7.74%

-5.67%

30%

2.14%

(FEN)

First Trust Energy Inc&Growth

MLPs

-2.4

-3.77%

10.33%

0%

7.52%

-4.57%

26%

1.52%

(HTY)

First Trust New Opps MLP & En

MLPs

-2.3

-4.75%

8.97%

0%

-4.71%

-7.86%

25%

1.60%

(FPL)

JH Tax Advantaged Global

U.S. Tax-Advantaged Equity

-2.3

-5.99%

8.49%

23%

-0.68%

-10.64%

0%

1.29%

(JMF)

Nuveen Energy MLP Total Return

MLPs

-2.3

-9.82%

9.31%

0%

12.45%

-7.47%

26%

1.55%

(JMLP)

Nuveen All Cap Energy MLP Opps

MLPs

-2.2

-7.14%

9.62%

0%

9.21%

-5.43%

25%

1.69%

Top 10 highest z-scores fixed income:

Ticker

Fund

Category

Z

P/D

Y

Cov

1Y NAV

Dis

Lev

BE

(AKP)

Alliance CA Municipal Income

California Munis

3.3

-5.80%

3.61%

100%

-1.40%

5.87%

38%

1.27%

(EDI)

Stone Harbor Emg Mkts Total In

Emerging Market Income

3.1

10.64%

14.07%

63%

-15.10%

9.33%

33%

1.94%

(EDF)

Stone Harbor Emerging Mkts FI

Emerging Market Income

3.0

22.13%

16.11%

55%

-15.02%

11.91%

33%

1.84%

(EDD)

MS Emerging Markets Domestic

Emerging Market Income

3.0

-7.65%

8.88%

39%

-14.48%

4.87%

32%

1.75%

(FTF)

Franklin Limited Duration Inco

Limited Duration

2.8

-1.99%

10.33%

33%

0.29%

3.44%

24%

0.76%

(HPS)

JH Preferred Income III

Preferreds

2.7

1.59%

7.65%

102%

6.61%

4.24%

33%

1.23%

(HPI)

JH Preferred Income

Preferreds

2.6

5.60%

7.43%

101%

6.88%

5.42%

34%

1.24%

(JMT)

Nuveen Mort Opp Term Fund 2

Mortgage Bonds

2.5

-0.85%

5.78%

83%

4.46%

2.35%

29%

1.77%

(VPV)

Calamos Convertible Opps & Inc

Multisector Income

2.3

10.53%

9.05%

49%

12.61%

7.69%

32%

1.23%

(CHI)

Western Asset Emerg Mkts Debt

Emerging Market Income

2.3

-10.37%

8.84%

87%

-8.93%

2.42%

22%

1.20%

Top 10 lowest z-scores fixed income:

Ticker

Fund

Category

Z

P/D

Y

Cov

1Y NAV

Dis

Lev

BE

(NSL)

Nuveen Senior Income

Senior Loan

-2.3

-12.05%

6.63%

102%

6.76%

-6.24%

37%

1.44%

(GFY)

Western Asset Variable Rate

Multisector Income

-2.2

-10.32%

5.69%

95%

5.20%

-2.88%

23%

1.25%

(MHE)

Massachusetts Tax-Exempt Trust

Massachusetts Equity

-2.1

-6.67%

4.24%

103%

-0.41%

-5.78%

39%

1.12%

(MPA)

Nuveen Shrt Duration Cred Opps

Senior Loan

-2.0

-7.27%

7.27%

100%

7.78%

-2.69%

37%

1.45%

(JPT)

Nuveen Pref and Inc 2022 Term

Preferreds

-2.0

-4.11%

6.17%

103%

0.40%

-3.31%

21%

1.19%

(JSD)

BlackRock MuniYield PA Quality

Pennsylvania Munis

-2.0

-13.84%

5.07%

102%

0.91%

-3.67%

40%

0.88%

(ARDC)

Ares Dynamic Credit Allocation

Senior Loan

-2.0

-10.68%

8.16%

104%

6.67%

-1.55%

29%

1.97%

(PPR)

Western Asset Corporate Loan

Senior Loan

-1.9

-11.70%

6.39%

95%

5.21%

-3.60%

32%

1.42%

(TLI)

Voya Prime Rate Trust

Senior Loan

-1.9

-12.01%

6.02%

84%

4.80%

-2.14%

28%

1.63%

(EFR)

Invesco VK Dynamic Cred Opps

Senior Loan

-1.9

-13.25%

6.54%

93%

8.39%

-2.41%

32%

1.94%

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

19.89%

10.71%

-0.8

5%

19.46%

-3.36%

0%

1.19%

(CRF)

Cornerstone Total Return

U.S. General Equity

19.36%

14.08%

-0.5

5%

19.58%

-2.26%

0%

1.20%

(NDP)

Tortoise Energy Independence F

MLPs

13.79%

7.91%

2.2

0%

14.74%

6.74%

25%

1.69%

(ZF)

Virtus Total Return Fund Inc.

Global Growth & Income

13.55%

-4.91%

-0.3

10%

-8.24%

-0.57%

27%

1.62%

(RIV)

RiverNorth Opportunities Fund

U.S. Growth & Income

12.91%

3.12%

-0.2

41%

4.45%

-0.95%

0%

1.74%

(CEN)

Center Coast MLP & Infras

MLPs

12.85%

-1.02%

-1.0

0%

7.31%

-2.40%

38%

2.12%

(GGN)

GAMCO Glb Gold Natural Res&Inc

U.S. Energy/Resources Equity

12.22%

6.28%

2.7

8%

-6.21%

6.54%

11%

1.29%

(EOD)

Wells Fargo Adv Glo Div Opp

Global Equity Dividend

11.46%

-7.17%

-0.4

11%

-2.64%

-0.47%

14%

1.17%

(ZTR)

Virtus Global Div & Inc Fund

U.S. Growth & Income

11.33%

7.63%

1.5

27%

-2.51%

4.98%

28%

1.56%

(EMO)

ClearBridge Energy MLP Opps

MLPs

11.21%

-6.47%

-1.0

0%

9.14%

-1.84%

30%

1.67%

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

16.11%

22.13%

3.0

55%

-15.02%

11.91%

33%

1.84%

(OXLC)

Oxford Lane Capital Corp

Senior Loan

15.00%

8.22%

0.7

0%

15.19%

3.58%

38%

4.35%

(EDI)

Stone Harbor Emg Mkts Total In

Emerging Market Income

14.07%

10.64%

3.1

63%

-15.10%

9.33%

33%

1.94%

(ECC)

Eagle Point Credit Company LLC

Senior Loan

13.22%

8.75%

-0.6

65%

14.68%

-3.26%

34%

3.29%

(VGI)

Virtus Global Multi-Sector Inc

Multisector Income

11.44%

-7.29%

-1.5

51%

-8.32%

-7.04%

29%

1.74%

(NCZ)

AGIC Convertible & Income II

Multisector Income

11.13%

8.01%

2.0

49%

9.01%

2.99%

38%

1.24%

(NCV)

AGIC Convertible & Income

Multisector Income

10.94%

11.58%

1.6

82%

9.05%

3.90%

38%

1.21%

(PHK)

PIMCO High Income Fund

Multisector Income

10.86%

38.29%

2.1

65%

8.06%

18.35%

24%

0.96%

(FTF)

Franklin Limited Duration Inco

Limited Duration

10.33%

-1.99%

2.8

33%

0.29%

3.44%

24%

0.76%

(OPP)

RiverNorth/DoubleLine Strategi

Multisector Income

10.32%

-6.18%

0.1

68%

0.91%

0.18%

24%

1.27%

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 -14.72% 10.50% -0.3 1% -9.89% -1.55 -0.78% 0% 1.99%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -19.79% 6.91% -1.0 33% 0.11% -1.37 -1.50% 31% 1.90%
(IHD) Voya Emerging Market High Div. Emerging Market Equity -12.81% 9.54% -1.8 3% -2.80% -1.22 -6.25% 0% 1.43%
(IIF) MS India Investment Asia Equity -10.83% 11.07% 0.4 0% -6.44% -1.20 0.07% 0% 1.43%
(KMF) Kayne Anderson MidstreamEnergy MLPs -12.95% 9.20% -2.6 0% 7.74% -1.19 -5.67% 30% 2.14%
(LCM) Advent Claymore Enh Grth & Inc Global Growth & Income -10.83% 10.85% -0.5 4% 3.50% -1.18 -0.62% 28% 2.05%
(FEO) First Trust/Aberdeen Emerging Global Growth & Income -11.07% 10.43% -0.9 18% -10.99% -1.15 -1.57% 6% 1.62%
(DNI) Dividend and Income Fund U.S. Growth & Income -22.91% 4.85% -1.7 9% -7.35% -1.11 -3.27% 0% 1.43%
(INF) Brookfield Glo List Infr Inc Global Equity -14.18% 7.82% -0.9 15% 1.02% -1.11 -1.35% 27% 1.88%
(IAE) Voya Asia Pacific High Dividen Asia Equity -12.58% 8.68% -1.6 6% -1.09% -1.09 -2.79% 0% 1.32%

Top 10 best D x Y fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV D x Y Dis Lev BE
(FAX) Aberdeen Asia-Pacific Income Global Income -12.68% 10.00% -1.2 48% -6.63% -1.27 -2.32% 29.5% 1.14%
(EXD) EV Tax-Advantaged Bond&Option Government Bonds -14.85% 7.20% -1.8 5% -9.88% -1.07 -6.13% 0.0% 1.44%
(AGC) Advent Claymore Cnvt Secs&Inc Convertibles -10.53% 9.91% -0.2 28% 4.74% -1.04 -0.26% 40.9% 2.09%
(GHY) PGIM Global Short Dur Hi High Yield -14.39% 7.17% -0.7 76% 4.05% -1.03 -1.38% 27.2% 1.25%
(NHS) Neuberger Berman High Yield St High Yield -14.34% 7.18% -0.9 115% 2.03% -1.03 -1.62% 32.2% 1.24%
(FAM) First Trust/Aberdeen Global Global Income -11.80% 8.71% -0.2 92% -10.96% -1.03 -0.20% 27.4% 1.83%
(FSD) First Trust High Inc Long/Shrt High Yield -12.09% 8.41% -0.6 75% 1.39% -1.02 -1.73% 19.8% 1.18%
(BWG) BrandywineGLOBAL-Gl Inc opps Global Income -12.52% 8.11% 1.4 102% -11.03% -1.02 1.05% 36.7% 1.53%
(HYB) New America High Income Fund High Yield -12.73% 7.76% -1.0 100% 1.10% -0.99 -3.15% 27.5% 1.14%
(HIX) Western Asset High Inc Fund II High Yield -11.39% 8.56% -0.7 97% 0.31% -0.97 -1.04% 26.4% 0.07%

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
(KMF) Kayne Anderson MidstreamEnergy MLPs -12.95% 9.20% -2.6 0% 7.74% 3.10 -5.67% 30% 2.14%
(SMM) Salient Midstream & MLP Fund MLPs -15.41% 6.70% -2.8 0% 5.30% 2.89 -6.02% 25% 2.14%
(BIF) Boulder Growth & Income U.S. General Equity -15.44% 3.65% -4.0 19% 14.13% 2.25 -0.09% 0% 1.32%
(IHD) Voya Emerging Market High Div. Emerging Market Equity -12.81% 9.54% -1.8 3% -2.80% 2.20 -6.25% 0% 1.43%
(JMF) Nuveen Energy MLP Total Return MLPs -9.82% 9.31% -2.3 0% 12.45% 2.10 -7.47% 26% 1.55%
(DNI) Dividend and Income Fund U.S. Growth & Income -22.91% 4.85% -1.7 9% -7.35% 1.89 -3.27% 0% 1.43%
(DSE) Duff & Phelps Select Energy ML MLPs -9.27% 10.22% -1.9 0% 19.78% 1.80 -9.15% 35% 2.07%
(IAE) Voya Asia Pacific High Dividen Asia Equity -12.58% 8.68% -1.6 6% -1.09% 1.75 -2.79% 0% 1.32%
(AEF) Aberdeen Emerg Mkt Equity Inc Latin American Eequity -13.41% 6.90% -1.8 -1% 1.01% 1.67 -4.27% 0% 2.00%
(JMLP) Nuveen All Cap Energy MLP Opps MLPs -7.14% 9.62% -2.2 0% 9.21% 1.51 -5.43% 25% 1.69%

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
(EXD) EV Tax-Advantaged Bond&Option Government Bonds -14.85% 7.20% -1.8 5% -9.88% 1.92 -6.13% 0% 1.44%
(NSL) Nuveen Senior Income Senior Loan -12.05% 6.63% -2.3 102% 6.76% 1.84 -6.24% 37% 1.44%
(ARDC) Ares Dynamic Credit Allocation Senior Loan -10.68% 8.16% -2.0 104% 6.67% 1.74 -1.55% 29% 1.97%
(VTA) Invesco VK Dynamic Cred Opps Senior Loan -13.25% 6.54% -1.9 93% 8.39% 1.65 -2.41% 32% 1.94%
(FAX) Aberdeen Asia-Pacific Income Global Income -12.68% 10.00% -1.2 48% -6.63% 1.52 -2.32% 29% 1.14%
(JRO) Nuveen Floating Rate Inc Opps Senior Loan -11.71% 6.89% -1.8 99% 5.88% 1.45 -7.32% 36% 1.41%
(TLI) Western Asset Corporate Loan Senior Loan -11.70% 6.39% -1.9 95% 5.21% 1.42 -3.60% 32% 1.42%
(MPA) BlackRock MuniYield PA Quality Pennsylvania Munis -13.84% 5.07% -2.0 102% 0.91% 1.40 -3.67% 40% 0.88%
(PPR) Voya Prime Rate Trust Senior Loan -12.01% 6.02% -1.9 84% 4.80% 1.37 -2.14% 28% 1.63%
(EVG) EV Short Duration Diversified Limited Duration -13.45% 6.09% -1.6 89% 2.40% 1.31 -3.59% 23% 1.49%

6. Summary statistics

The average premium/discount of all the CEFs in the database is -5.80%, a moderate decrease from -6.29% in the previous month. Equity CEF discounts contracted by 14 bps to -5.75%, while fixed income CEF discounts substantially contracted by 69 bps to -5.83%.

The average distribution yield of all the CEFs in the database is 6.57%, a slight decrease from 6.62% in the month prior. Equity CEFs average 7.59% yield, while fixed income CEFs average 6.01% yield.

The average 1-year z-score of all the CEFs in the database is -0.12, a large increase from -0.47 a month ago. Equity CEFs have an average z-score of -0.03, while fixed income CEFs have an average z-score of -0.16.

Commentary

In last month's commentary "The Chemist's CEF Report - August 2018: Equity CEFs Starting To Come Down To Earth?", we noted that equity CEFs had begun to reverse course and come back down to more reasonable valuations. Further, we noted that the gap between equity CEFs and fixed income CEFs (equity CEFs being more expensive) had narrowed for the third consecutive month in a row.

This month continued one of two trends. While equity CEFs did become marginally more expensive (14 bps contraction of discount), the gap with fixed income CEFs narrowed once again, thanks to a 69 bps contraction in valuation of fixed income CEFs. The current spread in valuation is now down to a mere 0.07% (equity CEFs more expensive), validating my prediction from two months ago:

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.

The 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.

U.S. stocks (SPY) continued their strong run this month, with a +3.19% return breaking to fresh record highs. International stocks (ACWX), however, faltered (-2.30%) amidst various geopolitical concerns in Europe and emerging markets. Long-dated treasuries (TLT) rebounded with a +1.31% return, while corporate bonds (LQD) were about flat (+0.02%). High-yield bonds (JNK) gained +0.62%, while a basket of high-yield CEFs (YYY) gained +1.59%.

Chart

The 10-2 Treasury spread plunged to as low as 0.18% towards the end of last month, before rebounding to its current level of 0.24%. There does not appear to be any significant respite in this spread's inexorable decline. Besides being a bearish indicator for the stock market (as an inverted curve is one of the more reliable signals for a recession), leveraged CEFs that borrow at short rates and lend at long rates will continue to face headwinds from the contracting spread.

Chart

Two common funding benchmarks, the 1-month and 3-month LIBOR rates, appeared to have stalled over the past several months. At the least, this will alleviate immediate pressure on rising interest expenses for leveraged CEFs.

Chart

For September 2018, my top 3 picks are:

  • Kayne Anderson Midstream Energy Fund (KMF): 9.20% yield, -12.95% discount, -2.6 z-score, -5.67% distance, 18% leverage, 2.14% baseline expense, and 0% coverage.
  • Nuveen Senior Income Fund (NSL): 6.63% yield, -12.05% discount, -2.3 z-score, -6.24% distance, 37% leverage, 1.44% baseline expense, and 102% coverage.
  • Voya Emerging Markets High Income Dividend Equity Fund (IHD): 9.54% yield, -12.81% discount, -1.8 z-score, -6.25% distance, 0% leverage, 1.43% baseline expense, and 3% coverage.

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

Five out of the top 10 "D x Y x Z" equity CEFs were MLP funds. I picked the top ranked D x Y x Z fund, Kayne Anderson Midstream Energy Fund, due to its favorable combination of wide discount (-12.95%), high yield (9.20%), large negative z-score (-2.6), and large distance (-5.67%) from its 52-week average discount. KMF's 1-, 3- and 5-year average discount values are -7.30%, -6.66% and -7.45% respectively.

Over the last 6 months, KMF has gained +10.80% in NAV whereas the price decreased by -0.27%.

Chart

KMF data by YCharts

The discount has widened from its peak of close to -2% earlier in the year to over -12% currently, a 10 percentage point swing.

(Source: CEFConnect)

The decline in valuation of KMF might be due to its recently completed merger with Kayne Anderson Energy Total Return Fund (KYE). However, Kayne Anderson is one of the best MLP managers there are out there, and I believe that a rebound in valuation of this fund may be a likely possibility. Note that KYE is structured as a registered investment company, or RIC (by limiting itself to <25% MLPs), and is thus not subject to the issues of deferred tax liabilities that affect most other MLP CEFs.

Nuveen Senior Income Fund, a $259 million senior loan fund from Nuveen, is picked for the second month in a row, so the rationale presented last month for picking the fund is still mostly valid. We can see from the chart below that the divergence between price and NAV has continued even over the most recent periods, which is something that I like to see when assessing buy candidates. NSL was the second-ranked fixed income D x Y x Z fund in this month's report. NSL trades with a discount of -12.05% (-6.24% below 52-week average), a 1-year z-score of -2.3 and a yield of 6.63%. Its 1-, 3- and 5-year average discount values are -5.84%, -6.64% and -7.15% respectively.

(Source: CEFConnect)

For the third pick, I chose Voya Emerging Markets High Income Dividend Equity Fund, an emerging markets option income CEF that was ranked 4th in the equity D x Y x Z list. It's no secret that emerging markets have been battered hard this year, so this pick should be considered to be a high-risk high-reward type candidate. IHD yields 9.54%, and trades with a discount of -12.81% (-6.25% below 52-week average) and a z-score of -1.8.

As with the other picks, there has been a serious divergence between the price and NAV of the fund over the past several four month or so period. While the price of the CEF has crashed by -16.6%, the NAV is down by "only" -5.32%.

Chart

Granted, I don't think the fund ever desired a near-par valuation earlier in the year (as various emerging market troubles were already beginning to manifest) - what were investors thinking at the time?! In hindsight, that would have been a great opportunity to sell and lock in profits in the fund. Despite this, the current discount is still at least a few percentage points lower than the 3- and 5-year historical discount averages, giving some impetus to the discount reversion trade.

(Source: CEFConnect)

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.

Please note: This article was first released to members of CEF/ETF Income Laboratory 1 month ago, so data may be out of date. Please check latest data before making investment decisions.

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.