The Chemist's CEF Report - October 2018: Fixed Income CEFs Under Renewed Pressure As LIBOR Rises

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Includes: ACWX, AEF, AKP, ARDC, ASG, BHV, BIF, BKK, BME, BST, BUI, BWG, CEN, CET, CGO, CHY, CLM, CRF, CUBA, DDF, DNI, DNP, DPG, DSU, ECC, ECF, EDD, EDF, EDI, EGIF, EHI, EIA, EMD, EOD, ERC, ETW, EXD, FAM, FAX, FCO, FEO, FSD, FT, FTF, FXBY, GDL, GGN, GHY, GOF, GRF, GUT, HIX, IHD, IIF, INF, IRL, JEQ, JNK, JPT, JTA, JTD, KMF, KST, KYE, LDF, LDP, LQD, MCR, MIY, MNE, MPA, MUJ, MUS, MXE, MZA, NBO, NCV, NCZ, NDP, NHS, NKG, NMI, NMY, NUM, OPP, OXLC, PCN, PCQ, PDI, PDT, PEO, PGP, PGZ, PHK, PML, PTY, RCS, RGT, RIF, RIV, SPY, SRF, SWZ, TLT, USA, VGI, VMM, YYY, ZF, ZTR
by: Stanford Chemist
Summary

Fixed income CEFs come under renewed pressure, with average discounts widening by more than 1% this month.

After several flat months, one and three-month LIBOR rates resume their upward move.

Picks for October are ARDC, PGZ and KMF.

Please note: This article was first released to members of CEF/ETF Income Laboratory one month ago, so data may be out of date.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

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 September 29, 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 one-year z-score is calculated as the difference between the current premium/discount and the one-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 one-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 18.47% 7.20% 0.6 28% 0.00% 2.23% 26% 1.00%
(GUT) Gabelli Utility Trust U.S. Utilities 18.02% 10.29% -0.9 4% 3.38% -8.21% 30% 1.75%
(DDF) Delaware Inv Div & Inc U.S. Growth & Income 14.07% 8.58% 2.5 26% 11.05% 17.93% 31% 1.14%
(CRF) Cornerstone Total Return U.S. General Equity 10.74% 19.98% -1.2 5% 19.48% -5.63% 0% 1.20%
(GOF) Guggenheim Strategic Opp Fund U.S. Growth & Income 9.54% 10.51% 0.0 50% 7.81% -0.16% 0% 1.28%
(BST) BlackRock Science and Technolo Global Equity 9.29% 5.05% 1.3 -5% 32.70% 7.18% 0% 1.07%
(CLM) Cornerstone Strategic Value U.S. General Equity 8.38% 20.31% -1.3 5% 19.94% -5.65% 0% 1.19%
(CGO) Calamos Global Total Return Global Growth & Income 7.94% 8.57% -0.2 16% 9.14% -0.61% 30% 1.59%
(ETW) EV Tax-Managed Glb B-W Opps Covered Call 7.02% 9.06% 1.5 19% 8.02% 2.73% 0% 1.09%
(BME) BlackRock Health Sciences U.S. Health/Biotech Equity 6.98% 5.64% 1.8 4% 21.24% 5.53% 0% 1.13%

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 -30.13% 0.46% -0.3 0% 9.86% -0.82% 0% 2.51%
(DNI) Dividend and Income Fund U.S. Growth & Income -22.99% 6.69% -1.4 7% -12.32% -2.92% 0% 1.43%
(CUBA) Herzfeld Caribbean Basin Latin American Eequity -20.63% 1.84% -2.4 -9% -1.85% -4.07% 0% 2.66%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -20.01% 7.40% -1.4 33% 1.56% -1.78% 31% 1.90%
(GDL) GDL Fund Global Equity -18.40% 4.36% -0.9 -8% 0.62% -1.92% 38% 1.74%
(EGIF) Eagle Growth & Income Opportun Global Growth & Income -18.25% 4.48% -1.1 101% 1.33% -1.82% 24% 2.07%
(CET) Central Securities Corporation U.S. General Equity -17.79% 3.56% -0.8 20% 19.09% -0.69% 0% 0.73%
(SRF) Cushing Energy Income Fund MLPs -17.47% 5.21% -1.9 0% 15.48% -2.88% 11% 3.14%
(PEO) Adams Natural Resources U.S. Energy/Resources Equity -16.18% 2.50% -1.2 34% 10.34% -0.85% 1% 0.77%
(RGT) Royce Global Value Trust Fund Global Equity -15.60% 1.04% -1.3 6% 7.76% -1.75% 6% 1.52%

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 35.39% 10.12% 0.1 70% 9.33% 0.71% 32% 1.48%
(RCS) PIMCO Strategic Income Fund Global Income 34.31% 8.97% 1.1 86% 3.55% 8.91% 64% 0.97%
(PHK) PIMCO High Income Fund Multisector Income 30.27% 11.60% 0.9 65% 7.96% 9.31% 24% 0.96%
(PCN) PIMCO Corporate & Income Strgy Investment Grade 22.46% 7.46% 1.3 86% 5.83% 6.87% 22% 1.01%
(BHV) BlackRock VA Municipal Bond Virginia Munis 21.10% 4.24% 3.1 88% -0.75% 11.42% 40% 1.78%
(PTY) PIMCO Corporate & Income Opps Investment Grade 20.96% 8.75% 0.8 77% 9.62% 4.76% 30% 0.86%
(PCQ) PIMCO CA Municipal Income California Munis 18.61% 5.77% -0.1 84% 1.79% -0.47% 51% 1.15%
(PDI) PIMCO Dynamic Income Fund Multisector Income 14.39% 7.97% 1.9 108% 9.94% 6.87% 45% -2.02%
(EDF) Stone Harbor Emerging Mkts FI Emerging Market Income 13.88% 16.67% 0.6 55% -10.86% 3.03% 33% 1.84%
(PML) PIMCO Municipal Income II National Munis 12.64% 5.91% 1.5 85% 2.82% 3.23% 48% 1.05%

Top 10 highest discounts fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dis Lev BE
(NUM) Nuveen MI Quality Muni Income Michigan Munis -16.21% 4.32% -1.3 104% -0.78% -1.68% 39% 1.00%
(FT) Franklin Universal Trust Multisector Income -16.08% 5.79% -1.8 103% 1.19% -2.29% 23% 1.09%
(NKG) Nuveen GA Quality Muni Income Georgia Munis -16.00% 3.79% -1.2 106% -1.48% -5.10% 39% 1.08%
(MIY) BlackRock MuniYield MI Quality Michigan Munis -15.99% 5.03% -2.0 107% 0.02% -4.11% 39% 0.87%
(MUJ) BlackRock MuniHoldings NJ Qty New Jersey Munis -15.98% 4.99% -1.5 110% 0.70% -4.28% 40% 0.90%
(NMY) Nuveen MD Quality Muni Income Maryland Munis -15.87% 4.49% -1.7 102% 0.12% -1.72% 39% 1.03%
(NBO) Neuberger Berman NY Inter Muni New York Munis -15.82% 4.17% -1.1 107% -1.48% -1.83% 40% 1.31%
(VMM) Delaware MN Muni Income II Minnesota Munis -15.73% 3.80% -1.9 110% -0.88% -5.84% 31% 0.77%
(EIA) EV CA Muni Bond II California Munis -15.66% 4.69% -1.5 103% -2.16% -4.04% 40% 1.24%
(MNE) BlackRock Muni NY Intermed. Du New York Munis -15.50% 3.86% -1.0 106% -1.69% -1.98% 38% 1.23%

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
(MXE) Mexico Equity & Income Latin American Eequity 4.6 -7.13% 0.39% -10% 0.55% 5.92% 0% 1.68%
(ASG) Liberty All-Star Growth U.S. General Equity 3.1 0.63% 6.27% -2% 25.75% -3.03% 1% 1.22%
(JTD) Nuveen Tax-Adv Div Growth U.S. Tax-Advantaged Equity 2.9 -0.67% 7.57% 12% 11.03% 2.75% 31% 1.48%
(DDF) Delaware Inv Div & Inc U.S. Growth & Income 2.5 14.07% 8.58% 26% 11.05% 17.93% 31% 1.14%
(LDF) Latin American Discovery Fund Latin American Eequity 2.4 -2.69% 0.72% 23% -14.70% 8.32% 0% 1.54%
(GRF) Eagle Capital Growth U.S. General Equity 2.3 -14.61% 6.35% 2% 3.99% -1.18% 0% 1.22%
(BUI) BlackRock Util, Infra & Power U.S. Utilities 2.3 4.74% 7.07% 42% 0.21% 4.68% 0% 1.09%
(JTA) Nuveen Tax-Adv Total Return U.S. Tax-Advantaged Equity 2.2 0.74% 7.97% 17% 4.41% 4.27% 32% 1.37%
(SWZ) Swiss Helvetia Fund Other Non-U.S. Equity 2.1 -3.27% 7.39% 4% -29.45% 4.42% 0% 1.35%
(USA) Liberty All-Star Equity U.S. General Equity 2.1 -2.28% 9.93% 3% 16.98% 4.71% 0% 1.01%

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 -15.26% 3.62% 19% 13.83% 0.05% 0% 1.32%
JEQ Aberdeen Japan Equity Fund Asia Equity -3.9 -14.50% 5.74% 2% 5.57% -3.01% 0% 0.84%
CUBA Herzfeld Caribbean Basin Latin American Eequity -2.4 -20.63% 1.84% -9% -1.85% -4.07% 0% 2.66%
FPL First Trust New Opps MLP & En MLPs -2.3 -7.08% 9.52% 0% -8.17% -9.72% 25% 1.60%
FIF First Trust Energy Infra. Fund U.S. Energy/Resources Equity -2.1 -8.66% 8.46% 17% -4.02% -4.51% 25% 1.53%
KMF Kayne Anderson MidstreamEnergy MLPs -2.0 -12.44% 10.32% 0% 0.99% -4.86% 30% 2.14%
SRF Cushing Energy Income Fund MLPs -1.9 -17.47% 5.21% 0% 15.48% -2.88% 11% 3.14%
TYG Tortoise Energy Infrastructure MLPs -1.9 -1.66% 9.82% 0% 12.73% -6.72% 33% 1.87%
KYN Kayne Anderson MLP MLPs -1.9 -6.45% 11.10% 0% 20.15% -5.78% 35% 2.64%
JOF Japan Smaller Capitalization Asia Equity -1.9 -14.67% 5.02% 1% 4.66% -2.93% 0% 1.05%

Top 10 highest z-scores fixed income:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(BHV) BlackRock VA Municipal Bond Virginia Munis 3.1 21.10% 4.24% 88% -0.75% 11.42% 40% 1.78%
(FCO) Aberdeen Global Income Global Income 3.0 3.90% 9.85% 53% -2.58% 7.39% 28% 1.90%
(ECF) Ellsworth Growth and Income Convertibles 2.7 -6.34% 5.80% 5% 14.07% 4.04% 19% 1.07%
(NCZ) AGIC Convertible & Income II Multisector Income 2.5 10.22% 11.22% 49% 5.30% 4.79% 38% 1.24%
(EDD) MS Emerging Markets Domestic Emerging Market Income 2.4 -7.88% 8.85% 39% -13.35% 4.46% 32% 1.75%
(KST) Deutsche Strategic Income Global Income 2.1 -0.63% 4.19% 105% 1.42% 2.51% 14% 1.69%
(AKP) Alliance CA Municipal Income California Munis 2.1 -6.99% 3.72% 100% -1.94% 4.44% 38% 1.27%
(CHY) Calamos Convertible & High Multisector Income 2.0 12.43% 8.96% 49% 11.26% 8.58% 32% 1.23%
(PDT) JH Premium Dividend Fund Preferreds 2.0 11.19% 7.18% 77% 2.25% 4.30% 35% 1.44%
(PDI) PIMCO Dynamic Income Fund Multisector Income 1.9 14.39% 7.97% 108% 9.94% 6.87% 45% -2.02%

Top 10 lowest z-scores fixed income:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(NMI) Nuveen Municipal Income National Munis -3.1 -7.71% 4.25% 102% 0.90% -7.95% 0% 0.78%
(ARDC) Ares Dynamic Credit Allocation Senior Loan -2.9 -11.94% 8.29% 104% 6.10% -2.67% 30% 1.97%
(MZA) BlackRock MuniYield Arizona Arizona Munis -2.6 -7.76% 4.91% 99% -0.41% -15.03% 38% 1.00%
(FAM) First Trust/Aberdeen Global Global Income -2.5 -14.57% 8.84% 84% -7.95% -2.75% 27% 1.83%
(BKK) BlackRock Municipal 2020 National Munis -2.5 -2.77% 2.59% 97% 0.03% -1.57% 1% 0.59%
(LDP) Cohen & Steers Ltd Dur Prf&Inc Preferreds -2.4 -7.13% 7.90% 73% 0.88% -3.65% 29% 1.15%
(DSU) BlackRock Debt Strategies Fund Senior Loan -2.2 -11.43% 7.37% 98% 5.72% -2.29% 30% 0.91%
(MPA) BlackRock MuniYield PA Quality Pennsylvania Munis -2.1 -14.81% 5.22% 102% -0.02% -4.13% 40% 0.88%
(JPT) Nuveen Pref and Inc 2022 Term Preferreds -2.1 -4.93% 6.28% 102% -0.64% -3.90% 21% 0.00%
(MUS) BlackRock MuniHoldings Quality National Munis -2.1 -12.26% 5.26% 105% -1.24% -5.54% 39% 1.03%

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 20.31% 8.38% -1.3 5% 19.94% -5.65% 0% 1.19%
(CRF) Cornerstone Total Return U.S. General Equity 19.98% 10.74% -1.2 5% 19.48% -5.63% 0% 1.20%
(NDP) Tortoise Energy Independence F MLPs 14.40% 2.10% 0.3 0% 5.63% 0.77% 25% 1.69%
(ZF) Virtus Total Return Fund Inc. Global Growth & Income 13.70% -5.39% -0.7 10% -7.47% -1.05% 27% 0.00%
(RIV) RiverNorth Opportunities Fund U.S. Growth & Income 13.45% 0.70% -0.8 41% 3.04% -3.40% 0% 1.74%
(CEN) Center Coast MLP & Infras MLPs 13.36% 0.00% -0.6 0% 1.10% -1.32% 38% 2.01%
(GGN) GAMCO Glb Gold Natural Res&Inc U.S. Energy/Resources Equity 12.82% 1.74% 0.7 8% -5.40% 1.90% 11% 1.29%
(IIF) MS India Investment Asia Equity 12.66% -11.08% 1.1 -1% -15.18% -0.20% 0% 1.43%
(ZTR) Virtus Global Div & Inc Fund U.S. Growth & Income 12.18% -0.09% -0.8 27% -2.81% -2.83% 28% 1.56%
(EOD) Wells Fargo Adv Glo Div Opp Global Equity Dividend 12.04% -8.46% -0.8 11% -2.95% -1.62% 14% 1.17%

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 16.67% 13.88% 0.6 55% -10.86% 3.03% 33% 1.84%
(OXLC) Oxford Lane Capital Corp Senior Loan 15.33% 5.91% 0.2 0% 15.39% 1.14% 38% 4.35%
(EDI) Stone Harbor Emg Mkts Total In Emerging Market Income 14.67% 2.32% 0.2 63% -11.49% 0.61% 33% 1.94%
(ECC) Eagle Point Credit Company LLC Senior Loan 13.41% 7.25% -0.8 65% 15.53% -3.67% 34% 3.29%
(PHK) PIMCO High Income Fund Multisector Income 11.60% 30.27% 0.9 65% 7.96% 9.31% 24% 0.96%
(VGI) Virtus Global Multi-Sector Inc Multisector Income 11.46% -7.83% -1.4 51% -7.58% -6.95% 29% 1.74%
(FTF) Franklin Limited Duration Inco Limited Duration 11.38% -8.41% -2.0 55% -2.59% -3.09% 24% 0.77%
(NCV) AGIC Convertible & Income Multisector Income 11.22% 11.56% 1.4 82% 5.72% 3.46% 38% 1.21%
(NCZ) AGIC Convertible & Income II Multisector Income 11.22% 10.22% 2.5 49% 5.30% 4.79% 38% 1.24%
(OPP) RiverNorth/DoubleLine Strategi Multisector Income 10.63% -7.63% -1.0 50% 0.56% -1.19% 24% 1.80%

4. Top 10 best combination of yield and discount

(May interest buy-and-hold income investors)

For possible buy candidates, it's 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 toward 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 -14.31% 10.91% 0.4 1% -13.78% -1.56 -0.12% 0% 1.99%
(DNI) Dividend and Income Fund U.S. Growth & Income -22.99% 6.69% -1.4 7% -12.32% -1.54 -2.92% 0% 1.43%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -20.01% 7.40% -1.4 33% 1.56% -1.48 -1.78% 31% 1.90%
(IIF) MS India Investment Asia Equity -11.08% 12.66% 1.1 -1% -15.18% -1.40 -0.20% 0% 1.43%
(FEO) First Trust/Aberdeen Emerging Global Growth & Income -12.38% 10.70% -1.4 17% -8.62% -1.32 -2.49% 6% 1.62%
(KMF) Kayne Anderson MidstreamEnergy MLPs -12.44% 10.32% -2.0 0% 0.99% -1.28 -4.86% 30% 2.14%
(INF) Brookfield Glo List Infr Inc Global Equity -15.52% 8.22% -1.8 15% -0.01% -1.28 -2.44% 27% 1.88%
(PGZ) Principal Real Estate Inc Fund U.S. Real Estate -14.36% 7.71% -1.6 78% 9.55% -1.11 -2.72% 31% 2.03%
(DPG) Duff & Phelps Global Utility U.S. Utilities -10.88% 9.82% -0.6 5% -1.57% -1.07 -0.40% 28% 1.59%
(IHD) Voya Emerging Market High Div. Emerging Market Equity -11.37% 9.31% -1.2 3% -0.22% -1.06 -4.30% 0% 1.43%

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 -12.92% 10.22% -1.2 48% -6.78% -1.32 -2.18% 31.7% 1.14%
(FAM) First Trust/Aberdeen Global Global Income -14.57% 8.84% -2.5 84% -7.95% -1.29 -2.75% 27.4% 1.83%
(BWG) BrandywineGLOBAL-Gl Inc opps Global Income -14.27% 8.40% -0.9 102% -11.06% -1.20 -0.71% 36.7% 1.53%
(EMD) Western Asset Emerg Mkts Debt Emerging Market Income -12.78% 8.93% -0.1 87% -6.64% -1.14 -0.06% 21.7% 1.20%
(EXD) EV Tax-Advantaged Bond&Option Government Bonds -15.46% 7.31% -1.6 5% -8.39% -1.13 -6.18% 0.0% 1.44%
(FSD) First Trust High Inc Long/Shrt High Yield -13.19% 8.51% -0.9 75% 1.26% -1.12 -2.39% 19.8% 1.18%
(NHS) Neuberger Berman High Yield St High Yield -15.11% 7.24% -1.2 115% 1.92% -1.09 -2.06% 25.5% 1.24%
(EHI) Western Asset Global High Inc Global Income -13.45% 8.01% -1.2 96% 0.03% -1.08 -1.64% 25.1% 1.22%
(HIX) Western Asset High Inc Fund II High Yield -12.36% 8.56% -1.3 97% 1.29% -1.06 -1.70% 26.4% 0.07%
(GHY) PGIM Global Short Dur Hi High Yield -14.15% 7.13% -0.5 76% 4.53% -1.01 -0.84% 27.2% 0.00%

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 one-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
(JEQ) Aberdeen Japan Equity Fund Asia Equity -14.50% 5.74% -3.9 2% 5.57% 3.25 -3.01% 0% 0.84%
(KMF) Kayne Anderson MidstreamEnergy MLPs -12.44% 10.32% -2.0 0% 0.99% 2.57 -4.86% 30% 2.14%
(INF) Brookfield Glo List Infr Inc Global Equity -15.52% 8.22% -1.8 15% -0.01% 2.30 -2.44% 27% 1.88%
(BIF) Boulder Growth & Income U.S. General Equity -15.26% 3.62% -4.0 19% 13.83% 2.21 0.05% 0% 1.32%
(DNI) Dividend and Income Fund U.S. Growth & Income -22.99% 6.69% -1.4 7% -12.32% 2.15 -2.92% 0% 1.43%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -20.01% 7.40% -1.4 33% 1.56% 2.07 -1.78% 31% 1.90%
(FEO) First Trust/Aberdeen Emerging Global Growth & Income -12.38% 10.70% -1.4 17% -8.62% 1.85 -2.49% 6% 1.62%
(AEF) Aberdeen Emerg Mkt Equity Inc Latin American Eequity -14.36% 6.95% -1.8 3% 0.62% 1.80 -4.91% 0% 2.00%
(PGZ) Principal Real Estate Inc Fund U.S. Real Estate -14.36% 7.71% -1.6 78% 9.55% 1.77 -2.72% 31% 2.03%
(SRF) Cushing Energy Income Fund MLPs -17.47% 5.21% -1.9 0% 15.48% 1.73 -2.88% 11% 3.14%

Ticker Fund Category P/D Y Z Cov 1Y NAV D x Y x Z Dis Lev BE
(FAM) First Trust/Aberdeen Global Global Income -14.57% 8.84% -2.5 84% -7.95% 3.22 -2.75% 27% 1.83%
(ARDC) Ares Dynamic Credit Allocation Senior Loan -11.94% 8.29% -2.9 104% 6.10% 2.87 -2.67% 30% 1.97%
(ERC) Wells Fargo Adv Multi-Sec Inc Limited Duration -9.51% 10.46% -2.1 65% 2.32% 2.09 -1.55% 27% 1.06%
(FTF) Franklin Limited Duration Inco Limited Duration -8.41% 11.38% -2.0 55% -2.59% 1.91 -3.09% 24% 0.77%
(DSU) BlackRock Debt Strategies Fund Senior Loan -11.43% 7.37% -2.2 98% 5.72% 1.85 -2.29% 30% 0.91%
(EXD) EV Tax-Advantaged Bond&Option Government Bonds -15.46% 7.31% -1.6 5% -8.39% 1.81 -6.18% 0% 1.44%
(FT) Franklin Universal Trust Multisector Income -16.08% 5.79% -1.8 103% 1.19% 1.68 -2.29% 23% 1.09%
(MCR) MFS Charter Income Global Income -10.91% 9.03% -1.7 49% 1.07% 1.67 -1.75% 18% 0.69%
(MPA) BlackRock MuniYield PA Quality Pennsylvania Munis -14.81% 5.22% -2.1 102% -0.02% 1.62 -4.13% 40% 0.88%
(MIY) BlackRock MuniYield MI Quality Michigan Munis -15.99% 5.03% -2.0 107% 0.02% 1.61 -4.11% 39% 0.87%

6. Summary statistics

The average premium/discount of all the CEFs in the database is -6.59%, a substantial decrease from -5.80% in the previous month. Equity CEF discounts widened by 24 bps to -5.99%, while fixed income CEF discounts widened by 108 bps to -6.91%.

The average distribution yield of all the CEFs in the database is 6.69%, a moderate increase from 6.57% in the month prior. Equity CEFs average 7.76% yield, while fixed income CEFs average 6.10% yield.

The average one-year z-score of all the CEFs in the database is -0.42, a large decrease from -0.12 a month ago. Equity CEFs have an average z-score of -0.10, while fixed income CEFs have an average z-score of -0.60.

7. D x Y x Z performance tracker (new!)

How useful are the D x Y x Z top lists? Aside from using them primarily for our three monthly picks (which also involves some subjective judgment), we also can evaluate the raw predictive power of this metric by comparing the three- or six-month total return values of the top 10 D x Y x Z funds from three or six months ago respectively. The links to the past reports from three and six months are below:

Here are the results for the equity CEFs. Remember that these lists are the top 10 D x Y x Z funds from three and six months ago, respectively. The data below shows that the average of the top 10 D x Y x Z lag the average for all equity CEFs at three months, but outperform at six months.

Here's the results for the fixed income CEFs. The top 10 D X Y x Z outperform the average for all fixed income CEFs at both three and six months.

Commentary

In last month's commentary "The Chemist's CEF Report - September 2018: Equity And Fixed Income CEF Valuations Back To Par," we noted that equity and fixed income CEFs had moved back to approximately equal valuation. However, fixed income CEFs have come under renewed pressure this month as short-term rates rose, with average discounts widening by 108 bps from -5.83% to -6.91%.

Two common funding benchmarks, the one-month and three-month LIBOR rates, moved up this month by 6 bps and 15 bps, respectively. Since most CEF leverage expenses are pegged to short-term LIBOR rates, this move will directly hurt the earnings potential of leveraged CEFs.

Chart

1-Month LIBOR based on US Dollar data by YCharts

While not directly related to the funding expenses of CEFs, the 10-2 Treasury spread is useful as a general indicator of the flatness of the yield curve, as well as a reliable indicator of a recession. The spread vacillated around and ended the month at the same level as last month, 0.24%. Remember that a flat yield curve is generally negative for leveraged strategies that borrow at short rates and lend at long rates.

Chart

10-2 Year Treasury Yield Spread data by YCharts

In light of this data, one sector that I'm watching right now are the senior loan CEFs. Many of these funds have fallen in sympathy other fixed income CEF sectors, even though they should benefit rather than suffer as interest rates rise (this is albeit muted somewhat by rising expenses). According to ADS Analytics ("Weekly Fund Wrap: 2 Steps Forward 1 Step Back"), senior loan funds have performed rather well at the NAV level during three recent periods of rising rates in 2018. Looking at the top discounted D x Y x Z senior loan funds may attractive entry points for these vehicles.

(Source: ADS Analytics)

In the broader markets, U.S. stocks (SPY) gained +0.63% this month and reached new highs again, while international stocks (ACWX) gained +0.46%. High-yield bonds (JNK) rose +0.60%, while investment grade corporates (LQD) were slightly negative (-0.15%). A basket of high-yield CEFs (YYY) was flat (+0.05%). However, long-dated treasuries (TLT) struggled this month (-3.00%) as long-term yields threatened to break out to the upside.

Chart

For October 2018, my top 3 picks are:

  • Ares Dynamic Credit Allocation Fund (ARDC): 8.29% yield, -11.94% discount, -2.9 z-score, -2.67% distance, 30% leverage, 1.97% baseline expense, and 104% coverage.
  • Principal Real Estate Income Fund (PGZ): 7.71% yield, -14.36% discount, -1.6 z-score, -2.72% distance, 31% leverage, 2.03% baseline expense, and 78% coverage.
  • Kayne Anderson Midstream Energy Fund (KMF): 10.32% yield, -12.44% discount, -2.0 z-score, -4.86% distance, 30% leverage, 2.14% baseline expense, 0% coverage.

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

Ares Dynamic Credit Allocation Fund (ARDC), the second ranked D x Y x Z fixed income pick, is classified by CEFConnect as a senior loan fund, but it actually invests in a changing mixture of loans, bonds and CLOs according to the market environment (the "dynamic" part of its name). Here's the latest portfolio mix from the fund site, showing 48% in bonds, 24% in loans and about 29% in CLO debt/equity. It holds $397 million in AUM and was incepted on November 28, 2012.

(Source: Ares)

The current discount of -11.94% is lowest in nearly two years, although it should be noted that the discount reached -18% in the late 2015/early 2016 credit crisis.

(Source: CEFConnect)

The second pick is Principal Real Estate Income Fund (PGZ), which was ranked ninth in the D x Y x Z equity list. PGZ is a relatively small $139 million fund that was incepted on June 26, 2013. According to the fund literature, PGZ will "under normal circumstances, invest between 40% and 70% of its total assets in CMBS and will invest between 30% and 60% in other real estate-related securities (including REITs)." Here's the latest asset mix from the fund's factsheet (dated July 31, 2018).

(Source: Principal)

The fund's premium/discount history is quite volatile, with large spikes of the discount occurring about once a year. The discount history suggests that the current discount of -14.36% is quite an attractive entry point. Additionally, since CEFs containing CMBS are rare, PGZ can be viewed as a nice diversifier to a portfolio containing the usual classes of fixed income funds.

(Source: CEFConnect)

The third pick is Kayne Anderson Midstream Energy Fund (KMF), which also was picked last month. KMF ranked second in this month's D x Y x Z equity list. The fund has $318 million in assets and was incepted on November 24, 2010. 9.20% yield, -12.95% discount, -2.6 z-score, -5.67% distance, 18% leverage, 2.14% baseline expense, 0% coverage. The rationale has remained unchanged since last month.

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.

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.

p.s. Remember to check out our new section, the D x Y x Z performance tracker above!

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.