The Chemist's Closed-End Fund Report - November 2018: Discounts Blow Out As The Stock Market Corrects

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Includes: ACWX, AGD, AIF, AMZN, ASA, AVK, BBN, BGB, BHV, BIF, BLH, BST, BWG, CAF, CEN, CET, CLM, CRF, CUBA, DDF, DHF, DHY, DNI, DNP, DPG, ECC, EDD, EDF, EDI, EGIF, EMD, EOD, ERC, ETW, EXD, FAM, FAX, FCO, FCT, FEO, FGB, FSD, FT, FTF, FXBY, GDL, GGN, GHY, GLQ, GOF, GOOG, GRF, GUT, HPF, HPS, IAE, IFN, IGR, IIF, IRL, JEQ, JGH, JHA, JHD, JNK, KF, KMM, KST, LDF, LGI, LOR, LQD, MCN, MPA, MSF, MUJ, MXE, NBD, NBO, NCV, NCZ, NDP, NHS, NXJ, OPP, OXLC, PCN, PCQ, PDI, PGP, PHK, PML, PTY, RCS, RGT, RIF, RIV, SOR, SPY, SRF, THQ, TLT, UTG, VGI, VPV, WIW, YYY, ZF, ZTR
by: Stanford Chemist
Summary

Discounts blow out as the stock market corrects.

Equity CEFs harder hit this month, and yields rise substantially.

Picks for November are AIF, BGB and AGD.

Author's note: All data is as of November 2, 2018, so numbers may be out of date. Please check latest data before making investment decisions.

Quantitative screens help to rapidly narrow down attractive candidates from the database of 500-plus closed-end funds ((CEFs)) for further due diligence and investigation.

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

(GUT)

Gabelli Utility Trust

U.S. Utilities

25.05%

9.93%

0.0

4%

0.07%

-0.31%

28%

1.75%

(DNP)

DNP Select Income

U.S. Growth & Income

20.65%

7.13%

1.1

28%

-1.63%

3.98%

28%

1.00%

(CRF)

Cornerstone Total Return

U.S. General Equity

8.29%

22.49%

-3.0

5%

7.32%

-7.43%

0%

1.20%

(CLM)

Cornerstone Strategic Value

U.S. General Equity

6.99%

22.61%

-2.9

5%

7.86%

-6.44%

0%

1.19%

(DDF)

Delaware Inv Div & Inc

U.S. Growth & Income

5.21%

10.01%

1.0

#DIV/0!

4.50%

7.52%

31%

1.14%

(ETW)

EV Tax-Managed Glb B-W Opps

Covered Call

4.75%

9.91%

-0.3

19%

0.82%

0.17%

0%

1.09%

(GOF)

Guggenheim Strategic Opp Fund

U.S. Growth & Income

4.50%

11.20%

-1.3

50%

5.67%

-5.05%

0%

1.28%

(FGB)

First Trust Specialty Finance

U.S. Financials Equity

3.19%

11.38%

0.8

31%

1.11%

1.81%

23%

1.49%

(BST)

BlackRock Science and Technolo

Global Equity

2.59%

6.05%

-0.3

-5%

10.10%

-0.77%

0%

1.07%

(NDP)

Tortoise Energy Independence F

MLPs

1.94%

16.67%

0.0

0%

-10.71%

0.58%

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

-30.41%

0.49%

-0.5

#DIV/0!

1.37%

-1.15%

0%

2.51%

(DNI)

Dividend and Income Fund

U.S. Growth & Income

-25.95%

7.23%

-2.5

7%

-17.78%

-5.15%

0%

1.43%

(CUBA)

Herzfeld Caribbean Basin

Latin American Eequity

-22.02%

2.03%

-2.5

-9%

-7.50%

-4.77%

0%

2.66%

(RIF)

RMR Real Estate Income Fund

U.S. Real Estate

-21.11%

7.73%

-1.7

33%

-1.61%

-2.52%

31%

1.90%

(GDL)

GDL Fund

Global Equity

-21.04%

4.54%

-2.6

-8%

-0.95%

-3.85%

38%

1.74%

(EGIF)

Eagle Growth & Income Opportun

Global Growth & Income

-18.57%

6.58%

-1.1

72%

-1.82%

-1.51%

30%

2.07%

(RGT)

Royce Global Value Trust Fund

Global Equity

-18.28%

1.16%

-3.1

6%

-4.13%

-4.07%

6%

1.52%

(IRL)

New Ireland Fund

Other Non-U.S. Equity

-18.00%

12.57%

-2.8

1%

-23.10%

-3.31%

0%

1.99%

(SRF)

Cushing Energy Income Fund

MLPs

-17.58%

5.88%

-1.8

0%

1.31%

-2.66%

11%

3.14%

(CET)

Central Securities Corporation

U.S. General Equity

-17.38%

3.85%

3.0

20%

5.74%

-0.15%

0%

0.73%

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

34.93%

11.05%

0.1

70%

-1.31%

1.11%

19%

1.48%

(RCS)

PIMCO Strategic Income Fund

Global Income

31.48%

9.36%

0.6

86%

0.45%

4.93%

68%

0.97%

(PHK)

PIMCO High Income Fund

Multisector Income

29.09%

11.93%

0.7

61%

5.43%

7.01%

26%

0.89%

(BHV)

BlackRock VA Municipal Bond

Virginia Munis

22.25%

4.26%

2.2

89%

-1.58%

11.90%

40%

1.78%

(PCN)

PIMCO Corporate & Income Strgy

Investment Grade

19.01%

7.79%

0.5

88%

3.96%

2.63%

18%

0.92%

(PTY)

PIMCO Corporate & Income Opps

Investment Grade

16.32%

9.24%

-0.1

78%

6.80%

-0.38%

28%

0.82%

(PCQ)

PIMCO CA Municipal Income

California Munis

15.60%

6.08%

-0.5

84%

-0.46%

-2.83%

51%

1.15%

(EDF)

Stone Harbor Emerging Mkts FI

Emerging Market Income

14.47%

17.28%

0.7

55%

-13.68%

3.53%

33%

1.84%

(PDI)

PIMCO Dynamic Income Fund

Multisector Income

11.52%

8.24%

0.9

108%

8.10%

3.47%

40%

-2.02%

(PML)

PIMCO Municipal Income II

National Munis

9.97%

6.20%

0.2

85%

0.90%

0.40%

48%

1.05%

Top 10 highest discounts fixed income:

Ticker

Fund

Category

P/D

Y

Z

Cov

1Y NAV

Dis

Lev

BE

(NHS)

Neuberger Berman High Yield St

High Yield

-16.84%

7.61%

-2.0

99%

-1.12%

-3.18%

33%

1.16%

(FT)

Franklin Universal Trust

Multisector Income

-16.65%

5.90%

-1.7

103%

-1.01%

-2.39%

23%

1.09%

(FAM)

First Trust/Aberdeen Global

Global Income

-16.59%

9.23%

-3.1

84%

-7.96%

-4.23%

30%

1.83%

(BWG)

BrandywineGLOBAL-Gl Inc opps

Global Income

-16.57%

8.85%

-2.6

102%

-10.59%

-2.70%

33%

1.53%

(MUJ)

BlackRock MuniHoldings NJ Qty

New Jersey Munis

-16.43%

5.10%

-1.4

113%

-0.85%

-3.84%

40%

0.92%

(GHY)

PGIM Global Short Dur Hi

High Yield

-16.35%

7.42%

-1.7

84%

3.02%

-2.48%

28%

1.24%

(EXD)

EV Tax-Advantaged Bond&Option

Government Bonds

-16.18%

7.63%

-1.6

5%

-9.26%

-5.72%

0%

1.44%

(MPA)

BlackRock MuniYield PA Quality

Pennsylvania Munis

-16.07%

5.38%

-2.0

105%

-1.51%

-4.74%

40%

0.94%

(NXJ)

Nuveen NJ Quality Muni Income

New Jersey Munis

-16.04%

5.21%

-1.2

101%

-1.06%

-0.99%

39%

0.98%

(NBO)

Neuberger Berman NY Inter Muni

New York Munis

-15.96%

4.23%

-1.1

107%

-2.57%

-1.48%

41%

1.31%

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

(MSF)

MS Emerging Markets

Emerging Market Equity

2.7

-3.69%

0.35%

30%

-13.68%

8.06%

2%

1.58%

(UTG)

Reaves Utility Income

U.S. Utilities

2.2

-3.90%

6.68%

46%

2.33%

3.44%

23%

1.08%

(GLQ)

Clough Global Equity

Global Equity

2.0

1.02%

11.12%

1%

4.16%

7.17%

39%

2.22%

(MCN)

Madison Covered Call & Eq Strt

Covered Call

2.0

-4.60%

9.65%

3%

4.21%

2.73%

0%

1.13%

(LDF)

Latin American Discovery Fund

Latin American Eequity

1.9

-1.71%

0.67%

23%

-4.95%

8.49%

0%

1.54%

(GRF)

Eagle Capital Growth

U.S. General Equity

1.9

-14.89%

6.81%

2%

0.88%

-1.08%

0%

1.22%

(THQ)

Tekla Healthcare Oppos Fund

U.S. Health/Biotech Equity

1.9

-8.50%

7.47%

12%

11.09%

1.62%

22%

1.50%

(MXE)

Mexico Equity & Income

Latin American Eequity

1.7

-8.63%

0.45%

26%

-2.36%

3.98%

0%

1.73%

(DNP)

DNP Select Income

U.S. Growth & Income

1.1

20.65%

7.13%

28%

-1.63%

3.98%

28%

1.00%

(DDF)

Delaware Inv Div & Inc

U.S. Growth & Income

1.0

5.21%

10.01%

26%

4.50%

7.52%

31%

1.14%

Top 10 lowest z-scores equity:

Ticker

Fund

Category

Z

P/D

Y

Cov

1Y NAV

Dis

Lev

BE

(ASA)

ASA Gold and Precious Metals

U.S. Energy/Resources Equity

-8.6

-11.59%

0.44%

#DIV/0!

-19.51%

1.91%

0%

1.16%

(BIF)

Boulder Growth & Income

U.S. General Equity

-5.0

-17.33%

3.85%

19%

6.79%

-1.79%

0%

1.32%

(KF)

Korea Fund

Asia Equity

-4.4

-11.34%

0.68%

3%

-18.56%

-0.32%

5%

1.10%

(IFN)

CBRE Clarion Global Real Est I

Global Real Estate

-4.2

-15.40%

8.96%

36%

-2.53%

-3.14%

15%

1.14%

(IGR)

India Fund Inc

Asia Equity

-4.2

-13.19%

6.96%

-1%

-12.16%

-1.32%

0%

1.25%

(AGD)

Aberdeen Global Dynamic Divide

Global Equity Dividend

-4.0

-15.15%

8.39%

#DIV/0!

2.24%

-5.78%

7%

1.17%

(JEQ)

Aberdeen Japan Equity Fund

Asia Equity

-3.9

-14.53%

6.48%

2%

-11.69%

-2.68%

0%

0.84%

(LOR)

Lazard World Dividend & Income

Global Growth & Income

-3.8

-15.48%

8.89%

73%

-8.38%

-6.24%

16%

1.66%

(IIF)

MS India Investment

Asia Equity

-3.7

-12.11%

13.55%

-1%

-25.48%

-0.99%

0%

1.43%

(IAE)

Aberdeen Australia Equity

Other Non-U.S. Equity

-3.7

-6.76%

12.21%

9%

-3.15%

-4.34%

0%

1.46%

Top 10 highest z-scores fixed income:

Ticker

Fund

Category

Z

P/D

Y

Cov

1Y NAV

Dis

Lev

BE

(FCO)

Aberdeen Global Income

Global Income

2.7

5.11%

9.95%

53%

-3.69%

8.17%

28%

1.90%

(BLH)

BlackRock NY Muni 2018 Term

New York Munis

2.3

0.00%

0.20%

7%

0.93%

0.79%

0%

0.55%

(BHV)

BlackRock VA Municipal Bond

Virginia Munis

2.2

22.25%

4.26%

89%

-1.58%

11.90%

40%

1.78%

(JHA)

Nuveen High Income Dec 2018 Ta

High Yield

2.1

-0.60%

3.28%

78%

0.00%

0.74%

0%

0.89%

(HPS)

JH Preferred Income III

Preferreds

2.0

1.57%

8.11%

79%

1.30%

3.91%

34%

1.24%

(KMM)

Deutsche Multi-Market Income

Global Income

1.8

-0.44%

4.33%

108%

0.96%

2.38%

11%

1.16%

(KST)

Deutsche Strategic Income

Global Income

1.7

-0.50%

4.20%

105%

0.87%

2.28%

14%

1.69%

(VPV)

Invesco PA Value Muni

Pennsylvania Munis

1.7

-10.94%

5.94%

118%

-1.14%

1.94%

42%

1.02%

(HPF)

JH Preferred Income II

Preferreds

1.5

3.05%

8.16%

78%

2.15%

3.31%

35%

1.26%

(JHD)

Nuveen High Income Dec 2019 Ta

High Yield

1.5

-1.50%

4.26%

99%

2.20%

0.58%

0%

0.95%

Top 10 lowest z-scores fixed income:

Ticker

Fund

Category

Z

P/D

Y

Cov

1Y NAV

Dis

Lev

BE

(DHY)

Credit Suisse High Yield Bond

High Yield

-3.7

-8.53%

10.17%

95%

0.21%

-7.34%

36%

1.53%

(BGB)

Blackstone/GSO Strategic Cred

Senior Loan

-3.5

-10.52%

8.42%

106%

5.82%

-3.87%

33%

2.02%

(AIF)

Apollo Tactical Income Fund In

High Yield

-3.3

-13.35%

8.60%

104%

5.68%

-2.96%

33%

2.28%

(NBD)

Nuveen Build America Bond Opp

Munis (Taxable)

-3.2

-8.35%

5.65%

100%

-0.22%

-3.40%

29%

0.93%

(WIW)

First Trust/Aberdeen Global

Global Income

-3.1

-16.59%

9.23%

84%

-7.96%

-4.23%

30%

1.83%

(ERC)

Wells Fargo Adv Multi-Sec Inc

Limited Duration

-3.1

-11.71%

1.08%

658%

1.26%

-3.47%

29%

1.06%

(FCT)

First Trust Senior FR Inc II

Senior Loan

-3.1

-13.72%

5.99%

94%

4.19%

-5.15%

29%

1.25%

(FAM)

WA Inflation-Linked Opps & Inc

Government Bonds

-3.1

-14.45%

4.22%

90%

-2.91%

-3.31%

29%

0.99%

(BBN)

BlackRock Taxable Muni Bond

Munis (Taxable)

-3.0

-10.48%

7.19%

103%

-0.32%

-5.44%

36%

0.90%

(AVK)

Advent Claymore Conv & Income

Convertibles

-2.9

-13.05%

9.86%

39%

0.75%

-2.59%

40%

1.14%

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

(LGI)

Lazard Glb Total Return & Inc

Global Growth & Income

31.48%

-10.06%

-1.1

6%

-0.59%

-2.36%

14%

1.42%

(CLM)

Cornerstone Strategic Value

U.S. General Equity

22.61%

6.99%

-2.9

5%

7.86%

-6.44%

0%

1.19%

(CRF)

Cornerstone Total Return

U.S. General Equity

22.49%

8.29%

-3.0

5%

7.32%

-7.43%

0%

1.20%

(NDP)

Tortoise Energy Independence F

MLPs

16.67%

1.94%

0.0

0%

-10.71%

0.58%

25%

1.69%

(ZF)

Virtus Total Return Fund Inc.

Global Growth & Income

15.54%

-9.89%

-3.1

10%

-15.11%

-5.17%

27%

1.62%

(CEN)

Center Coast MLP & Infras

MLPs

14.82%

-0.82%

-0.9

0%

-1.83%

-2.06%

38%

2.01%

(RIV)

RiverNorth Opportunities Fund

U.S. Growth & Income

14.74%

-4.04%

-1.8

19%

-0.77%

-8.05%

0%

1.35%

(GGN)

GAMCO Glb Gold Natural Res&Inc

U.S. Energy/Resources Equity

14.32%

-5.63%

-1.9

8%

-8.51%

-5.07%

11%

1.29%

(ZTR)

Virtus Global Div & Inc Fund

U.S. Growth & Income

13.72%

-5.18%

-2.1

27%

-8.85%

-7.61%

28%

1.56%

(IIF)

MS India Investment

Asia Equity

13.55%

-12.11%

-3.7

-1%

-25.48%

-0.99%

0%

1.43%

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

17.28%

14.47%

0.7

55%

-13.68%

3.53%

33%

1.84%

(EDI)

Stone Harbor Emg Mkts Total In

Emerging Market Income

15.34%

1.81%

0.1

63%

-14.60%

0.37%

33%

1.94%

(OXLC)

Oxford Lane Capital Corp

Senior Loan

15.14%

7.21%

0.6

0%

18.85%

2.83%

37%

4.35%

(ECC)

Eagle Point Credit Company LLC

Senior Loan

14.10%

3.28%

-2.2

65%

11.89%

-6.10%

34%

3.29%

(NCZ)

AGIC Convertible & Income II

Multisector Income

12.57%

4.97%

-0.4

67%

-0.87%

-0.79%

38%

1.24%

(NCV)

AGIC Convertible & Income

Multisector Income

12.38%

7.88%

-0.2

80%

-0.49%

-0.57%

38%

1.21%

(FTF)

Franklin Limited Duration Inco

Limited Duration

12.36%

-10.71%

-2.0

55%

-7.58%

-4.78%

26%

0.77%

(VGI)

Virtus Global Multi-Sector Inc

Multisector Income

12.21%

-8.84%

-1.3

51%

-12.33%

-6.58%

29%

1.74%

(PHK)

PIMCO High Income Fund

Multisector Income

11.93%

29.09%

0.7

61%

5.43%

7.01%

26%

0.89%

(OPP)

RiverNorth/DoubleLine Strategi

Multisector Income

11.08%

-9.82%

-2.8

50%

-0.62%

-2.96%

26%

1.80%

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, but 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

(LGI)

Lazard Glb Total Return & Inc

Global Growth & Income

-10.06%

31.48%

-1.1

6%

-0.59%

-3.17

-2.36%

14%

1.42%

(IRL)

New Ireland Fund

Other Non-U.S. Equity

-18.00%

12.57%

-2.8

1%

-23.10%

-2.26

-3.31%

0%

1.99%

(DNI)

Dividend and Income Fund

U.S. Growth & Income

-25.95%

7.23%

-2.5

7%

-17.78%

-1.88

-5.15%

0%

1.43%

(FEO)

First Trust/Aberdeen Emerging

Global Growth & Income

-15.16%

11.32%

-2.4

17%

-11.12%

-1.72

-4.46%

7%

1.62%

(IIF)

MS India Investment

Asia Equity

-12.11%

13.55%

-3.7

-1%

-25.48%

-1.64

-0.99%

0%

1.43%

(RIF)

RMR Real Estate Income Fund

U.S. Real Estate

-21.11%

7.73%

-1.7

33%

-1.61%

-1.63

-2.52%

31%

1.90%

(ZF)

Virtus Total Return Fund Inc.

Global Growth & Income

-9.89%

15.54%

-3.1

10%

-15.11%

-1.54

-5.17%

27%

1.62%

(DPG)

Duff & Phelps Global Utility

U.S. Utilities

-14.29%

10.51%

-3.1

5%

-3.64%

-1.50

-3.57%

30%

1.59%

(CAF)

MS China A Share

Asia Equity

-14.06%

10.49%

-0.9

0%

-12.97%

-1.47

0.51%

0%

1.75%

(EOD)

Wells Fargo Adv Glo Div Opp

Global Equity Dividend

-11.37%

12.79%

-3.5

11%

-6.06%

-1.45

-4.11%

14%

1.17%

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

-14.47%

10.61%

-2.1

48%

-7.43%

-1.54

-3.07%

31.7%

1.14%

(FAM)

First Trust/Aberdeen Global

Global Income

-16.59%

9.23%

-3.1

84%

-7.96%

-1.53

-4.23%

29.7%

1.83%

(EDD)

MS Emerging Markets Domestic

Emerging Market Income

-15.42%

9.68%

-1.5

39%

-9.62%

-1.49

-2.93%

33.5%

1.75%

(EMD)

Western Asset Emerg Mkts Debt

Emerging Market Income

-15.44%

9.52%

-2.0

87%

-9.69%

-1.47

-2.51%

21.7%

1.20%

(BWG)

BrandywineGLOBAL-Gl Inc opps

Global Income

-16.57%

8.85%

-2.6

102%

-10.59%

-1.47

-2.70%

33.0%

1.53%

(FSD)

First Trust High Inc Long/Shrt

High Yield

-15.66%

9.06%

-1.7

75%

-1.84%

-1.42

-4.08%

20.2%

1.18%

(FTF)

Franklin Limited Duration Inco

Limited Duration

-10.71%

12.36%

-2.0

55%

-7.58%

-1.32

-4.78%

25.5%

0.77%

(JGH)

Nuveen Global High Income

Global Income

-14.78%

8.73%

-2.1

102%

-0.47%

-1.29

-3.46%

29.7%

1.31%

(AVK)

Advent Claymore Conv & Income

Convertibles

-13.05%

9.86%

-2.9

39%

0.75%

-1.29

-2.59%

40.2%

1.14%

(NHS)

Neuberger Berman High Yield St

High Yield

-16.84%

7.61%

-2.0

99%

-1.12%

-1.28

-3.18%

33.3%

1.16%

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

(IRL)

New Ireland Fund

Other Non-U.S. Equity

-18.00%

12.57%

-2.8

1%

-23.10%

6.34

-3.31%

0%

1.99%

(IIF)

MS India Investment

Asia Equity

-12.11%

13.55%

-3.7

-1%

-25.48%

6.07

-0.99%

0%

1.43%

(IGR)

CBRE Clarion Global Real Est I

Global Real Estate

-15.40%

8.96%

-4.2

36%

-2.53%

5.80

-3.14%

15%

1.14%

(LOR)

Lazard World Dividend & Income

Global Growth & Income

-15.48%

8.89%

-3.8

73%

-8.38%

5.23

-6.24%

16%

1.66%

(EOD)

Wells Fargo Adv Glo Div Opp

Global Equity Dividend

-11.37%

12.79%

-3.5

11%

-6.06%

5.09

-4.11%

14%

1.17%

(AGD)

Aberdeen Global Dynamic Divide

Global Equity Dividend

-15.15%

8.39%

-4.0

124%

2.24%

5.08

-5.78%

7%

1.17%

(IAE)

Voya Asia Pacific High Dividen

Asia Equity

-14.17%

9.53%

-3.7

6%

-8.34%

5.00

-3.71%

0%

1.32%

(ZF)

Virtus Total Return Fund Inc.

Global Growth & Income

-9.89%

15.54%

-3.1

10%

-15.11%

4.76

-5.17%

27%

1.62%

(DNI)

Dividend and Income Fund

U.S. Growth & Income

-25.95%

7.23%

-2.5

7%

-17.78%

4.69

-5.15%

0%

1.43%

(DPG)

Duff & Phelps Global Utility

U.S. Utilities

-14.29%

10.51%

-3.1

5%

-3.64%

4.66

-3.57%

30%

1.59%

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

(FAM)

First Trust/Aberdeen Global

Global Income

-16.59%

9.23%

-3.1

84%

-7.96%

4.75

-4.23%

30%

1.83%

(BWG)

BrandywineGLOBAL-Gl Inc opps

Global Income

-16.57%

8.85%

-2.6

102%

-10.59%

3.81

-2.70%

33%

1.53%

(AIF)

Apollo Tactical Income Fund In

High Yield

-13.35%

8.60%

-3.3

104%

5.68%

3.79

-2.96%

33%

2.28%

(AVK)

Advent Claymore Conv & Income

Convertibles

-13.05%

9.86%

-2.9

39%

0.75%

3.73

-2.59%

40%

1.14%

(FAX)

Aberdeen Asia-Pacific Income

Global Income

-14.47%

10.61%

-2.1

48%

-7.43%

3.22

-3.07%

32%

1.14%

(DHY)

Credit Suisse High Yield Bond

High Yield

-8.53%

10.17%

-3.7

95%

0.21%

3.21

-7.34%

36%

1.53%

(BGB)

Blackstone/GSO Strategic Cred

Senior Loan

-10.52%

8.42%

-3.5

106%

5.82%

3.10

-3.87%

33%

2.02%

(DHF)

Dreyfus High Yield Strategies

High Yield

-11.14%

9.56%

-2.9

93%

0.36%

3.09

-4.08%

32%

1.27%

(OPP)

RiverNorth/DoubleLine Strategi

Multisector Income

-9.82%

11.08%

-2.8

50%

-0.62%

3.05

-2.96%

26%

1.80%

(EMD)

Western Asset Emerg Mkts Debt

Emerging Market Income

-15.44%

9.52%

-2.0

87%

-9.69%

2.94

-2.51%

22%

1.20%

6. Summary statistics

The average premium/discount of all the CEFs in the database is -8.53%, a massive decrease from -6.59% in the previous month. Equity CEF discounts widened by 230 bps to -8.29%, while fixed income CEF discounts widened by 175 bps to -8.66%.

The average distribution yield of all the CEFs in the database is 7.16%, a massive increase from 6.69% in the month prior. Equity CEFs average 8.72% yield, while fixed income CEFs average 6.10% yield.

The average 1-year z-score of all the CEFs in the database is -1.32, a large decrease from -0.42 a month ago. Equity CEFs have an average z-score of -1.50, while fixed income CEFs have an average z-score of -1.22.

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 judgement), we can also evaluate the raw predictive power of this metric by comparing the 3 or 6-month total return values of the top 10 D x Y x Z funds from 3 or 6 months ago respectively. The links to the past reports from 3 and 6 months are below:

Here's the results for the equity CEFs. Remember that these lists are the top 10 D x Y x Z funds from 3 and 6 months ago, respectively. The data below shows that the average of the top 10 D x Y x Z sightly outperform the average for all equity CEFs at 3 months, and greatly outperform at 6 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 3 months and 6 months.

Commentary

The big story this month is, of course, a sharp move downwards in the U.S. equity markets. U.S. stocks (SPY) posted their worst month since 2011, falling -7.09%, while international stocks (ACWX) fared even worse at -7.99%. Investment grade corporates (LQD) fell -2.01%, long-dated treasuries (TLT) dropped by -3.05% while high-yield bonds (JNK) declined by -2.02%. A basket of high-yield CEFs (YYY) fell by -6.06%.

Chart

JPMorgan's October 2018 market review presents the following chart, showing that safer styles such as bonds (-1.1%), REITs (-2.6%) and value (-4.7%) have outperformed riskier styles such as emerging markets (-7.8%), growth (-8.7%) and small-cap (-9.4%). For reference, the S&P 500 was down -6.8% in October.

(Source)

The stock market volatility in October was attributed to a combination rising treasury yields and strong wage and employment growth, which market observers linked to an increased likelihood of a hawkish Fed going forward. Later in the month, disappointing earnings and guidance from Amazon (AMZN) and Alphabet (GOOG) put a damper on the red-hot tech sector, and contributing to the NASDAQ's largest monthly decline (-9.20%) since November 2008.

Looking at some key funding rates, the 1-month and 3-month LIBOR have increased by 16 bps and 8 bps over the last month respectively. This will continue to put pressure on leveraged CEF expense ratios.

Chart

1-Month LIBOR based on US Dollar

data by

YCharts

A slightly silver lining for carry strategies and stocks in general is that the 10-2 treasury spread has moved off its lows in September and now sits at 0.29%. This suggests that a recession is not imminent.

Chart

10 Year Treasury Rate

data by

YCharts

How have CEFs reacted to this month's stock market volatility? Pretty much as expected. According to Lipper's October 2018 Closed-End Fund report, equity CEFs averaged a NAV return of -5.84%, exactly 1 percentage point better than the S&P 500's -6.84% return, but the average price return was -9.22% suggesting a major widening of discounts. Fixed income funds fared relatively better, at -1.13% and -3.48% average NAV and price returns respectively, although discounts still widened substantially.

Our own data corroborates this view. Equity CEF discounts widened by 230 bps this month, from -5.99% to -8.29%, while fixed income CEF discounts widened by 175 bps, from -6.91% to -8.66%. The average discount across the entire CEF universe is now -8.53%, which is -194 bps lower than the previous month. All are lows since we started the Chemist's CEF Report series in September 2016.

In terms of 1-year z-score, average equity z-score of -1.50 is a 12-month low, however, the average fixed income z-score is -1.22 which is still above the -1.80 reached in February of this year. This suggests that equity CEFs received the brunt of the damage in terms of discount widening this month.

Is this time to panic? I would say no. Fundamentally speaking, a widening discount simply allows you to buy exactly the same assets at a lower price and a higher yield than before. As a case in point, the average yield across all CEFs increased by 47 bps this month, from 6.69% to 7.16%. In fact, most of the increase was due to rising yields in equity CEFs (thanks to falling prices!); the average equity CEF yield rose 96 bps from 7.76% to 8.72%, while the average fixed income CEF only increased by 22 bps, from 6.10% to 6.32%.

Members who were with us last year may remember that I was frequently lamenting the high valuations in CEFs, which made it harder to put new money to work. A quick list of the CEF report titles from 2017 may jog your memory!

One of our members wrote a fantastic comment in the chat last month about how they, as an income investor, views volatility in CEFs. In case you missed it, here is the comment reproduced in full below:

Interesting how Fear & Greed is measured on the population compared to myself and buying CEFs for their monthly distribution. As the markets falls with increased volatility, I start to feel more greedy. When the market was up near Dow 27K, I was feeling Fear it was continuing to get ahead of itself. It's been a year since I turned off automatic reinvestment of distributions and now I'm considering turning it back on. While it may be nice to look at your portfolio value and see it hitting new highs, for an income investor I want the market volatility from Fear to present investment opportunities. I remember when I first started getting into CEFs back in 2015 and then watching the CEF value fall through early 2016. I stayed the course reinvesting the distributions and putting additional cash to work as the yields were too good to pass up such as buying PTY at a discount. I yearn for those days once again. As the trading price fell faster than the NAV, discounts got deep and yields got higher. So, if you're investing for a recurring income stream, ignore the portfolio value while focusing on the income stream boost you're getting is the lesson I learned. Today, I'm thankful for finding @stanford.chemist to help me find the gems using data to compare and analyze CEFs. Provides a level of confidence to help you sleep at night during volatile periods.

In my opinion, now that discounts are wider, and prices are lower, now is the time for the income investor to be a buyer, rather than a seller, of heavily discounted CEFs. To paraphrase our member's comment above, while it may be disheartening to look at your portfolio value and see it going down during times of market stress, an income investor should make use of the investment opportunities provided by the volatility in order to enhance future portfolio returns.

For November 2018, my top 3 picks are:

  • Apollo Tactical Income Fund (AIF): 8.64% yield, -13.52% discount, -3.7 z-score, -2.96% distance, 33% leverage, 2.28% baseline expense, and 104% coverage.
  • Blackstone/GSO Strategic Credit Fund (BGB): 8.42% yield, -14.36% discount, -3.5 z-score, -3.87% distance, 33% leverage, 2.02% baseline expense, and 106% coverage.
  • Aberdeen Global Dynamic Dividend Fund (AGD): 8.41% yield, -15.05% discount, -3.2 z-score, -5.78% distance, 7% leverage, 1.17% baseline expense, 124% coverage.

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 CLM, ECC, PTY, UTG. 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.