The Chemist's 'High-High-Low' Closed-End Fund Report - November 2018

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Includes: ACP, AFT, AGD, AIF, AOD, ARDC, AWF, BGB, BGH, BGX, CIK, DHF, DHY, DSL, DSU, HNW, HYB, HYT, IVH, JGH, JRI, JSD, KIO, NHS, OXLC, PHT
by: Stanford Chemist
Summary

Only funds with yield over 7.5%, coverage higher than 90% and trading at a discount are considered.

Top lists of discount, z-score, yield, D x Y and D x Y x Z are given.

CIK, BGB and HYT are the top-ranked D x Y x Z funds.

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. The "High-High-Low" was inspired by a member of CEF/ETF Income Laboratory, who wrote:

Stanford, you should do a follow up article on CEFs that distribute 8%-plus, have 90% or more coverage and trade under NAV. What does that look like in today's world? How many funds are doing that?

What are the Z scores? I think many investors would be interested who are pushing for higher yield to identify best in class of aggressive funds that are coming close to covering dividends. Allows people to reevaluate risk/reward.

The "High-High-Low" report, therefore, screens for the following three attributes that we would like to screen for:

  1. High distributions (>7.5%) (i.e., 7.5% or higher yields)
  2. High coverage (>90%) (i.e., 90% or better coverage)
  3. Low premium/discount value (<0%) (i.e., trading at a discount)

Note that the above thresholds are subject to change based on the number of eligible CEFs there are that satisfy all three of the criteria. I try to aim for a minimum of at least 20 eligible funds so that the "top 10" list actually means something (top 50% of the screen).

As for the Quality CEF report, I should mention some caveats about using coverage as a screen. First, the coverage ratios are calculated using earnings data from CEFConnect. No efforts have been made to independently verify the coverage ratios from the individual fund annual/semi-annual reports themselves. Second, having a coverage ratio >90% does not guarantee that the fund's distribution is secure. Many funds reduce their distributions periodically in line with market conditions in order to maintain good coverage. Third, a coverage cut-off ratio of 90% is, ultimately, an arbitrary number. A fund with 89.9% coverage will be excluded from the rankings, whereas funds with 90.1% coverage will be considered, even though only a sliver of coverage separates the two.

I also should note that having both high yields and less than 100% coverage (though greater than 90%) makes this a more aggressive screen compared to the quality report (which only selects for >100% coverage). Furthermore, note that because the universe of eligible funds is pretty small, some of the CEFs will appear in multiple top lists, just in a different order...

I hope that these rankings of "high-high-low" CEFs will provide fertile ground for further exploration.

Key to table headings:

P/D = premium/discount

Z = 1-year z-score

Lev = leverage

BE = baseline expense

Cov = coverage

Data were taken from CEFConnect on the close of Nov. 23, 2018.

1. Top 10 highest "high-high-low" discounts

The following data show the 10 CEFs with the highest discounts, yield >7.5% and coverage >90%. z-scores, leverage and baseline expense are shown for comparison.

CEF Category P/D Yield Z Lev BE Cov
(NHS) Taxable Income-High Yield -16.68% 7.83% -1.9 33% 1.16% 99%
(HNW) Taxable Income-High Yield -15.98% 8.44% -2.1 31% 1.47% 109%
(AWF) Taxable Income-High Yield -15.40% 7.77% -2.1 7% 0.99% 109%
(JRI) US Equity-Real Estate (Global) -15.17% 8.68% -2.4 31% 1.58% 98%
(JGH) Non-US/Other-Global Income -14.92% 9.04% -1.9 30% 1.31% 102%
(AGD) Non-US/Other-Global Equity Dividend -14.76% 8.58% -2.3 7% 1.17% 124%
(AOD) Non-US/Other-Global Equity Dividend -14.66% 8.78% -1.8 0% 1.15% 117%
(HYB) Taxable Income-High Yield -14.59% 8.29% -1.4 29% 1.14% 100%
(HYT) Taxable Income-High Yield -14.55% 9.00% -2.9 30% 0.93% 99%
(AFT) Taxable Income-Senior Loan -14.46% 8.09% -2.6 34% 2.24% 106%

(Source: CEFConnect, Stanford Chemist)

2. Top 10 lowest "high-high-low" z-scores

The following data show the 10 CEFs with the lowest z-scores, yield >8%, coverage >90% and premium/discount <0%. Leverage and baseline expense are shown for comparison.

CEF Category Z P/D Yield Lev BE Cov
(CIK) Taxable Income-High Yield -3.7 -12.39% 9.34% 30% 0.78% 105%
(BGB) Taxable Income-Senior Loan -3.6 -12.10% 9.13% 33% 2.02% 102%
(AIF) Taxable Income-High Yield -3.1 -13.38% 8.77% 33% 2.28% 104%
(JSD) Taxable Income-Senior Loan -3.1 -10.70% 8.09% 37% 1.51% 99%
(HYT) Taxable Income-High Yield -2.9 -14.55% 9.00% 30% 0.93% 99%
(DSU) Taxable Income-Senior Loan -2.8 -14.19% 7.93% 30% 0.91% 97%
(PHT) Taxable Income-High Yield -2.7 -13.86% 9.26% 29% 1.08% 110%
(ARDC) Taxable Income-Senior Loan -2.6 -14.02% 8.75% 30% 1.97% 104%
(DHY) Taxable Income-High Yield -2.6 -8.37% 10.39% 36% 1.53% 95%
(AFT) Taxable Income-Senior Loan -2.6 -14.46% 8.09% 34% 2.24%

106%

(Source: CEFConnect, Stanford Chemist)

3. Top 10 highest "high-high-low" yields

The following data show the 10 CEFs with the highest yields, coverage >90% and premium/discount <0%. z-scores, leverage, and baseline expense are shown for comparison.

CEF Category Yield P/D Z Lev BE Cov
(OXLC) Taxable Income-Senior Loan 16.30% -0.40% -1.0 37% 4.35% 114%
(ACP) Taxable Income-Senior Loan 12.24% -10.41% -2.3 30% 2.25% 112%
(BGH) Taxable Income-High Yield 10.50% -12.44% -2.5 30% 1.60% 108%
(DHY) Taxable Income-High Yield 10.39% -8.37% -2.6 36% 1.53% 95%
(DSL) Taxable Income-Multi-Sector 10.01% -8.60% -1.8 31% 1.66% 100%
(KIO) Taxable Income-High Yield 9.82% -9.61% -1.2 29% 1.96% 100%
(DHF) Taxable Income-High Yield 9.69% -9.03% -1.6 32% 1.27% 93%
(BGX) Taxable Income-Senior Loan 9.39% -11.10% -2.3 38% 1.71% 101%
(CIK) Taxable Income-High Yield 9.34% -12.39% -3.7 30% 0.78% 105%
(IVH) Taxable Income-High Yield 9.34% -13.74% -2.4 32% 1.58% 119%

(Source: CEFConnect, Stanford Chemist)

4. Top 10 best combination of "high-high-low" yield and discount

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 plus discount, however I disregarded this because yields and discounts may have different ranges of absolute values and a sum would be biased toward 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. Only funds with >7.5% yield, >90% coverage and <0% premium/discount are considered.

CEF Category P/D Yield Z D x Y Lev BE Cov
(JGH) Non-US/Other-Global Income -14.92% 9.04% -1.9 -1.35 30% 1.31% 102%
(HNW) Taxable Income-High Yield -15.98% 8.44% -2.1 -1.35 31% 1.47% 109%
(JRI) US Equity-Real Estate (Global) -15.17% 8.68% -2.4 -1.32 31% 1.58% 98%
(HYT) Taxable Income-High Yield -14.55% 9.00% -2.9 -1.31 30% 0.93% 99%
(BGH) Taxable Income-High Yield -12.44% 10.50% -2.5 -1.31 30% 1.60% 108%
(NHS) Taxable Income-High Yield -16.68% 7.83% -1.9 -1.31 33% 1.16% 99%
(AOD) Non-US/Other-Global Equity Dividend -14.66% 8.78% -1.8 -1.29 0% 1.15% 117%
(PHT) Taxable Income-High Yield -13.86% 9.26% -2.7 -1.28 29% 1.08% 110%
(IVH) Taxable Income-High Yield -13.74% 9.34% -2.4 -1.28 32% 1.58% 119%
(ACP) Taxable Income-Senior Loan -10.41% 12.24% -2.3 -1.27 30% 2.25%

112%

(Source: CEFConnect, Stanford Chemist)

5. Top 10 best combination of "high-high-low" yield, discount and z-score

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. Only funds with >7.5% yield, >90% coverage and <0% premium/discount are considered.

CEF Category P/D Yield Z D x Y x Z Lev BE Cov
(CIK) Taxable Income-High Yield -12.39% 9.34% -3.7 4.28 30% 0.78% 105%
(BGB) Taxable Income-Senior Loan -12.10% 9.13% -3.6 3.98 33% 2.02% 102%
(HYT) Taxable Income-High Yield -14.55% 9.00% -2.9 3.80 30% 0.93% 99%
(AIF) Taxable Income-High Yield -13.38% 8.77% -3.1 3.64 33% 2.28% 104%
(PHT) Taxable Income-High Yield -13.86% 9.26% -2.7 3.47 29% 1.08% 110%
(BGH) Taxable Income-High Yield -12.44% 10.50% -2.5 3.27 30% 1.60% 108%
(ARDC) Taxable Income-Senior Loan -14.02% 8.75% -2.6 3.19 30% 1.97% 104%
(JRI) US Equity-Real Estate (Global) -15.17% 8.68% -2.4 3.16 31% 1.58% 98%
(DSU) Taxable Income-Senior Loan -14.19% 7.93% -2.8 3.15 30% 0.91% 97%
(IVH) Taxable Income-High Yield -13.74% 9.34% -2.4 3.08 32% 1.58% 119%

(Source: CEFConnect, Stanford Chemist)

Disclosure: I am/we are long AOD, ARDC, NHS. 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.

Additional disclosure: 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.