Over the past few months, most of you have noticed increased activity in closed-end funds as the inflow of volatility finally shook them up and created various arbitrage and directional opportunities for active traders such as us.
Master Limited Partnerships, or MLPs, have had a couple of rough years, and we have been exposing ourselves to them through the related CEFs every now and then, as avid followers would have noticed from our articles. This group has now become part of our Weekly Reviews, so we can keep an eye on them in a more consistent manner and share our thoughts with you.
Over the past week, there was no important news that could affect the sector's performance.
Over the past week, the ALPS Alerian MLP ETF (AMLP) finished in negative territory. On Monday, the ETF opened lower with a gap and continued selling until the closing bell. The next day was once again not so promising after the fund hit a new low of $8.27 per share, but by the end of the trading day, the index closed positive. The following couple days were volatile and had high trading volume. At the end, AMLP closed at a price of $8.64 per share. On a weekly basis, this is a drop of $0.08 per share or 0.91%.
Source: Barchart.com - AMLP Daily Chart (6 months)
The US Oil Fund (USO) closed in red as well. The oil benchmark also hit a new low on Wednesday but closed a lot higher. The following days were with low trading volume. At the end, the ETF closed at $9.53 per share. On a weekly basis, this is a drop of $0.04 per share.
Source: Barchart.com - USO Daily Chart (6 months)
1. Highest Z-Score
In the table above are the closed-end funds which have the highest Z-scores in the sector. The results are quite higher today compared to last week. We can see that there are only two funds which are with positive scores. At our previous article, we had only one CEF that was trading at a tiny positive Z-score.
The Goldman Sachs MLP Income Opportunities Fund (GMZ) is the only statistically overvalued fund among all. Its high Z-score makes the CEF a possible "Sell" candidate. However, GMZ is currently trading at -2.34% discount, hence the short opportunity might fail here. We want to find funds which are statistically overvalued and trading at a premium to classify them as possible "Sell" candidates. I just want to look the fund a little bit closer before we move on:
If we take a closer at the numbers, we will see that GMZ is trading quite above its average discount but with a net asset value near to its lows. Let us now see how much has GMZ's NAV has fallen during the past month:
2. Lowest Z-Score
Since all of the CEFs from above have scores below -1.00, we can classify them as potential "Buy" opportunities. Of course, we are only scratching the surface here because we are talking only in the frames of this metric - statistical evaluation.
The leader in this metric is still the ClearBridge Energy Midstream Opportunity Fund (EMO). This is the most undervalued closed-end fund in the sector. Currently, EMO has a negative Z-score of -2.90. EMO is one of the highest yielders in the sector with a market yield of 16.86%. The fund is among those with highest leverage as well. Having this in mind, we should check how well is the EMO's NAV performing lately:
As we can see from the table above, the net asset value of the fund has fallen with $1.55 or more than 15.00% during the past month. Beneath are the top holdings of the CEF:
A fund which has almost the same holdings, with market yield above 15.00% and is also leveraged high above the average for the sector, stands right before the most undervalued fund in the sector. The ClearBridge MLP and Midstream Total Return Fund (CTR) is with -2.19 Z-score and trades at a -12.18% discount. Currently, CTR pays a quarterly dividend of $0.29 per share: Source: cefanalyzer.com
3. 5-Year Annualized Return On NAV
The aim of the above ranking is to show us the closed-end funds with higher yields based on net asset value. A combination of the return with the other metrics that we have is a foundation of our research for potential "Long" candidates. Clearly, we do not have a positive result from any of the funds.
4. Highest Premium
It might be a surprise to everyone, but today, we have a fund which is actually trading at a premium.
The Center Coast MLP & Infrastructure Fund (CEN) is the only fund which is trading at a premium at the moment. I just want to remind you that, at our previous review, CEN was trading at a wide discount of -6.27%. Today, we see the fund trading at 1.34% premium. Quite a swing for only one trading week. CEN is pumped up with 38.36% leverage - the highest in the sector - which, in these market conditions, could be quite risky. The fund also has the second highest market yield of 18.33%. This is how the CEF looks like on the exchange:
Source: Barchart.com - CEN Daily Chart (6 months)
5. Biggest Discount
As we already discussed, the discounts today are quite lower than our previous article. Still, there are no shifts between the leading positions from the above table.
As usual, at the very bottom, we can find the Salient Midstream & MLP Fund (SMM) trading at the widest discount of 16.32%. SMM has bounced off its last week lows. Its Z-score is higher today as well.
6. Highest Effective Leverage
Closed-end funds are no strangers to leverage, and investors interested in this kind of products should be familiar with where their holdings stand in this regard. Do not underestimate the effect of the leverage, and be sure it is included in your analysis. The average effective leverage of the sector is 28.50%.
7. Lowest Effective Leverage
Of course, leverage is a double-edged sword because it might look great when the company is achieving great results and distributing big returns, but when it starts to sink, things start to get a little bit gloomy, I would say. What I mean is that the higher debt brings a bigger risk.
8. Highest Distribution Rate
Most of the fixed-income investors are drawn to closed-end funds because of their relatively high distribution rates. However, for me, the distribution rate of a fund is not the most important metric to look at. For long-term investors, a CEF's total return is far more important than its distribution rate. Often, income-seeking investors become enamored with a CEF's distribution rate. They lose sight of the share price return.
9. Lowest Distribution Rate
The main reason for these weekly reviews is to track how the sector and its instruments are performing. Frankly speaking, there is not much improvement in the group. The past couple of years were tough for the MLP sector. The wide discounts, low Z-scores, and disappointing returns made the group more unattractive than ever.
Note: This article was originally published on December 30, 2018, and some figures and charts might not be entirely up to date.
Trade With Beta
At Trade With Beta, we also pay close attention to closed-end funds and are always keeping an eye on them for directional and arbitrage opportunities created by market price deviations. As you can guess, timing is crucial in these kinds of trades; therefore, you are welcome to join us for early access and the discussions accompanying these kinds of trades.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.