The Chemist's Closed-End Fund Report - January 2019: 'I Have Seen The End Of The World Come And Go Many Times. But I Am Still Here.'

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Includes: ACP, ACWX, AIF, APB, APF, ARDC, AVK, AWP, BCV, BIF, BME, BSL, BST, BUI, BWG, BZM, CAF, CCA, CCD, CEN, CET, CHN, CII, CLM, CRF, CUBA, DDF, DEX, DHY, DNI, DNP, DPG, ECC, EDD, EDF, EDI, EGIF, EIV, EMD, EMF, EMO, ETB, ETV, ETW, FAX, FIV, FSD, FT, FXBY, GBAB, GDL, GDV, GGN, GLO, GPM, GUT, HFRO, IFN, IGR, IHIT, IIF, INB, JGH, JHD, JHY, JNK, JQC, JTD, LQD, MGF, MGU, MPV, MSF, MYF, NBO, NBW, NCV, NCZ, NDP, NHF, NHS, NNC, NNY, NOM, NQP, OXLC, PCM, PCN, PCQ, PGP, PHK, PML, PTY, RA, RCS, RIF, RIV, SPY, SRF, SRV, STK, TDF, TLT, UTG, VCF, VGI, YYY, ZF, ZTR
by: Stanford Chemist
Summary

A deep plunge and sharp recovery in CEFs occurred last month.

Dip buyers were rewarded - thanks to the many steady heads who contributed in the chat room.

Picks for January are AIF, EGIF, and RA.

This article was first released to subscribers 1 month ago.

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. Previous editions of the Report can be searched using the keyword "cefrep".

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

Data were taken from the close of January 4, 2019.

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 32.47% 9.85% 0.8 4% -2.70% 7.31% 28% 1.75%
(DNP) DNP Select Income U.S. Growth & Income 19.22% 7.45% 0.5 24% -1.46% 1.60% 28% 1.03%
(DDF) Delaware Inv Div & Inc U.S. Growth & Income 15.89% 9.70% 1.7 28% -10.23% 14.82% 31% 1.14%
(CRF) Cornerstone Total Return U.S. General Equity 10.35% 21.29% -0.6 5% -3.63% -4.18% 0% 1.20%
(CLM) Cornerstone Strategic Value U.S. General Equity 8.41% 21.67% -0.6 6% -3.12% -3.71% 0% 1.19%
(CEN) Center Coast MLP & Infras MLPs 5.87% 17.15% -0.4 0% -22.53% 4.90% 38% 2.14%
(BST) BlackRock Science and Technolo Global Equity 5.00% 6.51% 0.4 -5% -4.75% 0.13% 0% 1.07%
(STK) Columbia Seligman Premium Tech Covered Call 4.69% 11.05% -0.5 -1% -14.58% 2.92% 0% 1.15%
(BME) BlackRock Health Sciences U.S. Health/Biotech Equity 4.63% 6.55% 0.7 4% 3.92% 2.37% 0% 1.13%
(ETV) EV Tax-Managed Buy-Write Opps Covered Call 4.58% 9.78% -2.3 6% -3.71% 1.85% 0% 1.10%

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 -34.24% 0.59% -3.2 #DIV/0! -18.46% -4.88% 0% 2.51%
(DNI) Dividend and Income Fund U.S. Growth & Income -23.62% 8.32% -1.0 7% -35.15% -1.76% 0% 1.43%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -22.28% 8.57% -1.7 33% -9.45% -3.07% 31% 1.90%
(EGIF) Eagle Growth & Income Opportun Global Growth & Income -20.74% 7.36% -2.3 72% -14.40% -3.00% 30% 2.07%
(CUBA) Herzfeld Caribbean Basin Latin American Equity -20.47% 5.98% -2.2 -3% -19.22% -2.09% 0% 2.66%
(SRF) Cushing Energy Income Fund MLPs -18.23% 7.13% -1.7 0% -25.39% -2.93% 11% 3.14%
(CET) Central Securities Corporation U.S. General Equity -17.60% 3.09% -0.4 10% -3.89% -0.10% 0% 0.73%
(GDL) GDL Fund Global Equity -17.28% 4.39% 0.4 -8% -2.02% 0.52% 38% 1.74%
(BIF) Boulder Growth & Income U.S. General Equity -17.23% 4.00% -3.4 6% -0.51% -1.34% 0% 1.32%
(IGR) CBRE Clarion Global Real Est I Global Real Estate -17.11% 9.55% -2.3 36% -9.08% -4.17% 15% 1.14%

Top 10 highest premia fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dis Lev BE
(RCS) PIMCO Strategic Income Fund Global Income 40.97% 8.89% 1.4 86% 1.12% 10.79% 68% 0.97%
(PGP) PIMCO Global StocksPLUS & Inc Multisector Income 40.24% 11.67% 1.0 70% -10.71% 7.92% 19% 1.48%
(PHK) PIMCO High Income Fund Multisector Income 36.54% 11.77% 1.3 61% 2.91% 10.52% 26% 0.89%
(PCQ) PIMCO CA Municipal Income California Munis 22.95% 5.62% 0.7 84% 1.32% 4.79% 51% 1.15%
(PML) PIMCO Municipal Income II National Munis 15.74% 5.81% 1.6 85% 3.18% 5.50% 48% 1.05%
(PTY) PIMCO Corporate & Income Opps Investment Grade 13.43% 9.87% -0.4 78% 3.29% -3.09% 28% 0.82%
(EDF) Stone Harbor Emerging Mkts FI Emerging Market Income 10.41% 18.95% 0.1 55% -19.59% -1.50% 33% 1.84%
(PCM) PCM Fund Mortgage Bonds 10.26% 9.19% -0.8 90% 4.98% 0.72% 35% 1.43%
(PCN) PIMCO Corporate & Income Strgy Investment Grade 9.97% 8.75% -0.9 88% 1.61% -5.98% 18% 0.92%
(MPV) Barings Participation Invs High Yield 9.08% 7.13% 1.2 32% 7.84% 2.48% 9% 1.47%

Top 10 highest discounts fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dis Lev BE
(EDD) MS Emerging Markets Domestic Emerging Market Income -16.78% 9.63% -1.5 36% -11.57% -3.72% 34% 1.72%
(NNC) Nuveen NC Quality Muni Income North Carolina Munis -16.71% 3.61% -1.8 106% -0.02% -1.92% 39% 1.06%
(BWG) BrandywineGLOBAL-Gl Inc opps Global Income -16.39% 7.02% -1.3 104% -10.13% -1.94% 33% 1.57%
(FT) Franklin Universal Trust Multisector Income -16.34% 6.02% 0.3 103% -3.77% -1.38% 24% 1.08%
(NBW) Neuberger Berman CA Inter Muni California Munis -16.33% 4.37% -0.9 98% 0.70% -2.13% 42% 1.28%
(FAX) Aberdeen Asia-Pacific Income Global Income -16.31% 10.71% -2.1 48% -7.24% -3.92% 32% 1.14%
(NHS) Neuberger Berman High Yield St High Yield -16.31% 8.00% -0.1 99% -7.80% -1.79% 33% 1.16%
(NBO) Neuberger Berman NY Inter Muni New York Munis -16.31% 4.18% -1.2 107% 0.30% -1.13% 41% 1.31%
(NQP) Nuveen PA Quality Muni Income Pennsylvania Munis -16.25% 4.55% -1.6 108% 1.31% -1.31% 41% 0.99%
(CCA) MFS California Municipal Fund California Munis -16.07% 4.02% -0.7 128% -0.39% -1.53% 42% 1.76%

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
(TDF) Templeton Dragon Fund Asia Equity 3.6 -7.81% 12.64% 7% -20.02% 5.03% 0% 1.34%
(APF) MS Asia Pacific Asia Equity 3.2 -3.73% 1.10% 10% -20.03% 8.88% 0% 1.34%
(MSF) MS Emerging Markets Emerging Market Equity 1.9 -2.89% 0.91% 7% -18.67% 7.28% 2% 1.58%
(UTG) Reaves Utility Income U.S. Utilities 1.9 -2.10% 6.87% 46% -5.44% 4.46% 23% 1.08%
(APB) Asia Pacific Fund Asia Equity 1.7 -1.12% 4.55% 9% -16.58% 3.22% 0% 1.85%
(CHN) China Fund Inc Asia Equity 1.7 -5.88% 1.01% 23% -22.60% 3.42% 0% 1.82%
(DDF) Delaware Inv Div & Inc U.S. Growth & Income 1.7 15.89% 9.70% 28% -10.23% 14.82% 31% 1.14%
(BUI) BlackRock Util, Infra & Power U.S. Utilities 1.5 4.48% 7.41% 42% -3.24% 4.07% 0% 1.09%
(EMF) Templeton Emerging Markets Emerging Market Equity 1.3 -10.33% 5.81% 2% -17.82% 1.84% 0% 1.31%
(CAF) MS China A Share Asia Equity 1.1 -10.70% 9.45% 0% -20.29% 3.64% 0% 1.75%

Top 10 lowest z-scores equity:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(NYSE:GAM) General American Investors U.S. General Equity -3.6 -15.07% 2.78% -2% -10.73% 0.93% 15% 1.23%
(NYSE:BIF) Boulder Growth & Income U.S. General Equity -3.4 -17.23% 4.00% 6% -0.51% -1.34% 0% 1.32%
(OTCPK:FXBY) Foxby Corp U.S. General Equity -3.2 -34.24% 0.59% #DIV/0! -18.46% -4.88% 0% 2.51%
(JTD) Nuveen Tax-Adv Div Growth U.S. Tax-Advantaged Equity -3.1 -4.61% 9.92% 12% -14.96% -0.99% 33% 1.48%
(ETW) EV Tax-Managed Glb B-W Opps Covered Call -3.1 -3.97% 11.62% 19% -7.65% -8.23% 0% 1.09%
(DPG) Duff & Phelps Global Utility U.S. Utilities -3.0 -13.29% 11.34% 4% -12.11% -2.01% 30% 1.63%
(GDV) Gabelli Dividend & Income U.S. Tax-Advantaged Equity -2.8 -7.92% 7.14% 9% -16.34% -1.04% 21% 1.38%
(GPM) Guggenheim Enhanced Equity Inc Covered Call -2.8 1.17% 13.99% -1% -14.48% 1.31% 31% 1.37%
(CII) BlackRock Enhanced Cap & Inc Covered Call -2.7 -5.28% 7.04% 17% -8.21% 0.23% 0% 0.92%
(ETB) EV Tax-Managed Buy-Write Inc Covered Call -2.6 -2.75% 9.49% 11% -8.36% -4.02% 0% 1.12%

Top 10 highest z-scores fixed income:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(NNY) Nuveen NY Municipal Value New York Munis 4.5 -0.71% 3.68% 99% 2.28% 4.92% 1% 0.00%
(MGF) MFS Government Markets Income Multisector Income 2.3 -4.66% 7.53% 37% 0.77% 1.48% 0% 0.71%
(JHY) Nuveen High Income 2020 Target High Yield 2.3 3.56% 4.73% 105% 0.67% 2.76% 29% 1.01%
(IHIT) Invesco High Income 2023 Target Mortgage Bonds 2.2 0.91% 5.99% 106% 5.13% 2.14% 25% 1.01%
(GBAB) Guggenheim Taxable Muni Mng Du Munis (Taxable) 2.0 -0.63% 6.81% 95% 2.66% 4.17% 19% 0.94%
(JHD) Nuveen High Income Dec 2019 Ta High Yield 2.0 -0.50% 3.95% 105% 1.73% 1.37% 0% 0.95%
(BZM) BlackRock MD Muni Bond Maryland Munis 1.8 -4.83% 4.06% 91% 0.23% 4.34% 37% 1.82%
(BCV) Bancroft Fund Convertibles 1.8 -12.46% 5.39% 0% -6.18% 1.01% 19% 1.26%
(JQC) Nuveen Credit Strat. Income Senior Loan 1.6 -11.79% 6.06% 111% -1.82% 0.53% 36% 1.34%
(PML) PIMCO Municipal Income II National Munis 1.6 15.74% 5.81% 85% 3.18% 5.50% 48% 1.05%

Top 10 lowest z-scores fixed income:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(EIV) EV Municipal Bond II National Munis -2.8 -14.21% 4.39% 102% 0.22% -4.67% 41% 1.07%
(VCF) Delaware Invest CO Muni Income Other Munis -2.7 -9.34% 4.60% 100% 0.39% -6.01% 29% 0.89%
(HFRO) Highland Floating Rate Opportu Senior Loan -2.7 -8.55% 7.01% 93% 0.38% -10.92% 29% 1.71%
(ECC) Eagle Point Credit Company LLC Senior Loan -2.2 -7.87% 15.78% 65% 11.05% -14.74% 34% 3.29%
(FIV) First Trust Senior Floating Ra Senior Loan -2.2 -7.18% 5.92% 92% -2.12% -3.03% 26% 1.32%
(FAX) Aberdeen Asia-Pacific Income Global Income -2.1 -16.31% 10.71% 48% -7.24% -3.92% 32% 1.14%
(MYF) BlackRock MuniYield Inv Fund National Munis -2.1 -7.65% 5.76% 103% 0.79% -5.05% 41% 0.97%
(BSL) Blackstone/GSO Sr Float Term Senior Loan -2.1 -4.70% 8.19% 97% 0.75% -5.04% 33% 2.04%
(DHY) Credit Suisse High Yield Bond High Yield -2.1 -9.43% 10.51% 99% -4.98% -6.41% 36% 1.53%
(NOM) Nuveen MO Quality Muni Income Missouri Munis -2.1 -14.06% 4.49% 101% 0.70% -10.41% 38% 0.00%

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
(NDP) Tortoise Energy Independence F MLPs 22.97% -1.16% -0.9 0% -35.97% -2.81% 25% 1.69%
(CLM) Cornerstone Strategic Value U.S. General Equity 21.67% 8.41% -0.6 6% -3.12% -3.71% 0% 1.19%
(CRF) Cornerstone Total Return U.S. General Equity 21.29% 10.35% -0.6 5% -3.63% -4.18% 0% 1.20%
(CEN) Center Coast MLP & Infras MLPs 17.15% 5.87% -0.4 0% -22.53% 4.90% 38% 2.14%
(ZF) Virtus Total Return Fund Inc. Global Growth & Income 17.07% -12.27% -1.9 10% -16.04% -6.46% 27% 0.00%
(GGN) GAMCO Glb Gold Natural Res&Inc U.S. Energy/Resources Equity 15.35% -8.18% -1.7 8% -14.27% -6.68% 11% 1.29%
(RIV) RiverNorth Opportunities Fund U.S. Growth & Income 15.33% -0.60% -0.8 19% -7.51% -4.10% 0% 1.35%
(ZTR) Virtus Global Div & Inc Fund U.S. Growth & Income 15.13% -7.76% -1.8 27% -15.73% -8.65% 28% 1.56%
(IIF) MS India Investment Asia Equity 14.99% -11.52% 0.1 0% -22.51% 0.10% 0% 1.43%
(EMO) ClearBridge Energy MLP Opps MLPs 14.81% -5.30% -1.8 0% -19.16% 0.15% 33% 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 18.95% 10.41% 0.1 55% -19.59% -1.50% 33% 1.84%
(EDI) Stone Harbor Emg Mkts Total In Emerging Market Income 16.67% -1.53% -0.4 63% -20.06% -2.88% 33% 1.94%
(OXLC) Oxford Lane Capital Corp Senior Loan 16.33% -0.50% -0.9 114% 16.64% -4.62% 37% 4.35%
(ECC) Eagle Point Credit Company LLC Senior Loan 15.78% -7.87% -2.2 65% 11.05% -14.74% 34% 3.29%
(NCZ) AGIC Convertible & Income II Multisector Income 14.65% 1.05% -1.5 67% -12.71% -4.50% 27% 1.24%
(NCV) AGIC Convertible & Income Multisector Income 14.55% 3.38% -1.6 80% -12.26% -5.01% 28% 1.21%
(VGI) Virtus Global Multi-Sector Inc Multisector Income 13.35% -11.60% -1.2 51% -16.25% -6.39% 29% 1.74%
(ACP) Aberdeen Inc Credit Strategies Senior Loan 13.31% -11.89% -1.5 112% -13.31% -4.63% 30% 2.25%
(RA) Brookfield Real Assets Income Mortgage Bonds 12.22% -12.31% -1.5 67% -3.55% -4.52% 24% 1.60%
(CCD) Calamos Dynamic Conv & Income Multisector Income 11.77% -4.86% -0.7 44% -6.91% -3.92% 33% 1.57%

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
(ZF) Virtus Total Return Fund Inc. Global Growth & Income -12.27% 17.07% -1.9 10% -16.04% -2.09 -6.46% 27% 0.00%
(DNI) Dividend and Income Fund U.S. Growth & Income -23.62% 8.32% -1.0 7% -35.15% -1.97 -1.76% 0% 1.43%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -22.28% 8.57% -1.7 33% -9.45% -1.91 -3.07% 31% 1.90%
(DEX) Delaware Enhanced Gbl Div&Inc Global Growth & Income -15.21% 12.45% -2.5 43% -17.51% -1.89 -7.91% 30% 1.56%
(NHF) NexPoint Strategic Opps Fund U.S. Growth & Income -15.77% 11.62% -1.1 46% -2.09% -1.83 -6.45% 12% 1.85%
(IIF) MS India Investment Asia Equity -11.52% 14.99% 0.1 0% -22.51% -1.73 0.10% 0% 1.43%
(IFN) India Fund Inc Asia Equity -14.05% 12.12% -1.4 -1% -4.96% -1.70 -1.82% 0% 1.25%
(SRV) Cushing MLP & Infras TR MLPs -14.26% 11.91% -1.4 0% -17.26% -1.70 -4.42% 30% 2.39%
(AWP) Aberdeen Global Premier Proper Global Real Estate -13.95% 11.90% -2.0 32% -15.68% -1.66 -4.31% 0% 1.20%
(GLO) Clough Global Opportunities Global Growth & Income -13.09% 12.56% -2.0 -3% -15.30% -1.64 -3.87% 40% 2.27%

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 -16.31% 10.71% -2.1 48% -7.24% -1.75 -3.92% 31.7% 1.14%
(AVK) Advent Claymore Conv & Income Convertibles -14.78% 11.07% -1.3 39% -11.02% -1.64 -3.54% 40.2% 1.14%
(EDD) MS Emerging Markets Domestic Emerging Market Income -16.78% 9.63% -1.5 36% -11.57% -1.62 -3.72% 33.5% 1.72%
(ACP) Aberdeen Inc Credit Strategies Senior Loan -11.89% 13.31% -1.5 112% -13.31% -1.58 -4.63% 29.5% 2.25%
(VGI) Virtus Global Multi-Sector Inc Multisector Income -11.60% 13.35% -1.2 51% -16.25% -1.55 -6.39% 29.1% 1.74%
(RA) Brookfield Real Assets Income Mortgage Bonds -12.31% 12.22% -1.5 67% -3.55% -1.50 -4.52% 23.7% 1.60%
(EMD) Western Asset Emerg Mkts Debt Emerging Market Income -15.34% 9.58% -1.1 87% -9.75% -1.47 -1.83% 24.0% 1.20%
(AIF) Apollo Tactical Income Fund In High Yield -14.73% 9.27% -1.7 104% -0.58% -1.37 -3.61% 33.5% 2.28%
(JGH) Nuveen Global High Income Global Income -14.41% 9.26% -1.2 100% -7.80% -1.33 -2.22% 30.4% 1.31%
(FSD) First Trust High Inc Long/Shrt High Yield -14.28% 9.33% -0.4 75% -6.55% -1.33 -1.59% 20.2% 1.18%

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
(DEX) Delaware Enhanced Gbl Div&Inc Global Growth & Income -15.21% 12.45% -2.5 43% -17.51% 4.73 -7.91% 30% 1.56%
(DPG) Duff & Phelps Global Utility U.S. Utilities -13.29% 11.34% -3.0 4% -12.11% 4.52 -2.01% 30% 1.63%
(ZF) Virtus Total Return Fund Inc. Global Growth & Income -12.27% 17.07% -1.9 10% -16.04% 3.98 -6.46% 27% 0.00%
(IGR) CBRE Clarion Global Real Est I Global Real Estate -17.11% 9.55% -2.3 36% -9.08% 3.76 -4.17% 15% 1.14%
(EGIF) Eagle Growth & Income Opportun Global Growth & Income -20.74% 7.36% -2.3 72% -14.40% 3.51 -3.00% 30% 2.07%
(AWP) Aberdeen Global Premier Proper Global Real Estate -13.95% 11.90% -2.0 32% -15.68% 3.32 -4.31% 0% 1.20%
(GLO) Clough Global Opportunities Global Growth & Income -13.09% 12.56% -2.0 -3% -15.30% 3.29 -3.87% 40% 2.27%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -22.28% 8.57% -1.7 33% -9.45% 3.25 -3.07% 31% 1.90%
(INB) Cohen & Steers Glb Inc Builder Covered Call -12.71% 10.65% -2.3 16% -13.87% 3.11 -4.98% 23% 1.55%
(MGU) Macquarie Glb Infrast TR Fund U.S. Utilities -15.29% 8.73% -2.3 27% -12.87% 3.07 -2.28% 31% 1.71%

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
(FAX) Aberdeen Asia-Pacific Income Global Income -16.31% 10.71% -2.1 48% -7.24% 3.67 -3.92% 32% 1.14%
(ECC) Eagle Point Credit Company LLC Senior Loan -7.87% 15.78% -2.2 65% 11.05% 2.73 -14.74% 34% 3.29%
(EDD) MS Emerging Markets Domestic Emerging Market Income -16.78% 9.63% -1.5 36% -11.57% 2.42 -3.72% 34% 1.72%
(ACP) Aberdeen Inc Credit Strategies Senior Loan -11.89% 13.31% -1.5 112% -13.31% 2.37 -4.63% 30% 2.25%
(AIF) Apollo Tactical Income Fund In High Yield -14.73% 9.27% -1.7 104% -0.58% 2.32 -3.61% 33% 2.28%
(RA) Brookfield Real Assets Income Mortgage Bonds -12.31% 12.22% -1.5 67% -3.55% 2.26 -4.52% 24% 1.60%
(AVK) Advent Claymore Conv & Income Convertibles -14.78% 11.07% -1.3 39% -11.02% 2.13 -3.54% 40% 1.14%
(ARDC) Ares Dynamic Credit Allocation Senior Loan -14.11% 9.23% -1.6 105% -2.88% 2.08 -3.44% 30% 1.93%
(DHY) Credit Suisse High Yield Bond High Yield -9.43% 10.51% -2.1 99% -4.98% 2.08 -6.41% 36% 1.53%
(VGI) Virtus Global Multi-Sector Inc Multisector Income -11.60% 13.35% -1.2 51% -16.25% 1.86 -6.39% 29% 1.74%

6. Summary statistics

The average premium/discount of all the CEFs in the database is -8.17%, a small increase from -8.31% in the previous month. Equity CEF discounts contracted by 26 bps to -7.75%, while fixed income CEF discounts contracted by 12 bps to -8.35%.

The average distribution yield of all the CEFs in the database is 7.57%, an increase from 7.25% in the month prior. Equity CEFs average 9.50% yield, while fixed income CEFs average 6.50% yield. Both are 12-month highs.

The average 1-year z-score of all the CEFs in the database is -0.76, a small increase from -0.89 a month ago. Equity CEFs have an average z-score of -1.11, while fixed income CEFs have the same average z-score of -0.56.

7. D x Y x Z performance tracker

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 are 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 outperform the average for all equity CEFs at 3 months and significantly outperform at 6 months.

Here are the results for the fixed income CEFs. The top 10 D x Y x Z slightly underperform the average for all fixed income CEFs at 3 months and at 6 months.

Commentary

The big news this month was the descent into bear market territory for U.S. stocks (SPY) (-8.75%), which suffered their worst December since 1931. By comparison, international stocks (ACWX) fared better at -5.01%. Long-dated treasuries (TLT) were big winners this month with a +5.77% gain, while investment grade corporates (LQD) also gained +1.89%. High-yield bonds (JNK) declined by -2.30%, while a basket of high-yield CEFs (YYY) lost -2.30%.

Chart

SPY Total Return Price data by YCharts

However, on aggregate, CEFs only appeared to be little-scratched as far as premium/discount changes go, with average valuations in fact increasing by 14 bps from -8.17% last month to -8.31% this month. Surprising?

Well, actually, first, note that this month's data were taken from January 4, 2019, rather than the end of December last year (a practical consequence of me not being able to compile the entire report on a weekday!). On December 31, 2018, the average CEF discount was -10.21%. In only three trading days, the average discount rebounded by over 200 bps to its current value of -8.17%, which tells you just how "V-shaped" this recovery in CEFs has been. This valuation shock is made clear when several intra-month data points are added to the monthly premium/discount chart above. The average discount reached as low as -11.61% on the 21st of December!

The same can be said of the average z-score, which dipped below -2.0 just before Christmas.

In fact, the average CEF discount of -11.61% on December 21 was the lowest since the Great Financial Crisis. You heard that right, this discount exceeded even the -11.29% average discount during the August 2015 "flash crash" and the -10.29% average during the depths of the 2016 credit panic, according to data from CEF Alpha.

It should be clear by now that such buying opportunities in CEFs present themselves only once every several years, and I am very glad that many of our members managed to pick up bargains during what was a very volatile week to Christmas.

This was aided, in no small part, by words of wisdom shared during the chat by our many seasoned and experienced investors during market hours, which allowed the rest of us to keep our heads firmly on our shoulders even while everyone around us was losing theirs!

Psychologically speaking, it is very difficult to press the "buy" button when your entire portfolio is showing red, and I fully sympathize with those members who expressed frustration and despair over their falling portfolio values last month. However, we can now see that buying at the moment of peak pessimism was exactly the correct course of action to take. This is especially the case if one's goal is to develop a stronger income stream over time - shouldn't we be ecstatic that CEF discounts have widened allowing us to pick up income investments at lower prices, rather than despondent? All of that is easier said than done, of course!

Here are a few snippets from our chat log over the volatile Christmas period that I found to be especially thoughtful and which I think reflects the steady nerves that many of our members possessed even in the face of extreme CEF volatility. This type of attitude may be worth keeping in mind next time that there is a market panic like the sort that we experienced towards the end of the last month - it wasn't the first time that something like this has happened, nor will it be the last! Unless one engages in market timing, it may not be possible to avoid every little dip in the market, so the question really becomes: how best shall an investor take advantage of this? I hope my Early Christmas CEF Shopping List and Early Christmas CEF Shopping List (Muni Edition) were useful in that regard!

(Due to brevity's sake, only a limited number of comments are presented. Apologies if you were not mentioned below - I sincerely thank all members who contributed. To those that who don't yet make use of the chat board - you're missing out!)

Stanford Chemist (December 21, in Early Christmas CEF Shopping List):

Christmas may have arrived early for closed-end fund ("CEF") investors as discounts are blowing out across the board as investors irrationally and indiscriminately sell all of their investments. While there's the saying "Stocks take the escalator up but the elevator down" - I'd like to add to that statement - "Just make sure you don't get out at the basement"! In my view, this bout of panic-induced selling is the perfect opportunity to buy into a higher-yielding income stream.

Steven Bavaria (December 20):

Re ECC and the CLOs it holds, you might be interested to know that CLOs came through the great crash of 2008 with flying colors for investors who held tight and clipped their coupons. The institutional investors who traditionally buy CLOs analyze them and hold them for their cash flows, and typically paid little attention to trying to mark them to a market that hardly exists. Lots of panic selling in the loan markets as people read the "sky is falling" articles and think something terrible is happening. We're going through a typical "end of cycle" period and CLO sponsors and investors have built cyclical credit expectations into the GAAP models they use to accrue their income. As a former journalist, I can tell you from experience it is much more fun to write "the sky is falling" articles (and they attract a bigger readership) than ones that say "the sky is cloudy, it may rain, but it is hardly about to fall." Jerome Powell's comments yesterday affirmed that the economy itself is pretty steady. I think much of the panic and nervousness relates to non-economic factors (like a presidency that is unravelling, trade wars, geopolitical uncertainty, loss of US leadership in the world, government shutdown, etc.). Of course, once it starts it builds on itself. In illiquid markets like closed end funds, with complex asset classes that attract lots of investors who want the high yields but who often have little real knowledge about the underlying assets, when panic hits a lot of people will head for the hills. But a portfolio that pays you cash distributions at 10-11% (or a 12 or 13% re-investment rate at current bargain prices) makes it a lot easier to keep your head down and wait it out then if you are sitting on a portfolio only yielding 2-3% (like the typical DGI portfolio) while prices are dropping....and dropping. By the way, FGB is way, way down too right now because people are so afraid of loans and credit. Great record, with total return of 14+% over ten years, yielding 13% now. Distribution rising or steady for 11 years since inception. Also FOF looking attractive, with discounts on discounts as it sells at a discount while buying other closed end funds at discounts. lots of opportunities for long-term income investors.

JunkJon (December 21):

CLO debt and equity trad by appointment only and NAV is an art. During 2009 etc. CLO equity nav was literally pennies on the dollar yet because they are cash flow CLOs, as long as the underlying loans are paying interest, there is no forced selling necessary. The navs get hit but the vehicle keeps on paying. Think of it as holding a portfolio of div paying stocks; as long as the cos keep paying their divs, and one doesn't act rashly, the mkt value isn't that meaningful from a purely cash flow perspective. In fact, volatility can benefit CLOs as they can purchase loans at a lower price. For example, if a CLO receives $1 from a loan paydown, they can reinvest that $1 and buy more cash flow since loans are now at a discount.

Member "X" (December 21) (great comments and excellent call!):

If you have cash and invest for income. You have to be almost giddy. Long term you should do well reinvesting those dividends. Even if the market takes another leg down next month. Just save a little extra cash for January, just in case.

...I stay the course. And if time is on my side I just keep reinvesting the dividends. That is what it is all about. I have seen the end of the world come and go many times. But I am still here.

Investors do a great job of scaring each other. Stop talking and focus on your reality and not the reality of others. That may mean turning off CNBC and focusing on your personal situation and dealing with it in a rational manner. It may mean turning over your finances to a professional.

One final note and then I am off. No one seems to be positioned for any kind of market rally. So when one happens, that will make it quite remarkable because just like fear of the downside, there will be fear of missing the upside. But if you are not a trader, upside or downside should not be of concern to you, because you should be an investor. Isn't that why you subscribe to this service?

Triple F Fred (December 22):

I have been actively adding over the last couple of weeks...There is always a chance things could get worse before they turn solidly around. I think that is still a slight unknown. The link above to the Barron's article from Stanford is an excellent read and should help soothe the nerves a bit... I found it quite insightful and very much in sync with where my head is. I am about as close to fully invested as I have been in several years. If it does not turn immediately, I am not overly worried because I have researched my holdings and concentrated into the ones I consider best of breed. For some other excellent historical study on past "very rough times" I would strongly suggest looking up some of Steven Bavaria's work on how these funds behaved during the 07-09 time frame as he was invested during that time in the category. His work had a great deal of influence on my decision to start specializing in the sector after over 40 years in the markets... Takes some work but worth the effort to learn the ins and outs of these testy but rewarding plays. Good luck and you are at a good place to hone your skill sets... FFF

stuma (December 22):

I primarily invest for income so day to day price fluctuations don't matter much as long as you invest in good funds with great managers. And you reinvest the income. I buy funds that SC and SB recommend since they know more than me. Funds that go down in price will go back up at some point. From what I read from Steve Bavaria funds can go quite low during a crisis but you will still collect the dividends and if you reinvest them you'll end up with more shares when the price recovers.

hhdemian (December 22):

SC & friends...While the market can go lower (Obviously), ignoring discounts of nearly 20% seems silly if you need to stay invested to income.....Thanks and Merry Christmas to one and all...Maybe Mr Market just gave us all a pretty big long term gift....

I intend to give a list of my top 3 CEF picks each month, which is based on my consideration of the data as well as my qualitative judgment. Note that me designating a fund as a top pick does not mean I am encouraging subscribers to buy the fund, nor am I necessarily going to include the fund in our portfolios. Moreover, note that some of the picks may have a narrow mandate (e.g. utilities stocks or MLPs), and therefore each investor should consider their own investment objective and risk tolerance before deciding to invest money into any of the picks. Furthermore, note that these are intended to be short/medium-term picks (to take advantage of mean reversion) rather than long-term holds.

For January 2019, my top 3 picks are:

  • Apollo Tactical Income Fund (AIF): 9.27% yield, -14.73% discount, -1.7 z-score, -3.61% distance, 33% leverage, 2.28% baseline expense, and 104% coverage.
  • Eagle Growth & Income Opportunities Fund (EGIF): 7.36% yield, -20.74% discount, -2.3 z-score, -3.00% distance, 30% leverage, 2.07% baseline expense, and 72% coverage.
  • Brookfield Real Assets Income Fund (RA): 12.22% yield, -12.31% discount, -1.5 z-score, -4.52% distance, 24% leverage, 1.6% baseline expense, 67% coverage.

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

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.

Disclosure: I am/we are long THE PORTFOLIOS. 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.