Weekly Review Of Preferred Stock CEFs: Statistics Makes It Hard To Find Long Opportunities

Includes: FPF, HPI, PDT
by: Arbitrage Trader

Several preferred closed-end funds announced their regular distributions.

All of the funds from the sector are traded at positive Z-scores, and we do not see a statistical edge to include some of them to our portfolio.

The average discount/premium in the sector is 0.24%.


Over the past week, several closed-end funds announced their regular distributions. This might create a good environment for some good "Buy" candidates. The Z-scores remained high this week as well, and since there is a lack of volatility in the sector, there were not any major changes in the leading positions. Interest rates remained low during the past week which makes us - fixed-income traders - more confident to "Buy" preferred funds.

However, for me, there are still some statistically overvalued funds which might be good "Sell" candidates. However, we should be cautious with the short play because it requires a lot of patience to enter the trade at the right moment. Let us now continue with our brief review of the preferred closed-end funds.

The News

Source: Yahoo Finance

The Benchmark

The leading benchmark of the preferred stock sector (PFF) finished the week positive. Once again, the trading week was calm with a trading volume below the average one. Currently, the ETF is trading in a sideways trend, and there is a total lack of volatility. On Friday, the fund closed at a price of $36.58 per share. On a weekly basis, this is a modest gain of $0.03 per share.

Source: barchart.com - PFF Daily Chart (6 months)

As you know, we follow the performance of the U.S. Treasury bonds - considering them a risk-free product - with maturities greater than 20 years: the iShares 20+ Year Treasury Bond ETF (TLT). At the end of March, the bond ETF reached a new high of $126.69 per share. The ETF closed the trading week at a price of $121.81 per share. On a weekly basis, the benchmark has gained $0.91 per share or 1.12%.

Source: barchart.com - TLT Daily Chart (6 months)

Interest rates remained low levels during the past week as well:

Source: cnbc.com - 10-Year Treasuries

1. Sorted By Z-Score

Source: Cefconnect.com

Today, the Z-scores are a little bit higher than our last article. Still, we have only two closed-end funds with negative Z-scores. During the past week, there were no major changes in the leading positions.

As we can easily see, the undisputed leader this week is still the John Hancock Preferred Income Fund (HPI). Currently, the preferred closed-end fund has a score of 1.70, which is the highest in the sector. Its NAV/Price spread has tightened as well, but more on this later. Let us continue with the number two in our table today.

The silver medalist in today's ranking is HPI's 'brother' - the John Hancock Preferred Income Fund III (HPS). The closed-end fund has the same statistical result as its brother. Compared to last week, the CEF has a higher Z-score. HPS has widened its NAV/price spread as well.

The First Trust Intermediate Duration Preferred & Income Fund (FPF) is third in the frames of this metric today. Currently, FPF has a 1.50 Z-score, which is a little bit higher than last time. Beneath, we can see the average Z-scores of the fund by the different frames of time: Source: cefdata.com

Lately, the Flaherty & Crumrine Preferred Income Opportunity Fund (PFO) is the most undervalued closed-end fund from a statistical perspective. During the past week, PFO has not changed its statistical result.

The average Z-score in the sector is 0.91.

2. Baseline Expense

Source: Cefconnect.com

The most "expensive" preferred closed-end fund is the John Hancock Premium Dividend Fund (PDT). From the above table, we could get information on how much the different funds charge us for managing our portfolio.

As we can see, the average charge in percent is 1.20%. Anything over 1% is a little bit high for me, but 1.20% is still acceptable, especially when we keep in mind the delightful performance of the sector. And, as we already mentioned, the performance of the sector let us take a look at the most generous CEFs in the group.

3. 5-Year Return On NAV

Source: Cefconnect.com

The aim of the above ranking is to show us the closed-end funds with higher yields based on the net asset value. The combination of the return with the other metrics that we have is a foundation of our research for potential "Long" candidates.

As we can easily see from the table, the John Hancock Premium Dividend Fund is not only the most expensive fund but the most generous as well. The average return in the preferred sector is 7.74%. PDT has a return over 9.40%, which is way above the average result, as we can see.

4. Discount/Premium

Source: Cefconnect.com

There were no major changes in the NAV/Price spreads this week. The top leaders have not changed either, as we can see from the table above.

The John Hancock Premium Dividend Fund (PDT) is the leader in this table on a regular basis. Today, the closed-end fund has an NAV/Price spread of 9.70%. Last week, the spread was a little bit wide - 10.01%:

Source: Cefconnect.com

Currently, the CEF is a little bit above its average trading levels, which creates a wider spread between the net asset value and price as shown below:

Source: Cefconnect.com

The Flaherty & Crumrine Total Return Fund (FLC) is still at the bottom of the table. At the moment, FLC is trading at a 5.23% discount. The change during the past week is quite modest to mention:

Source: Cefconnect.com

Today, the average discount/premium in the sector is 0.24%.

5. Effective Leverage

Source: Cefconnect.com

Leverage magnifies returns, both positively and negatively. And, we look at the effective leverage percentage, and we can understand these high-return results that the funds provide us with. This indicator is also quite important when we do our homework on the closed-end funds. Basically, what we have concluded is that the average leverage percent in the group is 31.65%.

6. Distribution Rate

Source: Cefconnect.com

Above, we saw what was the historical performance of the funds, but probably, most of you are interested in the current return which could be achieved, and that is the reason why I sorted the funds by the highest distribution rate.

The average yield on price for the sector is 7.20%, and the average yield on net asset value is 7.23%.


As we see, the sector continues with its delightful performance. The benchmark looks steady, and while the interest rates remain low, the bond ETF will continue adding gains as well. Despite that, all of the preferred closed-end funds are statistically overvalued here, which would make my game more passive and conservative.

Note: This article was originally published on April 28, 2019, and some figures and charts might not be entirely up to date.

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.