The Chemist's Closed-End Fund Report - April 2019: Treading Water

|
Includes: ACP, ACWX, APF, ARDC, AVK, BFY, BGIO, BGT, BIF, BQH, BST, BWG, CAF, CEN, CET, CHY, CLM, CRF, CTR, CUBA, DDF, DEX, DNI, DNP, ECC, EDD, EDF, EDI, EFF, EFR, EFT, EMO, EPD, ETV, ETW, EVV, EXG, FAM, FAX, FIV, FRA, FSD, FT, FXBY, GAB, GAM, GGN, GHY, GOF, GRX, GUT, HFRO, HGLB, HQL, HTD, IFN, IIF, INB, INF, IRL, IRR, ISD, JFR, JHI, JNK, JQC, LQD, MAV, MCN, MNE, MUH, MYJ, NDP, NHF, NHS, NKG, NQP, NRO, NUM, OCCI, OPP, OXLC, PAI, PCF, PCN, PCQ, PEO, PGP, PHK, PML, PTY, RA, RCS, RIF, RIV, SPY, SRF, SRV, TDF, TLI, TLT, TTP, TWN, VGI, WIA, WIW, YYY, ZF, ZTR
by: Stanford Chemist
Summary

CEFs tread water this month, but be wary of pockets of overvaluation in certain fixed income funds.

Remain nimble and opportunistic; look for chances to redeploy capital.

Our top D x Y x Z lists from 3 months ago crush the averages, providing validation of our quantitative methodology.

Top picks for April are EMO, HQL and EFT.

This article was first released to CEF/ETF Income Laboratory subscribers 1 month ago, so data may be out of date.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. 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 April 5, 2019.

1. Top 10 highest premia and top 10 highest discounts

Ticker Fund Category P/D Y Z Cov 1Y NAV Dis Lev BE
(GUT) Gabelli Utility Trust U.S. Utilities 39.28% 8.65% 2.0 3% 15.88% 15.23% 29% 1.77%
(DDF) Delaware Inv Div & Inc U.S. Growth & Income 15.35% 8.35% 1.1 23% 7.71% 8.09% 32% 1.17%
(DNP) DNP Select Income U.S. Growth & Income 14.02% 6.81% -1.7 24% 21.36% -4.35% 28% 1.03%
(GOF) Guggenheim Strategic Opp Fund U.S. Growth & Income 10.80% 11.04% 0.3 45% 4.67% 1.24% 0% 1.28%
(CRF) Cornerstone Total Return U.S. General Equity 9.73% 19.62% -0.2 6% 10.34% -2.99% 0% 1.49%
(CLM) Cornerstone Strategic Value U.S. General Equity 8.57% 19.90% -0.1 5% 10.37% -1.99% 0% 1.42%
(NDP) Tortoise Energy Independence F MLPs 7.33% 20.40% 0.6 0% -18.16% 3.12% 25% 1.81%
(IRR) Voya Natural Resource Equity Covered Call 6.06% 12.63% 1.6 3% -7.97% 6.07% 0% 1.21%
(BST) BlackRock Science and Technolo Global Equity 5.73% 5.41% -0.3 -10% 14.39% -0.78% 0% 1.08%
(ETV) EV Tax-Managed Buy-Write Opps Covered Call 5.40% 8.88% 1.2 6% 7.65% 1.90% 0% 1.14%

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 -34.29% 0.49% -1.4 #DIV/0! 2.59% -4.19% 0% 2.09%
(DNI) Dividend and Income Fund U.S. Growth & Income -22.98% 6.84% -0.2 10% 0.45% -0.30% 0% 1.33%
(CUBA) Herzfeld Caribbean Basin Latin American Eequity -21.91% 5.23% -1.0 -2% -8.23% -1.99% 0% 2.66%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -21.47% 7.08% -0.8 -2% 21.47% -1.13% 35% 1.80%
(PEO) Adams Natural Resources U.S. Energy/Resources Equity -17.07% 2.36% -1.1 37% -1.61% -0.70% 1% 0.77%
(GAM) General American Investors U.S. General Equity -16.99% 2.36% -1.3 -5% 7.06% -0.77% 17% 1.14%
(BIF) Boulder Growth & Income U.S. General Equity -16.79% 3.73% -0.4 8% 5.67% -0.50% 0% 1.21%
(SRF) Cushing Energy Income Fund MLPs -16.70% 6.32% -0.5 0% -7.50% -0.66% 19% 2.86%
(IRL) New Ireland Fund Other Non-U.S. Equity -16.46% 4.75% -0.5 -7% -14.02% -0.83% 0% 1.66%
(CET) Central Securities Corporation U.S. General Equity -16.43% 2.60% 1.9 8% 10.23% 1.07% 0% 0.67%

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 33.99% 7.74% -0.4 97% 6.97% -2.00% 68% 0.97%
(PCQ) PIMCO CA Municipal Income California Munis 31.77% 5.13% 1.7 77% 7.27% 10.01% 46% 1.14%
(PGP) PIMCO Global StocksPLUS & Inc Multisector Income 31.01% 8.86% -0.9 101% 3.75% -8.06% 29% 1.48%
(OXLC) Oxford Lane Capital Corp Senior Loan 29.89% 16.46% 1.5 114% 17.77% 18.70% 37% 4.35%
(EDF) Stone Harbor Emerging Mkts FI Emerging Market Income 29.40% 15.75% 2.4 51% -12.00% 14.47% 33% 1.88%
(PHK) PIMCO High Income Fund Multisector Income 26.50% 9.35% -0.7 84% 7.95% -6.65% 24% 0.89%
(ECC) Eagle Point Credit Company LLC Senior Loan 24.56% 13.73% 1.8 68% -12.99% 12.13% 34% 3.67%
(PTY) PIMCO Corporate & Income Opps Investment Grade 20.73% 8.88% 0.5 83% 9.74% 2.55% 15% 0.80%
(PML) PIMCO Municipal Income II National Munis 18.15% 5.51% 1.4 90% 8.90% 5.03% 45% 1.10%
(PCN) PIMCO Corporate & Income Strgy Investment Grade 17.79% 7.86% 0.3 94% 6.72% 1.05% 21% 0.92%

Top 10 highest discounts fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dis Lev BE
(FT) Franklin Universal Trust Multisector Income -15.63% 5.48% 0.2 103% 10.45% -0.08% 24% 1.08%
(BWG) BrandywineGLOBAL-Gl Inc opps Global Income -15.58% 6.61% -0.6 104% -5.83% -0.76% 37% 1.57%
(GHY) PGIM Global Short Dur Hi High Yield -14.22% 8.56% 0.9 76% 6.39% 0.48% 28% 1.24%
(WIW) WA Inflation-Linked Opps & Inc Government Bonds -14.04% 4.03% -0.8 105% 1.05% -1.50% 31% 0.89%
(ISD) PGIM Sht Duration Hi Yld High Yield -13.58% 8.40% 0.9 75% 7.26% 0.54% 26% 1.13%
(WIA) Western Asset Infl-Lnkd Income Government Bonds -13.53% 3.73% -1.0 101% 1.73% -1.19% 32% 0.94%
(FSD) First Trust High Inc Long/Shrt High Yield -13.44% 8.62% 0.7 85% 5.08% 0.24% 21% 1.19%
(NQP) Nuveen PA Quality Muni Income Pennsylvania Munis -13.32% 4.57% 1.8 101% 8.02% 1.47% 40% 0.99%
(EVV) EV Limited Duration Income Limited Duration -13.20% 6.37% 0.3 104% 4.10% 0.24% 37% 1.28%
(TLI) Western Asset Corporate Loan Senior Loan -13.19% 6.66% -0.5 102% 2.61% -1.25% 32% 1.40%

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
(GRX) Gabelli Health & Wellness U.S. Health/Biotech Equity 2.2 -13.26% 5.05% -5% 12.62% 1.55% 25% 1.55%
(CAF) MS China A Share Asia Equity 2.1 -8.72% 7.09% 2% -2.88% 4.91% 0% 1.72%
(GUT) Gabelli Utility Trust U.S. Utilities 2.0 39.28% 8.65% 3% 15.88% 15.23% 29% 1.77%
(HTD) JH Tax-Advantaged Dividend Inc U.S. Tax-Advantaged Equity 1.9 -3.43% 6.62% 75% 17.47% 3.44% 33% 1.21%
(CET) Central Securities Corporation U.S. General Equity 1.9 -16.43% 2.60% 8% 10.23% 1.07% 0% 0.67%
(APF) MS Asia Pacific Asia Equity 1.9 -0.36% 1.21% 71% -8.89% 9.67% 0% 1.20%
(TWN) Taiwan Fund Asia Equity 1.8 -11.63% 3.70% 4% -7.90% 1.62% 0% 1.65%
(TDF) Templeton Dragon Fund Asia Equity 1.7 -10.30% 10.24% 4% -0.12% 2.11% 0% 1.31%
(GAB) Gabelli Equity Trust U.S. General Equity 1.7 2.67% 9.75% 0% 4.96% 2.92% 24% 1.36%
(IRR) Voya Natural Resource Equity Covered Call 1.6 6.06% 12.63% 3% -7.97% 6.07% 0% 1.21%

Top 10 lowest z-scores equity:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(HGLB) Highland Global Allocation Fun Global Growth & Income -3.8 -13.33% 3.13% 0% 0.00% -12.39% 0% 0.00%
(HQL) Tekla Life Sciences Investors U.S. Health/Biotech Equity -1.9 -8.68% 7.55% -4% 8.06% -3.53% 0% 1.19%
(EXG) EV Tax-Managed Global Fund Covered Call -1.8 -6.00% 8.99% 9% 3.94% -6.02% 0% 1.07%
(DNP) DNP Select Income U.S. Growth & Income -1.7 14.02% 6.81% 24% 21.36% -4.35% 28% 1.03%
(ETW) EV Tax-Managed Glb B-W Opps Covered Call -1.7 -5.30% 8.87% 8% 1.92% -7.77% 0% 1.09%
(EMO) ClearBridge Energy MLP Opps MLPs -1.5 -12.02% 9.37% 0% 16.90% -4.59% 35% 1.76%
(OTCPK:FXBY) Foxby Corp U.S. General Equity -1.4 -34.29% 0.49% #DIV/0! 2.59% -4.19% 0% 2.09%
(GAM) General American Investors U.S. General Equity -1.3 -16.99% 2.36% -5% 7.06% -0.77% 17% 1.14%
(MCN) Madison Covered Call & Eq Strt Covered Call -1.3 -9.65% 10.64% 3% 2.42% -2.15% 0% 1.17%
(CTR) ClearBridge Energy MLP TR Fund MLPs -1.2 -11.77% 8.95% 0% 15.33% -3.36% 33% 1.68%

Top 10 highest z-scores fixed income:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(BGIO) BlackRock 2022 Global Income O Emerging Market Income 4.5 0.74% 6.44% 95% 2.89% 6.40% 20% 0.94%
(PAI) Western Asset Invest Grade Inc Investment Grade 3.5 4.08% 4.47% 94% 3.42% 8.71% 0% 0.75%
(BQH) BlackRock NY Municipal Bond New York Munis 3.3 -8.89% 4.04% 100% 5.05% 5.62% 40% 1.39%
(MNE) BlackRock Muni NY Intermed. Du New York Munis 3.2 -8.91% 3.48% 103% 5.18% 5.74% 40% 1.14%
(NKG) Nuveen GA Quality Muni Income Georgia Munis 3.0 -11.22% 3.69% 109% 5.53% 3.52% 38% 1.08%
(MYJ) BlackRock MuniYield NJ New Jersey Munis 2.9 -6.64% 4.94% 99% 5.69% 5.85% 40% 0.93%
(MUH) BlackRock MuniHoldings Fund II National Munis 2.8 -2.24% 4.96% 100% 5.27% 6.95% 41% 1.01%
(BFY) BlackRock NY Municipal Inc II New York Munis 2.8 -10.42% 4.32% 106% 4.87% 3.51% 41% 1.11%
(NHS) Neuberger Berman High Yield St High Yield 2.7 -9.63% 6.84% 93% 6.05% 4.67% 34% 1.16%
(NUM) Nuveen MI Quality Muni Income Michigan Munis 2.6 -13.15% 4.02% 102% 6.08% 2.35% 39% 1.00%

Top 10 lowest z-scores fixed income:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(FIV) FIRST TRUST SENIOR FLOATING RA Senior Loan -1.6 -7.17% 4.80% 111% 3.30% -2.54% 30% 1.32%
(PCF) High Income Securities High Yield -1.5 -5.07% 3.78% 4% 3.91% -1.53% 0% 0.75%
(HFRO) Highland Floating Rate Opportu Senior Loan -1.4 -7.04% 6.75% 86% 2.88% -7.05% 29% 1.71%
(EFT) EV Floating Rate Income Senior Loan -1.1 -12.48% 6.27% 88% 3.40% -3.72% 35% 1.27%
(FRA) BlackRock Float Rate Strat Senior Loan -1.0 -12.58% 6.56% 98% 2.62% -3.54% 29% 1.19%
(JHI) JH Investors Trust Investment Grade -1.0 -10.14% 6.21% 40% 5.57% -1.52% 37% 1.09%
(WIA) Western Asset Infl-Lnkd Income Government Bonds -1.0 -13.53% 3.73% 101% 1.73% -1.19% 32% 0.94%
(BGT) BlackRock Floating Rate Inc Tr Senior Loan -0.9 -12.32% 5.99% 106% 3.07% -2.60% 30% 1.20%
(CHY) Calamos Convertible & High Multisector Income -0.9 -2.54% 9.23% 61% 7.78% -4.94% 35% 1.28%
(MAV) Pioneer Muni High Inc Adv High Yield Munis -0.9 -8.02% 4.77% 107% 5.75% -1.70% 37% 1.09%

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 20.40% 7.33% 0.6 0% -18.16% 3.12% 25% 1.81%
(CLM) Cornerstone Strategic Value U.S. General Equity 19.90% 8.57% -0.1 5% 10.37% -1.99% 0% 1.42%
(CRF) Cornerstone Total Return U.S. General Equity 19.62% 9.73% -0.2 6% 10.34% -2.99% 0% 1.49%
(CEN) Center Coast MLP & Infras MLPs 14.75% 0.00% -0.3 0% 18.05% -0.71% 32% 1.89%
(IIF) MS India Investment Asia Equity 14.31% -11.41% 0.2 0% -16.47% 0.30% 0% 1.35%
(ZF) Virtus Total Return Fund Inc. Global Growth & Income 14.20% -8.56% -0.4 6% 10.19% -1.40% 27% 1.61%
(GGN) GAMCO Glb Gold Natural Res&Inc U.S. Energy/Resources Equity 13.70% -2.45% -0.1 4% 0.04% -0.21% 13% 1.33%
(IRR) Voya Natural Resource Equity Covered Call 12.63% 6.06% 1.6 3% -7.97% 6.07% 0% 1.21%
(ZTR) Virtus Global Div & Inc Fund U.S. Growth & Income 12.38% 5.26% 1.1 25% 5.10% 4.77% 28% 1.37%
(RIV) RiverNorth Opportunities Fund U.S. Growth & Income 12.19% -5.14% -1.1 23% 2.92% -6.56% 0% 1.35%

Top 10 highest yields fixed income:

Ticker Fund Category Y P/D Z Cov 1Y NAV Dis Lev BE
(OXLC) Oxford Lane Capital Corp Senior Loan 16.46% 29.89% 1.5 114% 17.77% 18.70% 37% 4.35%
(EDF) Stone Harbor Emerging Mkts FI Emerging Market Income 15.75% 29.40% 2.4 51% -12.00% 14.47% 33% 1.88%
(JQC) Nuveen Credit Strat. Income Senior Loan 15.54% -8.91% 2.6 41% 4.06% 3.39% 37% 1.34%
(EDI) Stone Harbor Emg Mkts Total In Emerging Market Income 13.75% 14.37% 2.1 62% -11.85% 10.66% 33% 1.97%
(ECC) Eagle Point Credit Company LLC Senior Loan 13.73% 24.56% 1.8 68% -12.99% 12.13% 34% 3.67%
(OPP) RiverNorth/DoubleLine Strategi Multisector Income 13.04% -6.89% 0.3 49% 3.94% 0.46% 27% 1.80%
(VGI) Virtus Global Multi-Sector Inc Multisector Income 12.13% -7.16% -0.1 45% -0.65% -0.25% 28% 1.83%
(ACP) Aberdeen Inc Credit Strategies Senior Loan 11.70% -5.88% 0.6 103% -2.80% 1.70% 31% 2.33%
(RA) Brookfield Real Assets Income Mortgage Bonds 10.89% -7.74% 0.1 61% 8.29% 0.26% 26% 1.63%
(OCCI) OFS Credit Company Inc Senior Loan 10.78% -2.05% 0.0 4% 0.00% #VALUE! 0% 0.37%

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
(IIF MS India Investment Asia Equity -11.41% 14.31% 0.2 0% -16.47% -1.63 0.30% 0% 1.35%
(DNI) Dividend and Income Fund U.S. Growth & Income -22.98% 6.84% -0.2 10% 0.45% -1.57 -0.30% 0% 1.33%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -21.47% 7.08% -0.8 -2% 21.47% -1.52 -1.13% 35% 1.80%
(NHF) NexPoint Strategic Opps Fund U.S. Growth & Income -12.09% 11.05% 0.4 32% 1.79% -1.34 -2.06% 16% 2.14%
(DEX) Delaware Enhanced Gbl Div&Inc Global Growth & Income -12.01% 11.05% -0.9 49% -1.56% -1.33 -3.29% 32% 1.83%
(SRV) Cushing MLP & Infras TR MLPs -12.45% 10.31% -0.5 0% 12.79% -1.28 -1.28% 25% 2.39%
(INF) Brookfield Glo List Infr Inc Global Equity -15.92% 7.86% -0.7 8% 16.31% -1.25 -0.91% 30% 1.86%
(TTP) Tortoise Pipeline & Energy U.S. Energy/Resources Equity -11.70% 10.52% -0.9 31% 12.61% -1.23 -1.96% 30% 1.82%
(ZF) Virtus Total Return Fund Inc. Global Growth & Income -8.56% 14.20% -0.4 6% 10.19% -1.22 -1.40% 27% 1.61%
(IFN) India Fund Inc Asia Equity -10.50% 11.57% 0.9 0% -2.95% -1.21 1.41% 0% 1.29%

Top 10 best D x Y fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV D x Y Dis Lev BE
(JQC) Nuveen Credit Strat. Income Senior Loan -8.91% 15.54% 2.6 41% 4.06% -1.38 3.39% 37.0% 1.34%
(GHY) PGIM Global Short Dur Hi High Yield -14.22% 8.56% 0.9 76% 6.39% -1.22 0.48% 28.1% 1.24%
(FAX) Aberdeen Asia-Pacific Income Global Income -11.80% 9.84% 0.7 53% -0.41% -1.16 1.23% 32.4% 1.16%
(FSD) First Trust High Inc Long/Shrt High Yield -13.44% 8.62% 0.7 85% 5.08% -1.16 0.24% 21.4% 1.19%
(EDD) MS Emerging Markets Domestic Emerging Market Income -12.76% 9.02% 0.3 36% -9.98% -1.15 0.26% 32.2% 1.72%
(ISD) PGIM Sht Duration Hi Yld High Yield -13.58% 8.40% 0.9 75% 7.26% -1.14 0.54% 26.4% 1.13%
(AVK) Advent Claymore Conv & Income Convertibles -11.10% 9.54% 0.0 35% 6.44% -1.06 0.53% 40.9% 1.27%
(ARDC) Ares Dynamic Credit Allocation Senior Loan -12.29% 8.58% -0.2 105% 3.15% -1.05 -0.78% 29.1% 1.93%
(FAM) First Trust/Aberdeen Global Global Income -12.32% 8.44% 0.8 81% -5.16% -1.04 1.15% 30.1% 1.79%
(BWG) BrandywineGLOBAL-Gl Inc opps Global Income -15.58% 6.61% -0.6 104% -5.83% -1.03 -0.76% 36.6% 1.57%

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
(EMO) ClearBridge Energy MLP Opps MLPs -12.02% 9.37% -1.5 0% 16.90% 1.69 -4.59% 35% 1.76%
(HGLB) Highland Global Allocation Fun Global Growth & Income -13.33% 3.13% -3.8 0% 0.00% 1.59 -12.39% 0% 0.00%
(MCN) Madison Covered Call & Eq Strt Covered Call -9.65% 10.64% -1.3 3% 2.42% 1.33 -2.15% 0% 1.17%
(NRO) Neuberger Berman Real Est Sec U.S. Real Estate -11.21% 9.62% -1.2 39% 22.05% 1.29 -3.74% 29% 1.39%
(CTR) ClearBridge Energy MLP TR Fund MLPs -11.77% 8.95% -1.2 0% 15.33% 1.26 -3.36% 33% 1.68%
(HQL) Tekla Life Sciences Investors U.S. Health/Biotech Equity -8.68% 7.55% -1.9 -4% 8.06% 1.25 -3.53% 0% 1.19%
(INB) Cohen & Steers Glb Inc Builder Covered Call -11.05% 9.26% -1.2 4% 2.29% 1.23 -2.70% 26% 1.57%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -21.47% 7.08% -0.8 -2% 21.47% 1.22 -1.13% 35% 1.80%
(DEX) Delaware Enhanced Gbl Div&Inc Global Growth & Income -12.01% 11.05% -0.9 49% -1.56% 1.19 -3.29% 32% 1.83%
(CUBA) Herzfeld Caribbean Basin Latin American Equity -21.91% 5.23% -1.0 -2% -8.23% 1.15 -1.99% 0% 2.66%

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
(EFT) EV Floating Rate Income Senior Loan -12.48% 6.27% -1.1 88% 3.40% 0.86 -3.72% 35% 1.27%
(FRA) BlackRock Float Rate Strat Senior Loan -12.58% 6.56% -1.0 98% 2.62% 0.83 -3.54% 29% 1.19%
(HFRO) Highland Floating Rate Opportu Senior Loan -7.04% 6.75% -1.4 86% 2.88% 0.67 -7.05% 29% 1.71%
(BGT) BlackRock Floating Rate Inc Tr Senior Loan -12.32% 5.99% -0.9 106% 3.07% 0.66 -2.60% 30% 1.20%
(JHI) JH Investors Trust Investment Grade -10.14% 6.21% -1.0 40% 5.57% 0.63 -1.52% 37% 1.09%
(BWG) BrandywineGLOBAL-Gl Inc opps Global Income -15.58% 6.61% -0.6 104% -5.83% 0.62 -0.76% 37% 1.57%
(JFR) Nuveen Floating Rate Income Senior Loan -11.67% 7.51% -0.7 100% 3.42% 0.61 -1.69% 38% 1.37%
(EFR) EV Senior Floating Rate Senior Loan -11.63% 6.52% -0.8 100% 3.99% 0.61 -2.71% 34% 1.30%
(EFF) EV Floating-Rate Inc Plus Fund Senior Loan -13.05% 6.23% -0.7 95% 1.98% 0.57 -2.13% 36% 1.43%
(FIV) FIRST TRUST SENIOR FLOATING RA Senior Loan -7.17% 4.80% -1.6 111% 3.30% 0.55 -2.54% 30% 1.32%

6. Summary statistics

The average premium/discount of all the CEFs in the database is -5.71%, a slight decrease from -5.60% in the previous month. Equity CEF discounts widened by 18 bps to -7.21%, while fixed income CEF discounts widened by 15 bps to -4.93%.

The average distribution yield of all the CEFs in the database is 6.85%, a significant decrease from 6.99% in the month prior. Equity CEFs average 8.15% yield, while fixed income CEFs average 6.12% yield.

The average 1-year z-score of all the CEFs in the database is +0.58, a slight decrease from +0.66 a month. Equity CEFs have an average z-score of -0.14, while fixed income CEFs have the same average z-score of +0.99.

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'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 absolutely crushed the average for all equity CEFs at 3 months, and substantially outperformed at 6 months.

Here's the results for the fixed income CEFs. The top 10 D x Y x Z absolutely crushed the average for all fixed income CEFs at 3 months, and are about even with the average at 6 months.

Commentary

The story this month was the "lower for longer" message promulgated by the Fed - something that we had been expecting ourselves last year even as rising rate fears hit many fixed income investments hard last year. The dovish message buoyed all asset classes this month. Long-term treasuries (TLT) led the way with +5.57% return, followed by investment grade corporates (LQD) at +2.93%. U.S. stocks (SPY) and international stocks (ACWX) posted +1.81% and +0.96% gains respectively, while high-yield bonds (JNK) rose +1.28%. A basket of high-yield CEFs (YYY) gained +0.74%.

Chart

According to Lipper Alpha Insight, equity CEFs and fixed income CEFs rose +1.65% and +1.39% respectively. However, perhaps in a sign of CEF investors getting more cautious, premiums did not expand this month and valuations tread water. In fact, equity CEF discounts and fixed income CEFs actually widened by 18 bps and 15 bps respectively in March, to -7.21% and -4.93% respectively. This also means that the trend in fixed income CEFs getting more expensive than equity CEFs has now entered into its fourth month (if only just).

We wrote last month in "The Chemist's Closed-End Fund Report - March 2019: Fixed Income CEFs Strike Back" that fixed income CEFs were in fairly valued, or may have even entered slightly overvalued, territory. While we noted above that average valuations were generally steady, I do see some specific fixed income CEFs reaching extremely overvalued territory. These include funds such as PIMCO California Municipal Income Fund (PCQ) and Stone Harbor Emerging Markets (EDF), both of which are in the Top 10 highest premiums of the fixed income category. Both funds have now breached the +30% premium mark, and are sitting at record high valuations over their nearly 20-year and 10-year lifetimes respectively. While we were early in calling for mean reversion to take place in these two funds (PCQ and EDF), I have no doubt that when a negative catalyst (e.g. a distribution cut) does occur, the results will not be pretty. This was what happened recently for several PIMCO and AllianzGI funds, as I noted here.

Overall, my message remains mostly the same as last month. Stay nimble, and don't be afraid to swap from an overvalued CEF to an undervalued CEF in order to harvest capital gains and compound income on steroids.

It is also worth checking out our fantastic results of our "D x Y x Z tracker" for this month. Both equity and fixed income Top 10 D x Y x Z lists from 3 months ago absolutely crushed the averages over this time period, with about 500 bps of outperformance. The Top 10 D x Y x Z equity CEFs from 6 months ago were also similarly dominating, while the fixed income CEFs from 6 months ago were about flat. These results provide strong validation of our quantitative ranking methodology, but I should warn that we are unlikely to see such levels of outperformance month after month. The powerful results from the Top D x Y x Z lists from three months ago are probably a reflection of the tremendous rebound in CEF valuations that have occurred over the first few months of this year, benefiting the funds that were beaten-down the most.

Due to member feedback, I'm reinstating the 3 monthly picks for our Chemist's monthly CEF report. 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 April 2019, my top 3 picks are:

  • ClearBridge Energy Midstream Opportunity Fund (EMO): 9.37% yield, -12.02% discount, -1.5 z-score, -4.59% distance, 35% leverage, 1.76% baseline expense, 0% coverage.
  • Tekla Life Sciences Investors (HQL): 7.55% yield, -8.68% discount, -1.9 z-score, -3.53% distance, 0% leverage, 1.19% baseline expense, -4% coverage.
  • Eaton Vance Floating-Rate Income Trust (EFT): 6.27% yield, -12.48% discount, -1.1 z-score, -3.72% distance, 35% leverage, 1.27% baseline expense, 88% coverage.

These funds were all picked out from the top D x Y x Z lists. We picked two equity CEFs and one fixed income CEF this month, due to equity CEFs offering better value from a statistical point of view.

EMO is the top-ranked D x Y x Z fund from the equity list. Its -12.02% discount is significantly lower than its 1, 3 and 5-year average discounts of -7.43%, -6.40% and -7.22% respectively, suggesting that the present valuation could represent a good entry point for the fund. The fund yields 9.38% on price, paid quarterly, and the next ex-date should be sometime in May.

(Source: CEFConnect)

EMO's top holding is MLP blue-chip Enterprise Products Partners (EPD) at 8.7% weighting (as of Dec. 31, 2018) and its top 10 holdings account for just over half of the weight of the fund.

(Source: LeggMason)

The sector allocations are shown below:

(Source: LeggMason)

Performance-wise, the fund bests the peer group average over 1-year and more recent time periods, but slightly lags over 3 and 5-years.

(Source: CEFConnect)

HQL is the 6th-ranked D x Y x Z equity CEF. I selected this fund because of its attractive z-score (-1.9) coupled with its reasonably wide discount (-8.68%) that is significantly wider than its 1, 3 and 5-year averages of -5.15%, -3.66% and -2.74% respectively. This suggests that the fund could be due for some mean reversion of the discount soon.

(Source: CEFConnect)

Compared to HQH which we own in our Tactical Income-100 portfolio, HQL is heavier in biotech rather than general healthcare. Despite the uncertain political environment regarding drug pricing, I am a believer in the performance of the healthcare sector over the long-run. The fund has a policy to pay out 2% of its NAV each quarter, so the distributions do go up and down on a regular basis. The next ex-date should be sometime in May. If HQL is trading at a discount, I recommend receiving the new shares in cash rather than in newly issued stock to avoid the NAV/share getting diluted by the distribution.

The top holdings of HQL are shown below:

(Source: Tekla)

The sub-sector allocations show that the majority of the portfolio is concentrated in biotech (73.4%).

(Source: Tekla)

The last selection is EFT, a fairly "vanilla" senior loan CEF to act as a counterweight to the two equity picks. With a discount of -12.48%, EFT is currently trading at much wider valuations than its 1, 3 and 5-year historical averages of -8.76%, -6.44%, and -7.32% respectively.

(Source: CEFConnect)

Senior loan CEFs have fallen somewhat out of favor as the "lower for longer" expectations make floating rate assets less attractive. Still, I think that this could be already priced into the discount of EFT, and the current valuation is quite attractive for a 6.27%-yielding monthly pay fund. The managers of EFT like to adjust the distribution level of EFT regularly, so expect a lot of small ups and downs in the payout. The next ex-date is on April 22, and the $0.0760 payout is a 2.7% increase from the previous month and is in fact the highest distribution level in a year, not counting the year-end special dividend.

(Source: CEFConnect)

The 88% coverage shown in the table uses earning figures from 11/30/2018, but it is likely that the earnings are now higher giving management the confidence to raise the distribution. Checking Eaton Vance's February UNII Report shows this indeed to be the case, with earnings of $0.0707/share compared to $0.0669/share last November. Moreover, despite this earnings number still lagging the $0.0760 distribution by 5.3 cents/month, the $0.0611 UNII banks does provide a cushion of ~11 months at the current run-rate.

The managers have also done a fairly decent job at maintaining the NAV of EFT over the past 5 years, despite a huge dip in 2015/2016 and a moderate correction at the end of last year.

Chart

Data by YCharts

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.