The week was once again quite successful for the fixed-income world. The leading benchmark reached a new high. The 10-year interest rates went to new lows and the bond ETF trades stable for now. Statistically, most of the closed-end funds are "Sell" candidates, and we do not have any "Buy" candidates. The NAV/Price spreads are also high compared to the average levels. Currently, fixed-income investors are in the so-called "safe haven".
As we can see from the chart beneath, the leading benchmark of the preferred stock sector (PFF) has not moved an inch during the past trading week. The trading activity is in the average levels, and there was lack of volatility during the last days. PFF closed the week at a price of $36.85 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). Over the past week, the bond ETF hit a new high of $134.29 per share. The trading volume was in the average levels. On Friday, the ETF closed the session at a price of $132.43 per share. On a weekly basis, TLT added to its price $0.97 per share.
Source: Barchart.com - TLT Daily Chart (6 months)
1. Sorted By Z-Score
Today the Z-scores are lower than our previous article. We have a new leader in the table above. The John Hancock Preferred Income Fund II (HPF) is the undisputed leader in today's ranking. The preferred CEF has a Z-score of 2.10. This is the most overvalued closed-end fund in the sector. Currently, the fund has a NAV/price spread of 9.77%. The main asset type of HPF's portfolio are preferred stocks: Source: Cefdata.com
Second in the chart today is the Flaherty & Crumrine Preferred Income Fund (PFD) which has a score of 1.80. The CEF is trading at a high premium as well and is outperforming its peers as we can see: Source: Cefdata.com
As usual, in our table, the most undervalued fund is the Flaherty & Crumrine Preferred Income Opportunity Fund (PFO). This is the only preferred closed-end fund which has a negative score.
The average Z-score in the sector is 1.18.
2. Baseline Expense
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 change 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
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 also the most generous as well. The average return in the preferred sector is 7.65%. PDT has a return over 9.50%, which is way above the average result, as we can see.
The gold medalist in the tale above is the John Hancock Premium Dividend Fund. If we judge by this criterion, PDT is the most overvalued closed-end fund in the group. Statistically, however, PFD has a low Z-score - 0.90. We cannot determine the CEF as overvalued with such a statistical result. On the chart beneath we can see that the CEF is headed to its yearly highs:
The chart translated in numbers:
The Nuveen Preferred and Income Term Fund (JPI) is the fund with the widest discount in the sector. Currently, JPI trades at a 3.74% discount. Despite that JPI has the lowest criteria in the frames of this criteria, it actually trades quite higher compared to its average levels:
Source: Barchart.com - JPI Daily Chart (6 months)
Today, the average premium in the sector is 2.09%.
5. Effective Leverage
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
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 6.94%, and the average yield on net asset value is 07.09%.
My conclusion is only one and it's simple - safe haven. The sector is performing quite well at the moment and looks stable as well. The dividend capture strategy is definitely the game of the moment. Of course, we should have hedging reactions when we have big positions, but for now, buy and hold is good enough for me. On the other side, if clouds appear on the horizon, we have plenty of overvalued closed-end funds as the numbers show us.
Note: This article was originally published on July 7, 2019, and some figures and charts might not be entirely up to date.
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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.