The Chemist's Closed-End Fund Report - August 2019: Sweet And Sour

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Includes: ACP, ACWX, ADX, AFT, AIF, ASA, AVK, BHV, BIF, BST, BUI, BWG, CEN, CET, CGO, CHN, CLM, CRF, CUBA, CXE, DDF, DMF, DNI, DNP, DSE, ECC, EDF, EDI, EEA, EFR, EFT, EMO, ETV, EVV, FAX, FDEU, FIV, FMO, FRA, FT, FXBY, GAM, GDL, GGN, GHY, GLQ, GLV, GOF, GUT, HFRO, HGLB, IDE, IIF, IRR, JGH, JMLP, JNK, JQC, JRO, JSD, KYN, LQD, MFD, MIE, MINT, MPV, MUJ, NCA, NDP, NFJ, NHF, NMT, NNC, OCCI, OPP, OXLC, PCF, PCN, PCQ, PEO, PGP, PHD, PHK, PML, PNI, PPR, PTY, PYN, RA, RCS, RIF, SPE, SPXX, SPY, SZC, THW, TLI, TLT, TSLF, TY, VAM, VGI, VKI, VPV, WIA, WIW, YYY, ZF
by: Stanford Chemist
Summary

Premium/discounts are now at 22-month highs.

Our portfolios are at record highs, but harder to put new money to work.

Our advice for new members who want to follow the model portfolios.

This article was originally published 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.

The coverage ratio is calculated by dividing the earnings/share number provided by CEFConnect on the "distributions" tab by the distribution/share. CEFdata also provides earning coverage numbers as well. Note a coverage of "0.00%" indicates that earnings numbers were not provided by CEFConnect (usually for MLP funds).

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 August 2, 2019.

1. Top 10 largest premia and top 10 widest discounts

Top 10 largest premia equity:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dis Lev BE
(GUT) Gabelli Utility Trust U.S. Utilities 50.20% 8.09% 2.0 3% 10.63% 18.93% 29% 1.77%
(DDF) Delaware Inv Div & Inc U.S. Growth & Income 36.54% 7.41% 2.1 23% 2.99% 19.78% 32% 1.17%
(DNP) DNP Select Income U.S. Growth & Income 18.37% 6.43% 0.8 27% 17.93% 1.46% 26% 1.03%
(NDP) Tortoise Energy Independence F MLPs 16.56% 30.70% 0.8 0% -52.94% 7.04% 25% 1.81%
(GOF) Guggenheim Strategic Opp Fund U.S. Growth & Income 16.29% 10.59% 1.3 45% 4.88% 5.94% 0% 1.28%
(BUI) BlackRock Util, Infra & Power U.S. Utilities 12.34% 6.30% 3.3 26% 8.69% 8.67% 0% 1.10%
(CGO) Calamos Global Total Return Global Growth & Income 9.08% 9.34% 0.7 19% 0.71% 3.79% 32% 1.67%
(CRF) Cornerstone Total Return U.S. General Equity 8.99% 20.68% 0.0 6% 5.53% 0.05% 0% 1.49%
(CLM) Cornerstone Strategic Value U.S. General Equity 8.90% 20.75% 0.4 5% 5.59% 1.51% 0% 1.42%
(ETV) EV Tax-Managed Buy-Write Opps Covered Call 8.74% 8.69% 2.0 6% 0.62% 4.32% 0% 1.14%

Top 10 widest discounts equity:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dis Lev BE
(OTCPK:FXBY) Foxby Corp U.S. General Equity -31.30% 0.48% 0.2 #DIV/0! -2.59% 0.41% 0% 2.09%
(DNI) Dividend and Income Fund U.S. Growth & Income -22.49% 6.99% 0.9 10% -1.35% 0.91% 0% 1.33%
(HGLB) Highland Global Allocation Fun Global Growth & Income -21.27% 9.84% -1.6 40% 0.00% -14.33% 0% 0.00%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -19.71% 6.94% 1.4 -2% 8.03% 1.28% 35% 1.80%
(CUBA) Herzfeld Caribbean Basin Latin American Equity -18.38% 5.05% 0.7 -2% -4.53% 1.76% 0% 2.66%
(CET) Central Securities Corporation U.S. General Equity -16.67% 2.32% 0.5 21% 12.49% 0.64% 0% 0.67%
(PEO) Adams Natural Resources U.S. Energy/Resources Equity -16.67% 2.53% 0.0 38% -15.35% -0.02% 1% 0.77%
(BIF) Boulder Growth & Income U.S. General Equity -16.41% 3.71% 0.4 8% 6.07% 0.32% 0% 1.21%
(ASA) ASA Gold and Precious Metals U.S. Energy/Resources Equity -16.12% 0.16% -0.9 -24% 28.03% -1.80% 0% 1.31%
(GDL) GDL Fund Global Equity -15.78% 4.26% 1.1 -13% 2.80% 1.65% 38% 1.27%

Top 10 largest premia fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dis Lev BE
(RCS) PIMCO Strategic Income Fund Global Income 41.89% 7.30% 0.8 97% 8.78% 4.03% 68% 0.97%
(EDF) Stone Harbor Emerging Mkts FI Emerging Market Income 38.22% 15.47% 1.7 51% 0.95% 15.54% 33% 1.88%
(PCQ) PIMCO CA Municipal Income California Munis 37.74% 4.71% 1.6 77% 12.43% 10.86% 46% 1.14%
(PGP) PIMCO Global StocksPLUS & Inc Multisector Income 29.90% 9.04% -0.7 101% 3.27% -7.05% 29% 1.48%
(PTY) PIMCO Corporate & Income Opps Investment Grade 28.20% 8.33% 1.4 83% 10.91% 8.78% 15% 0.80%
(ECC) Eagle Point Credit Company LLC Senior Loan 27.84% 14.01% 1.4 68% 0.04% 10.80% 34% 3.67%
(PHK) PIMCO High Income Fund Multisector Income 27.32% 9.07% -0.9 84% 0.00% -5.95% 24% 0.89%
(PML) PIMCO Municipal Income II National Munis 27.25% 4.88% 2.2 90% 13.80% 10.28% 45% 1.10%
(OXLC) Oxford Lane Capital Corp Senior Loan 24.76% 15.61% 0.4 126% -5.14% -3.51% 37% 4.91%
(PCN) PIMCO Corporate & Income Strgy Investment Grade 22.59% 7.38% 0.9 94% 10.97% 5.26% 21% 0.93%

Top 10 widest discounts fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dis Lev BE
(BWG) BrandywineGLOBAL-Gl Inc opps Global Income -13.85% 6.14% 1.3 107% 11.03% 1.54% 35% 1.57%
(FAX) Aberdeen Asia-Pacific Income Global Income -13.55% 7.84% 0.2 52% 8.07% 0.33% 32% 1.16%
(PPR) Voya Prime Rate Trust Senior Loan -12.93% 6.78% 0.3 93% 2.19% 0.35% 28% 1.63%
(WIW) WA Inflation-Linked Opps & Inc Government Bonds -12.89% 3.85% 0.3 81% 7.22% 0.32% 30% 0.89%
(EVV) EV Limited Duration Income Limited Duration -12.86% 6.63% 0.6 90% 5.22% 0.63% 35% 1.29%
(PHD) Pioneer Floating Rate Trust Senior Loan -12.76% 7.12% -0.2 100% 3.77% -0.31% 32% 1.20%
(WIA) Western Asset Infl-Lnkd Income Government Bonds -12.71% 3.57% 0.1 64% 7.25% 0.16% 32% 0.94%
(FRA) BlackRock Float Rate Strat Senior Loan -12.66% 6.54% -0.7 102% 3.93% -1.45% 28% 1.19%
(TSLF) THL Credit Senior Loan Fund Senior Loan -12.65% 8.05% -0.6 113% -0.31% -1.12% 31% 1.91%
(AIF) Apollo Tactical Income Fund In High Yield -12.39% 8.16% -0.3 110% 4.47% -0.43% 35% 2.30%

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
(DSE) Duff & Phelps Select Energy ML MLPs 3.8 1.41% 11.93% 0% -19.38% 8.73% 38% 2.16%
(GAM) General American Investors U.S. General Equity 3.4 -14.33% 2.23% -5% 3.70% 1.97% 17% 1.14%
(BUI) BlackRock Util, Infra & Power U.S. Utilities 3.3 12.34% 6.30% 26% 8.69% 8.67% 0% 1.10%
(ADX) Adams Diversified Equity U.S. General Equity 3.3 -11.30% 0.95% 33% 7.96% 2.57% 0% 0.54%
(MIE) Cohen & Steers MLP Inc&Energy MLPs 3.2 3.10% 9.59% 0% -14.21% 10.12% 31% 1.65%
(SPXX) Nuveen S&P 500 Dynamic Overwri Covered Call 3.0 4.93% 6.46% 6% 0.19% 4.90% 0% 0.91%
(THW) Tekla World Healthcare Fund U.S. Health/Biotech Equity 2.8 -2.63% 10.50% 5% 1.89% 5.09% 22% 1.50%
(FDEU) First Trust Dynamic Europe Equ Other Non-U.S. Equity 2.6 -5.62% 10.54% 23% -8.22% 3.64% 26% 1.64%
(TY) Tri-Continental Corporation U.S. General Equity 2.4 -9.16% 3.68% 32% 3.06% 1.87% 5% 0.45%
(NFJ) AllianzGI NFJ Div Int & Prem Covered Call 2.4 -9.83% 7.26% 10% -0.14% 2.55% 0% 0.95%

Top 10 lowest z-scores equity:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(CHN) China Fund Inc Asia Equity -1.9 -12.13% 0.86% -10% 3.99% -2.57% 4% 1.82%
(GLV) Clough Global Div and Inc Fund Global Growth & Income -1.7 -13.40% 11.62% 19% 0.00% -3.33% 40% 1.85%
(HGLB) Highland Global Allocation Fun Global Growth & Income -1.6 -21.27% 9.84% 40% 0.00% -14.33% 0% 0.00%
(EEA) European Equity Fund Other Non-U.S. Equity -1.5 -14.54% 3.90% -2% -4.64% -1.20% 0% 1.34%
(GLQ) Clough Global Equity Global Equity -1.4 -9.53% 11.20% 2% -3.74% -4.47% 39% 2.14%
(JMLP) Nuveen All Cap Energy MLP Opps MLPs -1.3 -10.56% 12.65% 0% -16.07% -2.01% 28% 1.89%
(KYN) Kayne Anderson MLP MLPs -1.3 -10.13% 9.72% 0% -10.07% -3.18% 33% 2.48%
(VAM) Vivaldi Opportunities Fund U.S. Growth & Income -1.3 -2.09% 9.45% -10% 0.00% -2.00% 100% 2.63%
(MFD) Mac/First Glb Infrastructure U.S. Utilities -1.2 -8.92% 11.26% 32% 4.80% -3.43% 30% 1.76%
(BST) BlackRock Science and Technolo Global Equity -1.1 1.31% 5.43% -10% 10.14% -3.62% 0% 1.08%

Top 10 highest z-scores fixed income:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(NMT) Nuveen MA Quality Muni Income Massachusetts Equity 4.3 -5.88% 3.49% 102% 9.64% 6.79% 37% 1.12%
(NYSE:CXE) MFS High Income Municipal High Yield Munis 4.0 5.15% 4.30% 107% 7.18% 10.70% 36% 1.39%
(DMF) Dreyfus Municipal Income National Munis 3.7 -0.21% 4.51% 111% 7.85% 9.71% 36% 1.13%
(FT) Franklin Universal Trust Multisector Income 3.5 -11.88% 5.18% 99% 11.08% 3.77% 24% 1.08%
(VPV) Invesco PA Value Muni Pennsylvania Munis 3.2 -4.06% 4.76% 93% 8.99% 5.96% 42% 1.04%
(VKI) Invesco Adv Muni Inc II National Munis 3.0 -3.65% 4.64% 100% 8.19% 5.71% 42% 0.99%
(NNC) Nuveen NC Quality Muni Income North Carolina Munis 2.9 -9.71% 3.39% 103% 9.98% 4.58% 37% 1.06%
(NCA) Nuveen CA Muni Value California Munis 2.9 -1.50% 3.26% 102% 8.07% 5.09% 0% 0.62%
(MUJ) BlackRock MuniHoldings NJ Qty New Jersey Munis 2.7 -8.68% 4.31% 101% 9.47% 5.27% 39% 0.92%
(MPV) Barings Participation Invs High Yield 2.7 22.21% 6.50% 31% 5.05% 8.80% 10% 1.58%

Top 10 lowest z-scores fixed income:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dis Lev BE
(PCF) High Income Securities High Yield -1.5 -11.45% 6.77% 21% 3.69% -5.73% 0% 0.75%
(PNI) PIMCO NY Municipal Income II New York Munis -1.0 0.95% 4.13% -619% 13.23% -3.09% 49% 1.33%
(PHK) PIMCO High Income Fund Multisector Income -0.9 27.32% 9.07% 84% 0.00% -5.95% 24% 0.89%
(BHV) BlackRock VA Municipal Bond Virginia Munis -0.7 6.33% 3.33% 101% 7.83% -3.85% 42% 1.86%
(FRA) BlackRock Float Rate Strat Senior Loan -0.7 -12.66% 6.54% 102% 3.93% -1.45% 28% 1.19%
(HFRO) Highland Floating Rate Opportu Senior Loan -0.7 -6.79% 6.92% 86% -0.21% -3.07% 29% 1.13%
(PGP) PIMCO Global StocksPLUS & Inc Multisector Income -0.7 29.90% 9.04% 101% 3.27% -7.05% 29% 1.48%
(PYN) PIMCO NY Municipal Income III New York Munis -0.7 4.41% 4.39% 209% 10.22% -2.92% 46% 1.48%
(FIV) FIRST TRUST SENIOR FLOATING RA Senior Loan -0.6 -6.41% 4.09% 129% 3.56% -0.68% 30% 1.32%
(TSLF) THL Credit Senior Loan Fund Senior Loan -0.6 -12.65% 8.05% 113% -0.31% -1.12% 31% 1.91%

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 30.70% 16.56% 0.8 0% -52.94% 7.04% 25% 1.81%
(CLM) Cornerstone Strategic Value U.S. General Equity 20.75% 8.90% 0.4 5% 5.59% 1.51% 0% 1.42%
(CRF) Cornerstone Total Return U.S. General Equity 20.68% 8.99% 0.0 6% 5.53% 0.05% 0% 1.49%
(CEN) Center Coast MLP & Infras MLPs 15.89% 3.96% 2.0 0% -11.68% 3.64% 30% 1.89%
(IIF) MS India Investment Asia Equity 15.72% -12.03% -0.2 0% -18.02% -0.21% 0% 1.35%
(IRR) Voya Natural Resource Equity Covered Call 14.41% 6.21% 0.8 3% -21.74% 3.74% 0% 1.27%
(ZF) Virtus Total Return Fund Inc. Global Growth & Income 13.90% -5.20% 1.1 6% 11.08% 2.96% 27% 1.61%
(SPE) Special Opportunities Fund U.S. General Equity 13.65% -11.08% 0.4 -36% 2.55% 0.65% 32% 1.91%
(FMO) Fid/Claymore Energy Infrastru MLPs 13.46% -5.79% 0.1 0% -16.65% 0.11% 38% 1.71%
(GGN) GAMCO Glb Gold Natural Res&Inc U.S. Energy/Resources Equity 13.27% 3.91% 1.1 4% 0.69% 5.15% 13% 1.33%

Top 10 highest yields fixed income:

Ticker Fund Category Y P/D Z Cov 1Y NAV Dis Lev BE
(JQC) Nuveen Credit Strat. Income Senior Loan 16.01% -8.49% 1.1 41% 3.22% 2.70% 37% 1.34%
(OXLC) Oxford Lane Capital Corp Senior Loan 15.61% 24.76% 0.4 126% -5.14% -3.51% 37% 4.91%
(EDF) Stone Harbor Emerging Mkts FI Emerging Market Income 15.47% 38.22% 1.7 51% 0.95% 15.54% 33% 1.88%
(EDI) Stone Harbor Emg Mkts Total In Emerging Market Income 14.30% 13.01% 0.9 62% 1.37% 5.16% 33% 1.97%
(ECC) Eagle Point Credit Company LLC Senior Loan 14.01% 27.84% 1.4 68% 0.04% 10.80% 34% 3.67%
(OPP) RiverNorth/DoubleLine Strategi Multisector Income 12.48% -2.54% 1.8 49% 9.00% 4.14% 27% 1.80%
(OCCI) OFS Credit Company Inc Senior Loan 12.06% -11.72% 0.0 78% 0.00% #VALUE! 0% 0.37%
(VGI) Virtus Global Multi-Sector Inc Multisector Income 11.55% -3.32% 1.7 45% 4.81% 4.92% 28% 1.83%
(ACP) Aberdeen Inc Credit Strategies Senior Loan 11.39% 0.08% 1.7 80% -5.71% 6.11% 30% 2.33%
(RA) Brookfield Real Assets Income Mortgage Bonds 10.86% -6.51% 0.6 61% 6.35% 1.73% 26% 1.63%

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
(HGLB) Highland Global Allocation Fun Global Growth & Income -21.27% 9.84% -1.6 40% 0.00% -2.09 -14.33% 0% 0.00%
(NHF) NexPoint Strategic Opps Fund U.S. Growth & Income -15.55% 13.08% -1.1 32% -3.24% -2.03 -4.02% 16% 2.14%
(IIF) MS India Investment Asia Equity -12.03% 15.72% -0.2 0% -18.02% -1.89 -0.21% 0% 1.35%
(DNI) Dividend and Income Fund U.S. Growth & Income -22.49% 6.99% 0.9 10% -1.35% -1.57 0.91% 0% 1.33%
(GLV) Clough Global Div and Inc Fund Global Growth & Income -13.40% 11.62% -1.7 19% 0.00% -1.56 -3.33% 40% 1.85%
(SPE) Special Opportunities Fund U.S. General Equity -11.08% 13.65% 0.4 -36% 2.55% -1.51 0.65% 32% 1.91%
(SZC) Cushing Renaissance Fund U.S. Energy/Resources Equity -12.17% 12.03% -0.8 25% -16.34% -1.46 -3.32% 24% 1.96%
(RIF) RMR Real Estate Income Fund U.S. Real Estate -19.71% 6.94% 1.4 -2% 8.03% -1.37 1.28% 35% 1.80%
(EMO) ClearBridge Energy MLP Opps MLPs -11.98% 11.17% -0.8 0% -11.28% -1.34 -1.96% 35% 1.76%
(JMLP) Nuveen All Cap Energy MLP Opps MLPs -10.56% 12.65% -1.3 0% -16.07% -1.34 -2.01% 28% 1.89%

Ticker Fund Category P/D Y Z Cov 1Y NAV D x Y Dis Lev BE
(OCCI) OFS Credit Company Inc Senior Loan -11.72% 12.06% 0.0 78% 0.00% -1.41 #VALUE! 0.0% 0.37%
(JQC) Nuveen Credit Strat. Income Senior Loan -8.49% 16.01% 1.1 41% 3.22% -1.36 2.70% 36.5% 1.34%
(FAX) Aberdeen Asia-Pacific Income Global Income -13.55% 7.84% 0.2 52% 8.07% -1.06 0.33% 31.7% 1.16%
(TSLF) THL Credit Senior Loan Fund Senior Loan -12.65% 8.05% -0.6 113% -0.31% -1.02 -1.12% 31.1% 1.91%
(AVK) Advent Claymore Conv & Income Convertibles -10.67% 9.49% 0.7 33% 4.57% -1.01 1.03% 40.0% 1.27%
(AIF) Apollo Tactical Income Fund In High Yield -12.39% 8.16% -0.3 110% 4.47% -1.01 -0.43% 35.1% 2.30%
(GHY) PGIM Global Short Dur Hi High Yield -12.03% 8.25% 1.8 76% 8.80% -0.99 2.18% 28.1% 1.24%
(JGH) Nuveen Global High Income Global Income -12.21% 7.92% 0.4 99% 5.79% -0.97 0.62% 30.6% 1.31%
(TLI) Western Asset Corporate Loan Senior Loan -12.20% 7.84% 0.7 84% 3.13% -0.96 0.87% 32.4% 1.40%
(AFT) Apollo Senior Floating Rate Senior Loan -11.81% 8.03% -0.2 104% 3.30% -0.95 -0.29% 35.6% 2.26%

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
(HGLB) Highland Global Allocation Fun Global Growth & Income -21.27% 9.84% -1.6 40% 0.00% 3.35 -14.33% 0% 0.00%
(GLV) Clough Global Div and Inc Fund Global Growth & Income -13.40% 11.62% -1.7 19% 0.00% 2.65 -3.33% 40% 1.85%
(NHF) NexPoint Strategic Opps Fund U.S. Growth & Income -15.55% 13.08% -1.1 32% -3.24% 2.24 -4.02% 16% 2.14%
(JMLP) Nuveen All Cap Energy MLP Opps MLPs -10.56% 12.65% -1.3 0% -16.07% 1.74 -2.01% 28% 1.89%
(GLQ) Clough Global Equity Global Equity -9.53% 11.20% -1.4 2% -3.74% 1.49 -4.47% 39% 2.14%
(KYN) Kayne Anderson MLP MLPs -10.13% 9.72% -1.3 0% -10.07% 1.28 -3.18% 33% 2.48%
(MFD) Mac/First Glb Infrastructure U.S. Utilities -8.92% 11.26% -1.2 32% 4.80% 1.21 -3.43% 30% 1.76%
(SZC) Cushing Renaissance Fund U.S. Energy/Resources Equity -12.17% 12.03% -0.8 25% -16.34% 1.17 -3.32% 24% 1.96%
(EMO) ClearBridge Energy MLP Opps MLPs -11.98% 11.17% -0.8 0% -11.28% 1.07 -1.96% 35% 1.76%
(IDE) Voya Infrastructure Ind & Mat Global Equity -10.87% 10.18% -0.9 4% -4.96% 1.00 -3.24% 0% 1.22%

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
(PCF) High Income Securities High Yield -11.45% 6.77% -1.5 21% 3.69% 1.16 -5.73% 0% 0.75%
(TSLF) THL Credit Senior Loan Fund Senior Loan -12.65% 8.05% -0.6 113% -0.31% 0.61 -1.12% 31% 1.91%
(FRA) BlackRock Float Rate Strat Senior Loan -12.66% 6.54% -0.7 102% 3.93% 0.58 -1.45% 28% 1.19%
(EFR) EV Senior Floating Rate Senior Loan -11.91% 6.68% -0.5 99% 3.25% 0.40 -0.86% 35% 1.30%
(JSD) Nuveen Shrt Duration Cred Opps Senior Loan -9.26% 8.11% -0.5 97% 0.87% 0.38 -1.07% 38% 1.51%
(HFRO) Highland Floating Rate Opportu Senior Loan -6.79% 6.92% -0.7 86% -0.21% 0.33 -3.07% 29% 1.13%
(AIF) Apollo Tactical Income Fund In High Yield -12.39% 8.16% -0.3 110% 4.47% 0.30 -0.43% 35% 2.30%
(JRO) Nuveen Floating Rate Inc Opps Senior Loan -11.36% 7.75% -0.3 101% 1.57% 0.26 -0.36% 37% 1.40%
(EFT) EV Floating Rate Income Senior Loan -11.58% 6.38% -0.3 99% 2.80% 0.22 -0.76% 35% 1.27%
(AFT) Apollo Senior Floating Rate Senior Loan -11.81% 8.03% -0.2 104% 3.30% 0.19 -0.29% 36% 2.26%

6. Summary statistics

The average premium/discount of all the CEFs in the database is -4.00%, a very large increase of 107 bps from -5.07% in the previous month. Equity CEF discounts narrowed by 114 bps to -5.58%, while fixed income CEF narrowed by 106 bps to -3.04%.

The average distribution yield of all the CEFs in the database is 6.83%, down from 6.84% the month prior. Equity CEFs average 8.46% yield, while fixed income CEFs average 5.91% yield.

The average 1-year z-score of all the CEFs in the database is +1.04, a large increase from +0.66 a month prior. Equity CEFs have an average z-score of +1.00, while fixed income CEFs have the same average z-score of +1.32.

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 slightly underperformed the average for all equity CEFs at 3 months and slightly outperformed the average at 6 months.

Here's the results for the fixed income CEFs. The top 10 D x Y x Z underperformed the average of fixed income CEFs at 3 months and substantially underperformed the average at 6 months.

Commentary

U.S. stocks (SPY) propelled to new all-time highs this month, although gave away about half of this month's gains amidst new trade war fears. International stocks (ACWX) fared poorly at -1.73%. Long-term treasuries (TLT) gained +0.26% while investment-grade corporates (LQD) rose +0.25%. High-yield bonds (JNK) gained +0.14%, while a basket of high-yield CEFs (YYY) rose by +0.67%.

Closed-end funds continue to get more expensive! Last month, we remarked that the average -5.07% discount of CEFs across the universe was an 18-month high (The Chemist's Closed-End Fund Report - July 2019: Premium/Discounts At 18-Month Highs). This month saw a very substantial ~1% increase in average premium/discount to -4.00%, which is a highest since October 2017's -3.53% discount, making it a 22-month high! Moreover, the average 1-year z-score of +1.04 is a record high since we started tracking this metric three years ago. Although it should be noted that these values are somewhat inflated by the CEF sell-off late last year which brought down average 1-year discount values.

I looked up our commentary from our October 2017 report, and I find that my current thoughts parallel what I wrote nearly two years ago:

As with last month, I am still cautiously long with CEFs at the moment. I have not been selling even at these elevated levels, but I haven't been buying much either, with few bargains to be had in CEFland.

It turned out that warning was timely, as CEF discounts widened significantly over the next couple of months, which is reflected by the poor price performance of YYY, an ETF basket of CEFs.

Chart

Data by YCharts

Note that I am not calling a top in CEFs today, as this is difficult to do except in hindsight, and market timing is not our emphasis anyway. To repeat, I am not saying to sell everything! However, we continue to maintain that with bargains few and far between right now, that members should be cautious and not "back up the truck" on new purchases. Try to resist the urge to succumb to "fear of missing out," and instead consider keeping incoming dividend cash as "dry powder" for use when the inevitable correction arrives.

As an aside, for those members who are keeping a significant cash reserve, be sure that you're getting a competitive interest rate on your cash balance. Now that we're no longer in the ZIRP regimen, cash is no longer trash! However, not all banks or brokers will sweep your cash balance into a high-interest rate account. For those willing to take on slightly higher risk-reward but still retain overall excellent liquidity and capital preservation, consider something like PIMCO Enhanced Short Maturity Active ETF (MINT) with its 2.69% ttm yield or similar funds (last profiled in ETF Month #4: MINT Yield Rises, But Comparative Advantage Diminishes)

For our portfolios, both our Tactical Income-100 and Income Generator portfolios are sitting in nearly 10% cash as a result of previous sells or trims, as well as accumulating distribution from our investments. We do want to deploy these in cash-generating vehicles soon, but aren't in any great hurry to do so until attractive opportunities can be found. If we really can't find a compelling fund to drop the cash into, we may just add a bit here and there to our existing positions.

Speaking of our portfolios, did you see that they both reached all-time closing monthly highs last month? (The Tactical Income-100 Portfolio - July 2019 Report; The Income Generator Portfolio - July 2019 Report). While I'm very proud of our market-beating performance, at the same time, I do understand the frustration of newer members who want to establish positions in our portfolios but find "buy" opportunities few and far between.

Remember, we're not cheerleaders at CEF/ETF Income Laboratory and we're not going to tout ultra-bullish picks just to make members feel like they're getting their money's worth! The time to be ultra-bullish was in last December, as you can see from the screenshot of the Income Generator portfolio from around that time. The portfolio had an average discount of -6.90%, with 8 "buy" rated funds! Today, the portfolio has an average premium of +2%, and only one fund is currently buy rated at the time of writing. A world of difference!

(December 28, 2018, screenshot)

One of our members captured this dilemma nicely in our chat last week, using the analogy of... sweet and sour Chinese food! (Hence the title of this report!)

On one hand it's nice they are reaching all-time highs...but on the other hand we know they are trading near NAV or at premiums making me feel uneasy putting money to work. That also means the percentage distribution is down from their "normal" trading value. Quite frankly, I'm feeling uneasy putting additional money to work at these lofty valuations and with CEFs, it's the "covered" distribution percentage I'm more so worried about. It's like Chinese food...sweet and sour...sweet trading at all time highs, but sour wanting to buy anything. I long for the days of +10% discounts. Thankfully we have you all to guide us on those arbitrage trades to continue squeezing extra money.

Image result for sweet and sour pork

Given all of the above, what should new members do then?

My overall advice as outlined in our Welcome Letter + FAQ still broadly applies:

A more conservative approach, and one that I would recommend to a typical new member, is to focus mainly on the "BUY" rated and "HOLD" rated funds to establish initial positions (perhaps with a greater allocation to the "buys" than the "holds"), and wait for better opportunities to initiate in those funds that are currently above our "Sell Above" targets. Again, dollar-cost averaging can, and should, be used here as well particularly for those members who are less experienced with CEFs.

In other words, it's fine for new members to initiate small positions in the "hold" rated funds using a dollar-cost averaging approach, even if they aren't great bargains right now. That way you can see how the funds behave, how premium/discount fluctuations affect the market prices of funds, etc. More importantly, having some investment in our picks also gives you an opportunity to try out our "compounding income on steroids" strategy by following our trade alerts, or as our member puts it above, "Thankfully we have you all to guide us on those arbitrage trades to continue squeezing extra money."

You can then gradually increase positions over a period of time using the dollar-cost averaging approach, which should smooth out the effects of volatility and hopefully allow you to better prices down the road. In this sense, a correction would be more than welcome to drive prices back into the "buy" zone, painful as it might be for our portfolios - just think about to December 2018 when many members were in a full state of panic! In my view, volatility in CEFs is to be exploited rather than feared. Nick also put out a great piece recently in the Lab discussing "pullbacks, corrections and bear markets" and how members might think about and take advantage of these.

Turning to our D x Y x Z tracker, this month was one of the worst performances of our metric on the fixed income side, with significant underperformance over both 3- and 6-month time frames (the equity D x Y x Z top 10 picks slightly underperformed the average over 3 months while outperforming over 6 months). The reason for this, in my view, is that the metric is very good at picking out value opportunities due to its emphasis on discount and z-score as factors. However, it is not as good as following momentum. Essentially, what happened was that the fixed income D x Y x Z picks from 3 and 6 months ago were dominated by senior loan funds as these had the cheapest valuation back then. However, as interest rates reversed direction and fell, it was long-duration assets that outperformed, and today many of these sectors are actually quite overheated (such as preferreds CEFs).

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 August 2019, my top 3 picks are:

  • Kayne Anderson MLP/Midstream Investment Company (KYN): 9.72% yield, -10.13% discount, -1.3 z-score, -3.18% distance, 33% leverage, 2.48% baseline expense.
  • BlackRock Floating Rate Income Strategies Fund (FRA): 6.54% yield, -12.66% discount, -0.7 z-score, -1.45% distance, 28% leverage, 1.19% baseline expense, 102% coverage.
  • Apollo Tactical Income Fund (AIF): 8.16% yield, -12.39% discount, -0.3 z-score, -0.43% distance, 35% leverage, 2.30% baseline expense, 110% coverage.

These were picked out of the top D x Y x Z lists.

Disclosure: I am/we are long THE PREMIUM 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.