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The Chemist's Closed-End Fund Report December 2019: Equity CEFs Join The Party

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Includes: ACP, ACWX, ARDC, ASA, BFY, BFZ, BGH, BWG, CEN, CGO, CHN, CHW, CLM, CRF, CUBA, DDF, DHF, DMO, DNI, DNP, DSE, DTF, ECC, EDF, EDI, EMO, ERH, ETB, ETV, EVV, FEO, FGB, FIF, FMO, FRA, FT, FXBY, GCV, GDL, GER, GGZ, GHY, GIM, GLO, GRF, GUT, HFRO, HGLB, HPF, HPI, HQL, IDE, IGD, IGR, IID, IIF, IRR, JLS, JNK, JQC, JSD, KF, LQD, MFV, MINT, MPV, MZA, NBO, NCB, NDP, NHF, NIQ, NML, NMY, NPV, NRO, NTG, NXC, NXP, NXQ, NXR, OCCI, OPP, OXLC, PCF, PCN, PCQ, PDI, PEO, PGP, PGZ, PHK, PML, PTY, RCG, RCS, RIF, RSF, SCD, SMM, SPY, SZC, TDF, TEI, TLI, TLT, VCIF, VGI, VLT, VMM, VTA, VVR, WIW, YYY, ZTR
by: Stanford Chemist
Stanford Chemist
ETF investing, closed-end funds, dividend investing, portfolio strategy
Summary

Equity CEFs rally to their narrowest discounts since mid-2018.

Overall valuations inch up by 1 bps, despite fixed income CEFs taking a breather.

Why we continue to suggest a conservative dollar-cost averaging strategy for newer members.

Author's note: This article was released to CEF/ETF Income Laboratory members on December 17, 2019.

Chemist's Closed-End Fund Report

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, "deviation" refers to the deviation 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 earnings 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

Dev = deviation

Lev = leverage

BE = baseline expense

Cov = coverage

Data were taken from the close of December 13, 2019.

1. Top 10 largest premia and top 10 widest discounts

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 largest premia equity:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dev Lev BE
(GUT) Gabelli Utility Trust Sector Equity 52.57% 8.04% 1.3 5% 11.55% 10.70% 28% 1.81%
(DDF) Delaware Investments Dividend & Income U.S. Allocation 30.97% 7.57% 0.9 37% 9.53% 7.06% 29% 1.26%
(DNP) DNP Select Income Sector Equity 24.73% 6.09% 2.0 27% 15.81% 6.28% 25% 1.02%
(PGP) PIMCO Global StocksPLUS & Income Global Allocation 20.94% 9.64% -1.0 96% 13.77% -10.82% 33% 1.54%
(MFV) MFS Special Value U.S. Allocation 12.15% 8.79% 1.5 29% 14.33% 7.75% 0% 1.39%
(ERH) Wells Fargo Util & High In U.S. Allocation 9.22% 6.86% 1.9 126% 11.42% 7.10% 16% 0.00%
(CGO) Calamos Global Total Return Global Allocation 9.16% 9.20% 1.2 19% 13.68% 4.09% 33% 1.70%
(ETB) Eaton Vance Tax-Managed Buy-Write Income Covered Call 7.40% 7.91% 0.7 12% 7.92% 2.57% 0% 1.11%
(ZTR) Virtus Total Return Fund Inc Global Allocation 6.04% 12.66% 1.6 6% 16.02% 10.40% 28% 1.56%
(CHW) Calamos Global Dynamic Income Fund Global Allocation 5.95% 9.76% 1.9 24% 13.44% 6.44% 36% 1.64%

Top 10 widest discounts equity:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dev Lev BE
(OTCPK:FXBY) Foxby Corp. U.S. Equity -33.92% 0.45% -0.4 11.07% -0.86% 0% 2.13%
(HGLB) Highland Global Allocation Fund Global Allocation -23.08% 14.07% 0.0 35% 0.00% 42% 0.00%
(DNI) Dividend and Income Fund U.S. Allocation -20.00% 7.89% 1.7 5% 12.42% 2.46% 0% 1.34%
(RCG) RENN Global Entrepreneurs Fund U.S. Allocation -19.37% -0.6 -0.50% -3.12% 0% 0.00%
(RIF) RMR Real Estate Income Fund Real Estate -18.45% 6.63% 1.9 28% 21.71% 2.20% 30% 1.83%
(GDL) GDL Fund U.S. Allocation -17.27% 4.34% -0.5 -28% 3.73% -0.49% 39% 2.51%
(NHF) NexPoint Strategic Opportunities Fund U.S. Allocation -16.92% 13.65% -0.5 17% -2.28% -2.10% 20% 1.23%
(GRF) Eagle Capital Growth U.S. Equity -16.64% 7.36% -0.5 1% 9.46% -1.17% 0% 1.34%
(GGZ) Gabelli Global Small & Mid Cap Value Tru Global Equity -16.15% 1.21% -0.1 -6% 4.36% -0.16% 19% 1.68%
(ASA) ASA Gold and Precious Metals Limited Sector Equity -15.60% 0.16% -0.1 -24% 47.11% -0.11% 0% 0.00%

Top 10 largest premia fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dev Lev BE
(ECC) Eagle Point Credit Company LLC Senior Loans 51.21% 16.45% 2.2 61% -6.01% 23.03% 45% 5.68%
(EDF) Stone Harbor Emerg. Mkts Income Fund Emerging Market Income 49.06% 16.30% 1.4 48% 4.44% 16.15% 1% 1.79%
(PCQ) PIMCO CA Municipal Income California Munis 42.50% 4.57% 1.6 71% 14.56% 8.90% 47% 0.00%
(RCS) PIMCO Strategic Income Fund Investment Grade 33.60% 8.06% -1.2 67% 9.37% -5.10% 69% 0.98%
(PTY) PIMCO Corporate & Income Opportunity Fd Investment Grade 29.43% 8.44% 0.9 324% 12.00% 5.89% 26% 0.80%
(PCN) PIMCO Corporate & Income Strgy Investment Grade 28.04% 7.24% 1.1 149% 12.48% 7.96% 24% 0.94%
(PML) PIMCO Municipal Income II National Munis 24.89% 4.99% 1.0 82% 16.00% 3.44% 46% 1.13%
(PHK) PIMCO High Income Multisector Income 23.52% 9.72% -0.9 73% 13.20% -7.04% 29% 0.91%
(PDI) PIMCO Dynamic Income Fund Multisector Income 23.00% 8.04% 1.6 55% 7.44% 7.28% 41% 1.89%
(MPV) Barings Participation Invs High Yield 18.37% 6.65% -0.1 23% 6.42% -0.42% 9% 2.33%

Top 10 widest discounts fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV Dev Lev BE
(VCIF) Vertical Capital Income Fund Senior Loans -18.21% 2.78% 0.0 88% 0.00% 2% 0.00%
(BWG) BrandywineGLOBAL Global Inc Opp Fund Global Income -13.34% 6.23% 1.8 94% 21.47% 1.84% 33% 2.38%
(WIW) Western Asset Infl-Linked Opps & Inc Fd Investment Grade -12.85% 3.82% 1.0 81% 10.25% 0.66% 30% 0.91%
(PCF) High Income Securities Convertibles -12.44% 6.77% -0.9 27% 5.69% -3.60% 1% 0.00%
(BFZ) BlackRock CA Municipal Income California Munis -12.16% 3.37% 0.2 109% 11.51% 0.26% 40% 1.06%
(NMY) Nuveen MD Quality Muni Inc Single-state Munis -11.99% 3.97% 0.7 103% 12.62% 0.93% 38% 1.05%
(NBO) Neuberger NY Municipal New York Munis -11.98% 3.82% 0.4 103% 8.48% 0.63% 39% 2.69%
(VTA) Invesco Dynamic Credit Opp Senior Loans -11.84% 8.25% 0.2 74% 3.77% 0.43% 33% 1.96%
(VMM) Delaware Inv MN Muni Income II Single-state Munis -11.76% 3.42% 1.0 102% 10.08% 1.10% 30% 0.85%
(VVR) Invesco Senior Income Senior Loans -11.75% 6.99% -0.1 85% 2.77% -0.15% 30% 1.62%

2. Top 10 highest z-scores and top 10 lowest z-scores

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 Dev Lev BE
(NRO) Neuberger Real Estate Securities Income Real Estate 2.6 2.90% 8.44% 53% 22.32% 9.90% 28% 1.40%
(PGZ) Principal Real Estate Income Fund Real Estate 2.6 -4.47% 6.20% 89% 21.97% 6.67% 28% 2.10%
(FIF) First Trust Energy Infrastructure MLPs 2.5 -6.19% 8.22% 20% 8.26% 4.13% 26% 1.53%
(IGR) CBRE Clarion Global Real Estate Income Real Estate 2.3 -8.55% 7.59% 39% 19.40% 4.84% 14% 1.17%
(PEO) Adams Natural Resources Fund Sector Equity 2.3 -13.44% 2.54% 5% -5.06% 2.85% 1% 0.79%
(NML) NB MLP and Energy Income Fund Inc. MLPs 2.2 -9.87% 9.91% -30% -10.25% 2.13% 28% 1.37%
(GCV) Gabelli Conv Inc Secs U.S. Allocation 2.2 4.58% 8.32% 0% 16.88% 7.76% 19% 1.60%
(NYSE:FT) Franklin Universal Trust U.S. Allocation 2.2 -9.93% 4.95% 99% 13.95% 4.20% 23% 0.00%
(DNP) DNP Select Income Sector Equity 2.0 24.73% 6.09% 27% 15.81% 6.28% 25% 1.02%
(SCD) LMP Capital and Income Global Allocation 2.0 -5.58% 8.31% 10% 19.44% 4.14% 22% 1.28%

Top 10 lowest z-scores equity:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dev Lev BE
(KF) Korea Fund Asia Equity -2.2 -14.52% 2.12% 0% -2.88% -3.07% 6% 0.00%
(FGB) First Trust Spec Finance & Fincl Opp Sector Equity -2.2 -1.32% 9.12% 38% 14.46% -5.43% 22% 1.58%
(CHN) China Fund Asia Equity -1.7 -12.73% 0.79% -6% 19.88% -2.33% 4% 1.91%
(IRR) Voya Natural Resources Equity Income Fd Covered Call -1.5 -11.75% 7.74% 9% -4.11% -11.72% 0% 1.29%
(TDF) Templeton Dragon Asia Equity -1.4 -12.85% 15.18% 3% 14.14% -1.58% 0% 1.33%
(IDE) Voya Infrastructure Industrials&Matls Fd Global Equity -1.4 -12.89% 8.02% 13% 3.71% -2.53% 0% 1.23%
(HQL) Tekla Life Sciences Investors Sector Equity -1.3 -10.23% 7.61% -3% 11.94% -1.61% 0% 0.00%
(ETV) Eaton Vance Tax-Managed Buy-Write Opp Covered Call -1.3 1.85% 8.92% 7% 9.54% -2.87% 0% 1.09%
(IID) Voya International High Div Eq Inc Fd Global Equity -1.2 -9.25% 6.68% 60% 5.54% -4.17% 0% 1.25%
(NDP) Tortoise Energy Independence Fund, Inc Sector Equity -1.2 -11.82% 10.13% -15% -45.50% -16.10% 50% 1.82%

Top 10 highest z-scores fixed income:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dev Lev BE
(TLI) Western Asset Corporate Loan Fund Senior Loans 3.6 -8.82% 7.64% 93% 4.56% 4.03% 32% 0.00%
(NXC) Nuveen CA Select Tax Free Income California Munis 3.0 5.08% 3.19% 104% 10.05% 9.94% 2% 0.55%
(NXQ) Nuveen Select Tax Free Inc 2 National Munis 2.7 -1.41% 3.34% 106% 10.48% 3.88% 1% 0.31%
(NXR) Nuveen Select Tax Free Inc 3 National Munis 2.7 -0.70% 3.20% 110% 11.23% 4.25% 0% 0.32%
(NPV) Nuveen VA Quality Muni Inc Single-state Munis 2.6 -2.50% 3.58% 100% 12.88% 7.83% 36% 1.07%
(DTF) DTF Tax Free Income National Munis 2.5 -6.26% 3.26% 77% 10.20% 5.05% 33% 1.19%
(NIQ) Nuveen Inter Dur Quality Muni Term Fund National Munis 2.5 -3.97% 2.72% 106% 10.19% 2.94% 35% 0.81%
(FRA) BlackRock Floating Rate Inc Strategies Senior Loans 2.4 -9.52% 7.19% 91% 5.75% 2.58% 28% 0.00%
(NXP) Nuveen Select Tax Free Inc National Munis 2.3 2.58% 3.31% 106% 11.30% 5.84% 1% 0.26%
(BFY) BlackRock NY Municipal Income II New York Munis 2.3 -5.84% 3.99% 97% 10.94% 4.80% 40% 0.00%

Top 10 lowest z-scores fixed income:

Ticker Fund Category Z P/D Y Cov 1Y NAV Dev Lev BE
(JLS) Nuveen Mortgage Opportunity Term High Yield -2.8 -3.92% 6.20% 56% 4.47% -2.85% 54% 1.63%
(DMO) Western Asset Mortgage Defined Opp High Yield -2.2 3.82% 8.78% 89% 11.06% -4.32% 32% 1.74%
(NCB) Nuveen CA Municipal Value 2 California Munis -2.0 -3.64% 2.98% 38% 9.71% -3.55% 9% 0.76%
(VLT) Invesco High Income II High Yield -1.7 -10.92% 8.36% 76% 10.11% -3.13% 27% 1.23%
(MZA) BlackRock MuniYield AZ Single-state Munis -1.4 -8.77% 3.81% 107% 12.25% -3.12% 38% 1.09%
(OXLC) Oxford Lane Capital Corp Senior Loans -1.4 13.46% 19.49% 95% -6.60% -13.72% 26% 8.02%
(HPF) JHancock Preferred Income II Preferreds -1.3 2.54% 6.84% 83% 18.05% -3.78% 35% 1.27%
(RCS) PIMCO Strategic Income Fund Investment Grade -1.2 33.60% 8.06% 67% 9.37% -5.10% 69% 0.98%
(HFRO) Highland Floating Rate Opportunities Fd Senior Loans -1.2 -11.64%

7.7

3%

99% -3.46% -3.69% 34% 0.00%
(HPI) JHancock Preferred Income Preferreds -1.1 3.05% 6.69% 82% 18.10% -3.90% 34% 1.26%

3. Top 10 highest yielding CEFs

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 Dev Lev BE
(IIF) Morgan Stanley India Investment Asia Equity 22.63% -14.16% -0.8 -25% -0.95% -1.51% 0% 1.30%
(CLM) Cornerstone Strategic Value U.S. Equity 22.17% 4.72% -0.6 7% 14.14% -2.06% 0% 1.14%
(CRF) Cornerstone Total Return Fund U.S. Equity 22.08% 4.97% -0.8 7% 14.27% -2.63% 10% 1.18%
(CEN) Center Coast Brookfield MLP & NRG Inf Fd MLPs 19.75% 2.11% 0.6 -18% -13.88% 1.20% 33% 0.00%
(FMO) Fiduciary-Claymore Energy Infrastructure MLPs 16.98% -7.19% -0.8 0% -16.42% -1.21% 44% 1.69%
(CUBA) Herzfeld Caribbean Basin U.S. Equity 16.89% -15.32% 1.1 -2% 13.51% 3.25% 0% 0.00%
(DSE) Duff & Phelps Sel Enrg MLP Midstrm Enrg MLPs 16.39% -5.17% 0.0 -10% -20.32% 0.19% 42% 2.13%
(NTG) Tortoise Midstream Energy Fund MLPs 15.58% -2.07% 1.8 29% -17.07% 3.11% 43% 1.63%
(GER) Goldman Sachs MLP and Energy Rena. Fund MLPs 15.31% -3.68% 1.4 -5% -19.74% 3.65% 41% 1.62%
(TDF) Templeton Dragon Asia Equity 15.18% -12.85% -1.4 3% 14.14% -1.58% 0% 1.33%

Top 10 highest yields fixed income:

Ticker Fund Category Y P/D Z Cov 1Y NAV Dev Lev BE
(OXLC) Oxford Lane Capital Corp. Senior Loans 19.49% 13.46% -1.4 95% -6.60% -13.72% 26% 8.02%
(JQC) Nuveen Credit Strategies Income Fund Senior Loans 16.67% -7.99% 1.1 38% 5.29% 1.77% 39% 1.34%
(ECC) Eagle Point Credit Company LLC Senior Loans 16.45% 51.21% 2.2 61% -6.01% 23.03% 45% 5.68%
(EDF) Stone Harbor Emerg. Mkts Income Fund Emerging Market Income 16.30% 49.06% 1.4 48% 4.44% 16.15% 1% 1.79%
(EDI) Stone Harbor Emg Mkts Total Income Fund Emerging Market Income 15.55% 15.45% 0.7 57% 5.01% 3.67% 34% 1.87%
(OPP) RiverNorth/DoubleLine Strategic Opp Fund High Yield 13.54% -5.39% -0.2 36% 11.12% -0.49% 24% 1.92%
(ACP) Aberdeen Income Credit Strategies Fund Senior Loans 12.88% -7.27% -0.5 80% 2.95% -1.85% 32% 0.00%
(OCCI) OFS Credit Company Inc Senior Loans 12.76% -4.91% 0.3 77% -4.72% 1.89% 0% 4.42%
(VGI) Virtus Global Multi-Sector Income Fund Multisector Income 12.07% -4.98% 0.5 41% 10.88% 1.44% 28% 1.84%
(RSF) RiverNorth Marketplace Lending Corp High Yield 11.87% -9.43% 0.0 0% 0.00% 23% 5.37%

4. Top 10 best combination of yield and discount

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 Dev Lev BE
(HGLB) Highland Global Allocation Fund Global Allocation -23.08% 14.07% 0.0 35% 0.00% -3.25 42% 0.00%
(IIF) Morgan Stanley India Investment Asia Equity -14.16% 22.63% -0.8 -25% -0.95% -3.20 -1.51% 0% 1.30%
(CUBA) Herzfeld Caribbean Basin U.S. Equity -15.32% 16.89% 1.1 -2% 13.51% -2.59 3.25% 0% 0.00%
(NHF) NexPoint Strategic Opportunities Fund U.S. Allocation -16.92% 13.65% -0.5 17% -2.28% -2.31 -2.10% 20% 1.23%
(TDF) Templeton Dragon Asia Equity -12.85% 15.18% -1.4 3% 14.14% -1.95 -1.58% 0% 1.33%
(SZC) Cushing Renaissance Fund Sector Equity -12.81% 12.84% -0.6 28% -8.20% -1.64 -2.19% 13% 1.98%
(DNI) Dividend and Income Fund U.S. Allocation -20.00% 7.89% 1.7 5% 12.42% -1.58 2.46% 0% 1.34%
(GLO) Clough Global Opportunities Global Allocation -12.61% 11.37% -0.9 0% 12.10% -1.43 -1.33% 39% 2.26%
(EMO) ClearBridge Energy Midstream Opportunity MLPs -11.96% 11.37% -0.1 -5% -6.57% -1.36 -0.12% 37% 2.12%
(SMM) Salient Midstream & MLP Fund MLPs -14.26% 9.26% 1.1 31% -10.23% -1.32 1.02% 30% 2.19%

Top 10 best D x Y fixed income:

Ticker Fund Category P/D Y Z Cov 1Y NAV D x Y Dev Lev BE
(JQC) Nuveen Credit Strategies Income Fund Senior Loans -7.99% 16.67% 1.1 38% 5.29% -1.33 1.77% 38.7% 1.34%
(FEO) First Trust/Aberdeen Emerging Opp Emerging Market Income -11.55% 10.01% -0.2 16% 12.71% -1.16 -0.40% 6.8% 1.78%
(RSF) RiverNorth Marketplace Lending Corp High Yield -9.43% 11.87% 0.0 0% 0.00% -1.12 23.2% 5.37%
(ARDC) Ares Dynamic Credit Allocation Fund Senior Loans -11.37% 8.73% 0.5 104% 3.41% -0.99 0.71% 28.9% 2.04%
(GHY) PGIM Global High Yield Fund, Inc. High Yield -11.34% 8.64% 1.2 73% 11.30% -0.98 1.55% 28.1% 1.28%
(EVV) Eaton Vance Limited Duration Income Limited Duration -10.49% 9.33% 1.7 60% 6.81% -0.98 2.26% 35.8% 1.31%
(VTA) Invesco Dynamic Credit Opp Senior Loans -11.84% 8.25% 0.2 74% 3.77% -0.98 0.43% 33.0% 1.96%
(GIM) Templeton Global Income Global Income -11.39% 8.42% -0.5 85% -0.74% -0.96 -0.72% 0.0% 0.71%
(TEI) Templeton Emerg Mkts Income Emerging Market Income -9.75% 9.62% -0.7 87% -4.49% -0.94 -1.48% 0.0% 1.14%
(ACP) Aberdeen Income Credit Strategies Fund Senior Loans -7.27% 12.88% -0.5 80% 2.95% -0.94 -1.85% 32.2% 0.00%

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 Dev Lev BE
(TDF) Templeton Dragon Asia Equity -12.85% 15.18% -1.4 3% 14.14% 2.73 -1.58% 0% 1.33%
(IIF) Morgan Stanley India Investment Asia Equity -14.16% 22.63% -0.8 -25% -0.95% 2.50 -1.51% 0% 1.30%
(IDE) Voya Infrastructure Industrials&Matls Fd Global Equity -12.89% 8.02% -1.4 13% 3.71% 1.45 -2.53% 0% 1.23%
(NDP) Tortoise Energy Independence Fund, Inc Sector Equity -11.82% 10.13% -1.2 -15% -45.50% 1.41 -16.10% 50% 1.82%
(IRR) Voya Natural Resources Equity Income Fd Covered Call -11.75% 7.74% -1.5 9% -4.11% 1.35 -11.72% 0% 1.29%
(GLO) Clough Global Opportunities Global Allocation -12.61% 11.37% -0.9 0% 12.10% 1.31 -1.33% 39% 2.26%
(NHF) NexPoint Strategic Opportunities Fund U.S. Allocation -16.92% 13.65% -0.5 17% -2.28% 1.22 -2.10% 20% 1.23%
(HQL) Tekla Life Sciences Investors Sector Equity -10.23% 7.61% -1.3 -3% 11.94% 1.04 -1.61% 0% 0.00%
(FMO) Fiduciary-Claymore Energy Infrastructure MLPs -7.19% 16.98% -0.8 0% -16.42% 0.96 -1.21% 44% 1.69%
(IGD) Voya Global Equity Dividend&Prm Opp Fd Covered Call -11.08% 7.77% -1.1 48% 6.81% 0.94 -2.87% 0% 1.20%

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 Dev Lev BE
(VLT) Invesco High Income II High Yield -10.92% 8.36% -1.7 76% 10.11% 1.53 -3.13% 27% 1.23%
(HFRO) Highland Floating Rate Opportunities Fd Senior Loans -11.64% 7.73% -1.2 99% -3.46% 1.07 -3.69% 34% 0.00%
(PCF) High Income Securities Convertibles -12.44% 6.77% -0.9 27% 5.69% 0.75 -3.60% 1% 0.00%
(TEI) Templeton Emerg Mkts Income Emerging Market Income -9.75% 9.62% -0.7 87% -4.49% 0.70 -1.48% 0% 1.14%
(JLS) Nuveen Mortgage Opportunity Term High Yield -3.92% 6.20% -2.8 56% 4.47% 0.68 -2.85% 54% 1.63%
(JSD) Nuveen Short Duration Credit Opps Fund Senior Loans -10.42% 7.45% -0.8 105% 2.38% 0.61 -1.40% 39% 1.46%
(DHF) BNY Mellon High Yield Strategies Fund High Yield -9.26% 8.51% -0.7 97% 11.21% 0.58 -1.05% 32% 1.26%
(GIM) Templeton Global Income Global Income -11.39% 8.42% -0.5 85% -0.74% 0.51 -0.72% 0% 0.71%
(BGH) Barings Global Short Duration High Yield High Yield -7.27% 10.60% -0.6 111% 0.86% 0.49 -2.08% 30% 2.02%
(MZA) BlackRock MuniYield AZ Single-state Munis -8.77% 3.81% -1.4 107% 12.25% 0.48 -3.12% 38% 1.09%

6. Summary statistics

The average premium/discount of all the CEFs in the database is -4.08%, a 1 bps increase from -4.09% in the previous month. Equity CEF discounts narrowed by 76 bps to -5.29%, while fixed income CEF widened by 22 bps to -3.11%.

The average distribution yield of all the CEFs in the database is 6.85%, up 4 bps from 6.81% the month prior. Equity CEFs average 8.48% yield, while fixed income CEFs average 6.02% yield.

The average 1-year z-score of all the CEFs in the database is +0.63, a slight increase from +0.61 a month prior. Equity CEFs have an average z-score of +0.46, while fixed income CEFs have the same average z-score of +0.73.

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're 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 outperformed the average at 3 months but underperformed at 6 months.

The top 10 D x Y x Z outperformed the average of fixed income CEFs at both 3 months and 6 months.

Commentary

In November, U.S. stocks (SPY) (+3.62%) raced ahead again to all-time highs, and led all major sectors by far. International stocks (ACWX) were solidly up (+0.99%), while both corporate bonds (LQD) (+0.48%) and junk bonds (JNK) (+0.59%) were mildly positive. Long-term treasuries (TLT) fell by -0.41%, while a basket of high-yield CEFs (YYY) gained +1.03%. The risk is fully back on!

Here's JPMorgan Asset Management's performance chart for November 2019. As expected for a "risk on" rally, the markets were led by growth (+3.5%) and small caps (+3.3%). REITs took a breather (-1.2%) and, now, fall behind growth stocks on a YTD basis.

Consistent with this backdrop, equities CEFs have rallied and, with their -5.29% average discount, are now trading at their tightest valuations since mid-2018. They still remain cheaper than fixed income CEFs, however, although that gap has narrowed compared to last month.

There was a brief spike in volatility at the start of December but any geopolitical uncertainties have appeared to be resolved for the time being with the US-China Phase 1 trade deal agreed and the UK general election over. With only around two weeks left in the year, this is likely going to be a banner year for stocks!

Last month, we discussed possible complacency in the markets, and I still stand by the cautious stance that we have been espousing with regards to new purchases despite the markets rallying to new highs this month. This is because CEF valuations continue to be narrow, even inching up by 1 bps to -4.08% from last month (a 2-year high), making it difficult to find attractive places to put new money to work.

This is again why we have been recommending a dollar-cost averaging strategy for our newer members who have just joined us who are looking to following the portfolios. Both "buy" and "hold" rated positions can be shortlisted for further research, and in our brand-new format of portfolio reports, we go through each portfolio holding position by position and discuss which of the "hold" rated funds might be relatively attractive based on how close they are to the buy zone.

Of course, please remember that these ratings are for guidance purposes only and do not take into account an investor's risk tolerance or desired asset allocation. It's also important to note that the reason that the Tactical Income-100 portfolio has more "buy" rated positions than our Income Generator portfolio is because the TI-100 (+28.32% YTD to November 30) is our more aggressive portfolio, where we don't shy away from deep value opportunities, out-of-favor sectors, or distribution cutters that we think have been unfairly punished by the market. Whereas, our more conservative IG portfolio (+28.45% YTD to November 30) has a bigger emphasis on management and historical performance, and many of the funds in that portfolio have been bid up to quite high valuations relative to their historical norms, and are thus out of the buy zone currently. Think about your desired risk tolerance first, then only after that consider potential rewards!

Now might also be a good time to circle back to the question of why we have ratings in the first place. As one of our newer members asked:

Hi SC, I am enjoying the free trial, thanks! I do have a very basic question: I'm not sure I understand the difference between the buy and hold ratings. If we are willing to hold at a price shouldn't we also be willing to buy at that price? Is your thinking analogous to the gambler at Las Vegas who takes more risks when ahead because he is playing with the "house money" instead of folding? Seems like most pro gamblers maintain their betting rules and risk levels whether or not they are ahead, the odds remain the same whether or not you lost or won the previous hands. Shouldn't we be willing to buy any stock or CEF that we are holding as long as it doesn't exceed the buy under price or the portfolio percentage we have previously set and sell the same when it exceeds our sell price? Hence, there would be only Buy and Sell ratings.....

Yes, this member is not wrong! In fact, taking this logic even further would suggest that there shouldn't even be any sell ratings in the portfolio either, because any funds that are have entered "sell" territory should be immediately sold! This is the most academic way of looking at the portfolios and, in fact, is something that we have mentioned as a possibility in our Welcome Letter + FAQ, under "C. Which positions should I buy in the portfolios?" for members who are comfortable with that school of thought.

"iii. Should I only invest in the "BUY" rated funds, or only those that are trading under our initial purchase price? This again comes down to personal preference. At the most academic and theoretical level, ratings for existing portfolio positions are basically meaningless because any fund worth holding is a fund worth buying (thus avoiding the anchoring bias). If you subscribe to that school of thought, then all of the positions in the portfolio can be bought on day 1 (but you may still wish to dollar-cost average into each of them depending on your risk tolerance)."

As much as I'd like to have a portfolio with 100% "strong buys" to lure new subscribers, I think our approach reflects a more pragmatic viewpoint that takes investor psychology into account as well. Our portfolios are up nearly +30% this year, so psychologically speaking, I would feel like I could easily take a -10% loss tomorrow and still feel quite comfortably ahead. However, the same might not be true for a member who switched their entire portfolio into our recommendations and then the market tanked the next day. Yes, they're "paper losses" and all that, but the pain felt would still be real. And as much as we stress that we are not registered investment or retirement advisors for our members, I would still feel quite bad if that happened.

At least with a dollar cost averaging approach, one isn't all-in or all-out with any decision. This can also allow you to get more comfortable with our investing style and methodology, including take part in any swap opportunities as they arise. If CEF discounts widen back out from here, more cash can be utilized to take advantage of lower prices. On the other hand, if CEF discounts continue to narrow, one would be enjoying nice gains from whatever positions already purchased into, which can't really be complained about! And the rest of the money that hasn't been committed to our recommendations, whether it is in an existing investment strategy (e.g. mutual funds, DGI, etc.) or in a liquid stash (e.g. a high-interest rate account, money market fund, an ultrashort duration ETF like MINT, etc.) would still be doing work for you in some way, shape or form.

Another nice thing about a dollar cost averaging strategy as well is that you automatically buy more shares when prices are low, and fewer shares when prices are high.

Image result for dca dollar cost average

Am I saying that our portfolios and our investing philosophy is the only way to make money from CEFs or ETFs? Absolutely not! As our community continues to grow, I have noticed that we now have a group of very experienced traders and technicians/chartists in our community. These members have generously shared their knowledge with the rest of our community, and have done very well with funds that are not in our portfolios, or even with funds that I have expressed some reservations about which I'm very happy to admit. I'm personally loving the new interactions and conversations that we're seeing in the chat!

To close, the tight CEF valuations suggest caution which is why I recommend a conservative dollar-cost averaging approach for the newer members who have just joined us. However, I would like to emphasize that I am not bearish on the markets or making a market top call (we are still fully invested in our portfolios after all!). Despite complacency in the markets, there's no immediate catalyst for a market drop on the horizon so I wouldn't be surprised if the markets continued to grind slowly higher in the weeks or months ahead. Unfortunately, it doesn't seem like there will be a Christmas wish list this year!

Disclosure: I am/we are long THE STOCKS IN OUR 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.