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Opportunities Abound But Keep It Higher Quality

Mar. 02, 2020 11:00 AM ETECC, ECCB, ECCX, ECCY, FFC, FPF, PDI, PMX, PTY, NBB, NXDT, PCN12 Comments


  • We have buying opportunities broadly in the closed-end fund space. It has been 14 months since the bear market of late 2018.
  • The CEF market is no longer rich as discounts widened out significantly in the last week.  The average fund widened its discount by 4.1% but some funds declined by >15%.
  • The only other time I experienced such a dramatic widening of discounts was in 2008.  We are still above where we were on Christmas eve 2018.
  • We think we can continue "nibbling" at opportunities.  We recently released our monthly letter in which we identified some great buying opportunities.
  • For the time being, we are buying higher-quality positions using dry powder to leg into positions slowly.
  • Looking for a helping hand in the market? Members of Yield Hunting: Alt Inc Opps get exclusive ideas and guidance to navigate any climate. Get started today »

For the first time in awhile, we have buying opportunities broadly in the closed-end fund space. It has been 14 months since the swoon of late 2018 when an interest rate-fueled selloff sent the equities into a bear market. It also caused CEF discounts to widen out significantly as investors feared higher rates - both on the short and long end of the curve.

On the short end, it causes borrowing costs to rise while the long end can cause NAVs to fall. Over time, higher long-term rates can be a good thing as they can reinvest maturing positions into higher yielding bonds.

The CEF market is no longer rich as discounts widened out significantly in the last week. The average fund widened its discount by 4.1% but some funds saw much further widening or premium collapse. In fact, as mentioned earlier some funds widened out by as much as 15% or more.

Be wary of stale NAV funds which do not fully reflect the true value of the fund. One example would be Eagle Point Credit Corp (ECC) which saw its premium decline by a tremendous 35% on the week. That's because the NAV is very stale as it only updates monthly. Clearly it will be adjusted lower - it was down ~5% in January alone. I expect ECC's NAV to fall by 18% for February which means that the premium is really ~40% and not the 22.7% that is currently reflected.

Discounts across the CEF space have blown out. No sector was spared. Below is the CEFAdvisors High Income Index. It provides a good comparison of where we were in 2018, the run up in the last 14 months, and where we are today.

Discounts had inched very close to par reaching just -2.7% on Feb. 22. But the end of the

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This article was written by

Alpha Gen Capital profile picture
Yield Hunting: Alternative Income Opportunities is a premium service dedicated to income investors who are searching for yield without the high risk of the equity market. We are one of the top experts in closed-end funds ("CEFs") in the country having spoken at many national conferences on how to incorporate CEFs into client portfolios. We manage four portfolios that investors can follow:

- YH Core Income Portfolio: yield ~8%
- YH Flexible Income Portfolio: yield 7.53%
- YH Taxable Core Portfolio: yield 5.24% (some tax free)
- YH Financial Advisor Model

Plus: Muni CEF Shopping List.

Our team includes:

1) Alpha Gen Capital - I am a former financial advisor and investor. Not someone from another career doing this on the side. My analysis is meant to provide safe and actionable insight without the fluff or risky ideas of most other letters. My goal is to provide a relatively safer income stream with CEFs and mutual funds. We also help investors learn about investing and how to properly construct a portfolio.

2) George Spritzer - Another career financial guru who runs a registered investment advisor with a specialization in closed-end funds for individuals. George uses the following investment strategies:1) Opportunistic Closed-end fund investing: Buy CEFs at larger than normal discounts to NAV and sell them when the discounts narrow. 2) Exploit special situations: tender offers, fund terminations, fund activism, rights offerings etc.

3) Landlord Investor- spent his career as a management consultant for public sector clients at a multinational consulting firm in the DC area. He has transitioned to a new career as a full time landlord. His investment portfolio is comprised of two parts -- broad-based index funds and income plays such as preferred stock, CEFs, and REITs. He also owns individual/baby bonds which he buys on margin to boost total return. Landlord is our 'individual preferred stock' expert analyst.


Analyst’s Disclosure: I am/we are long NBB, FPF. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (12)

Virus in the states has just started,Most hospital dont even have the right test for virus,And if think a person has the virus they have to call the cdc to if they test them,what a bunch of bull.
papaone profile picture
great article. Several good buy thoughts. However, hold your hat if Bernie ends up on top, the bottom will be hard to see. Check out WSJ op ed piece 2/2/2020 by professor James Huffman he hit the nail right on the head.
Utility cef's are back in the game today. Glad I added during the rout.
HsterInvestigates profile picture
UTF trading like a tech stock. Volatility is so extreme, not sure if I should lock in the gain so slowly and painfully gained last year or hold on for dear life.
Going to Hell in a hand basket profile picture
I agree with your prediction that ECC's NAV will be lower when reported for February.

But I disagree with your statement that their NAV decreased for January. It actually increased more than 5% from the December NAV.

December NAV - 10.59

January NAV - 11.21
Interesting article....Not easy to average down but in the long run it pays off..
Mili21 profile picture
Nice write up.....should be useful for investors to do their homework and be prepared for any opportunity market may present .....
I picked up BST & UTG the first ever CEFs in my portfolio....PIMCO is next in line to get added...
NV_GARY profile picture
Bought a little last week, but waiting for the next US viral inspired big drop.
hawkeyec profile picture
Really good piece. Thanks for the timely report. (Sadly,) I already have max positions in a couple our best picks, doing very well thanks. I do have a couple of goodies from your big list though the distributions on them are not super large.
JustinBaldwin profile picture
Great advice. Hard to stick with given some of the apparent "buys" right now.
Having a fantastic day! My approach to adding everyday last week is really paying dividends (pun intended). Yes, we were probably overbought but a 12% decline in a week didn’t match up with the reasoning...a virus outbreak. You’d have thought the world was going to end.

Hopefully, a little more orderly trade settles into the market madness.
Thank you for this awesome article
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