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CEF Report March 2020: Panic Spreads Like Wildfire



  • Discounts were taking the escalator up for months reaching what has been historically tight levels.
  • But as usual, panic selling sends those discounts down the elevator in quick fashion.
  • This is irrational selling. Either investors are selling everything not bolted down or they are raising cash on their "winners" which are down less.
  • So our strategy remains: clip coupons, manage risk, be positioned in the best funds from a fundamental standpoint, and pool cash for these events.
  • The cheapest sector on the list are taxable munis with a one-year z-score of -3.4. That is a very cheap value.
  • I do much more than just articles at Yield Hunting: Alt Inc Opps: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

(This report was issued to members of Yield Hunting on March 4th, 2020, with additional analysis for members only)

Well, we knew this was going to happen. Discounts were taking the escalator up for months reaching what has been historically tight levels. But as usual, panic selling sends those discounts down the elevator in quick fashion. This used to happen with more regularity but in the last several years, has become more infrequent. We used to tell members when we first started this service that you could expect some volatility in CEF pricing every few months or so. However, the last time we saw such discount widening volatility was in December 2018.

My, how things can change. On February 6th, we wrote:

The CEF market continues to be frothy though remains well below prior peak valuation periods. The only thing cheap right now are the funds that deserve to be cheap. In other words, funds we probably would not EVER own. We've been looking for alternative funds to add to the portfolio including BDCs, ETFs, and open-end mutual funds.

Just a couple of weeks later, in five trading days, we saw discounts blow out significantly. Why? Just like a traditional stock, the retail closed-end fund ("CEF") investor hates uncertainty. Remember, most CEF shares are held by retail investors - mom and pop do-it-yourself investors that tend to be emotional traders. Once fear and panic grip the markets, they tend to be very quick pulling the trigger and getting out. Given that CEFs have lower liquidity than other securities, that can send prices plummeting even if there is no rational reason for doing so.

A great example is one we highlighted recently in the March letter. BlackRock Build America Bond Trust (BBN) is a very high-quality municipal bond fund

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This article was written by

Alpha Gen Capital profile picture

Alpha Gen Capital is a former financial advisor and his analysis is meant to provide a relatively safer income stream with CEFs and mutual funds. He has been writing about investing on Seeking Alpha for the past decade and he aims to help investors better understand how to properly construct a portfolio.

Alpha Gen Capital leads the investing group Yield Hunting: Alt Inc Opps, where along with his team of analysts, he focuses on closed-end funds and getting yield from bonds to complement dividend portfolios. The service is dedicated to income investors who are searching for yield without the high risk of the equity market. Additionally, they provide 4 actively managed portfolios. Learn more.

Analyst’s Disclosure: I am/we are long NBB, GBAB, BBN. 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)

ijeff profile picture
Some great points in this article. I don't own a lot of CEFs. I've always been deterred by the huge premiums many of them trade at. I bought PCI at a discount years ago and have held through the volatility.

I keep reading CEF advocates that ignore the premiums and correctly say the best ones always trade for a high premium. Still, as this article makes clear, retail investors can desert those funds in a heartbeat when things go south
The panic selling by CEF owners was unprecedented today. I hold 11 funds in corporate bonds, multisector income, senior loans, and investment grade bonds. Without exception the price drops were anywhere from 5 to over 8%; but the change in NAV was at most -2% and for most well under - 1.5% --- discounts just blew out.

The same is true of the 8 equity funds I own... price drops of 6 to 9.5% but NAV declines of 2 to 2.5%.

My allocations for all of these are full so I am not bargain hunting, but I would fully expect these discounts to return to normal over the next few weeks if not days.
I made some moves today. Sold a few of my lower quality funds and reallocated the proceeds to my higher quality funds. BBN and GBAB were already two of my larger positions so I took no action on them, but many of my PIMCO funds got additional capital today. I own quite a few PIMCO funds: PFN, PTY, PDI, PCI, PCM, PGP, PFL. I also added to FPF, RQI, RNP, JPS, UTF, UTG, ETV, PDT, EOS, STK, CSQ. I am willing to sacrifice a few funds from other fund families to maintain My PIMCO capital positions. I ended the day with a little more in my cash position than I started with but nothing significant. Mostly just shuffled it.
FlaYankee profile picture
Panic selling Royale as investors stampeded towards the exits and ran over anybody who got in their way. Pricing on closed end funds collapsed especially in the energy sector but selling was indiscriminate across all sectors. Watching my favorite CEFs break down in some cases to new 52 week lows put me in a buying mode and I added to existing positions while opening up a couple of new ones. Fear makes one hesitant and panic driven selling just demolishes your portfolio but over the long term the shares you buy down at such depressed levels will turn out to be you biggest winners. If you were willing to buy when the market was close to record highs why not now when the market just go mauled by. Bear!
sts66 profile picture
Good article - everything is even cheaper today as the DOW crashed -2000 pts at the open, S&P500 went down -7% and triggered a 15 minute halt in trading - PCI premium may have disappeared entirely today, but like last week I'm not buying a damn thing until I see something resembling a bottom. If oil continues to crash into the $20's are some are predicting there's going to be a lot more bloodletting - this is now more about oil demand than the virus.
@sts66 - I nibbled on a few funds today but am trying to be patient and hold on for even better opportunities. Energy producers and MLPs are being valued as if end of life as they know it is assured.
What a delightful piece to read. Short, to the point, easy to understand. I hit the “follow” button, look forward to more from you. Rather than panic, it is time to go back up to the north woods of Wisconsin and watch the snow melt.
Thank you, Alpha Gen Capital, for the excellent, informational report. Not sad to see the PIMCO income funds come down to earth, as I'll be buying over the next few months.

Retired income investor
Alpha Gen Capital profile picture
Yes! These have been excellent buying opportunities in the past.
papaone profile picture
panic and fear are in the market. This virus issue will be solved. I went to 80% cash two weeks ago and the 20% in the market are in muny's, So, there is opportunity here.
Alpha Gen Capital profile picture
Hopefully you went to cash a couple of weeks ago! Yes, i'm loaded to the gilts in munis, both tax free and taxable.
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