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JQC: Final Year Of The Capital Return Program


  • The capital return program had a hiccup with 2020's volatile year.
  • Winding down the fund's capital return program will see decreasing distribution throughout this third and final year.
  • Overall, one would need to be optimistic on senior loans to consider getting involved with this investment at this point.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Get started today »

Written by Nick Ackerman, co-produced by Stanford Chemist

Nuveen Credit Strategies Income Fund (NYSE:JQC) had initiated a "capital return program" on December 17th, 2018. The plan was to return 20% of assets to shareholders over a three-year period. It was via raised distributions over and above what the fund could actually sustain. However, 2020 certainly wasn't anticipated and I believe threw a wrench into its plan. It resulted in several cuts and is continuing to result in cuts.

The ultimate idea was to "enhance the Fund's competitiveness and investment returns for current and prospective common shareholders." This would have come through the fund's discount narrowing. Besides the higher distribution rate, it had also been buying back shares through a repurchase plan.

The basics of the fund are: "primary investment objective of high current income; and its secondary objective is total return." It will invest "at least 80% of its assets at the time of purchase, in loans or securities that are senior to its common equity in the issuing company's capital structure, including, but not limited to debt securities and preferred securities." It will "invest at least 70% of its assets in adjustable-rate senior secured or second lien loans, and up to 30% opportunistically in other types of securities across a company's capital structure..."

To put it in much simpler terms, it is a senior loan fund primarily with flexible exposure to other debt-related investments. These loans are floating rates typically and should benefit from an increase in interest rates. Now that rates are targeted to 0% by the Fed, the logical idea is that the only way they have to go is up. Barring the U.S. following other countries in a below zero interest rate world. The benefits aren't felt immediately; however, a "floor" must be breached first before benefits kick in. Stanford Chemist had covered that

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This article was written by

Nick Ackerman profile picture

Nick Ackerman is a former financial advisor using his experience to provide coverage on closed-end funds and exchange-traded funds. Nick has previously held Series 7 and Series 66 licenses and has been investing personally for over 14 years.

He contributes to the investing group Learn more.

Analyst’s 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.

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Comments (32)

bot jqc near yearly wide discount to nav of 15%..the jqc/hyg leveraged pair is near all time low set in march 2020
good article.. i bot jqc as the jqc/bkln leveraged loan pair is trading at multimonth lows and at a 8% discount ..close below 6.28 woudl be ominous
12/20 stopped out of jqc as the jqc/bkln pair is below multimonth low and it appears we will close below 6.28
Nick Ackerman profile picture
@mmarek evans thanks for bringing this up. Looks like the discount has been widening out a bit here. I was curious how this fund would perform after their program finished up.
@Nick Ackerman a 20% capital return over a 3 year period was barely a spit in the ocean.. poorly designed in my view if their objective was to narrow discount
Nick Ackerman profile picture
@mmarek evans I think it was mostly an experiment to see if it would help since it was rather unique. 2020 certainly didn't help with what they were trying to do either.
205427 profile picture
@Nick Ackerman

As always, an informative and well researched article.

Since 2020 really messed up their objective, is there a chance they extend the program another year?

And if not, would this fund essentially mirror JRO and if so, wouldnt it make sense to merge the 2 and get better scale and leverage
Nick Ackerman profile picture
@205427 I'm glad you enjoyed! I don't believe they will as they have already been going ahead and reducing the distribution every month - as they laid out that they would be doing this.

I do suspect JRO and JQC would essentially be quite similar. Returns should be close I would imagine. Both funds are fairly sizeable for CEFs, JRO is the smaller one but at $623 million in assets is a good size for a CEF. If they were to be persuaded to merge it would probably come from am activist. At this time, there isn't any arbitrage opportunity between the two. So essentially it seems like a merger between the two is rather low.
I've kept a small exposure to floating rates with BGX, now thinking of adding to it with PHD, assuming the rising rate trend continues.
Nick Ackerman profile picture
@jazznut - thank you for sharing! Good luck!
right now the chance of maintaining 0 fed rates has been dissolved. the bond market took care of that. does only the fed rate control how jqc would benefit on the floating rates on there senior loans
Nick Ackerman profile picture
@mcrmgf a lot of the rates are set by LIBOR + a spread. So technically no, but the rates typically trend in the same direction. They have hardly moved at all too. www.bankrate.com/...
I've been holding JQC since May 2019. I was aware of the artificially high distribution. But I had forgotten about the final year's monthly distribution decrease.

Although my loss was much greater last year, JQC's price has slowly clawed its way back up to where I'm 19% down currently. I have been hoping that this will narrow further. However, the decreasing distribution this year most likely will prevent that from happening.

If the distributions are considered, I am actually slightly ahead of the game. I may consider selling sooner than later and move on to something more promising.
Nick Ackerman profile picture
@valleyside - good luck with whatever you decide! 2020 certainly threw their overall plan into disarray. Thank you for reading and taking the time to share your thoughts.
Again excellent article on JQC please keep up the good work always look forward to reading your articles
Nick Ackerman profile picture
@alohabernie - I appreciate the kind words! Thank you.
Of my 40 current CEF holdings JQC is my 2nd highest yield at 12.7%. Number 1 is OPP at 12.9% and number 3 is OXLC at 12.4%. JQC is 2.2% of my total portfolio value. I opened the position 2/18/20 @ $7.59 so am down about 15% on paper. Thanks for the heads up...I will keep my eye on this one, but am reluctant to unload right away due to the income.
Nick Ackerman profile picture
@GeorgeH thank you for sharing your thoughts! Just thought one of the more important points of this is that the distribution will be lowered gradually every month. That could put pressure on the fund's discount to widen further. Though overall, the fund can still do well on a total NAV return basis.
wiuser profile picture
Thank you for the thorough analysis. I've been trying for some time to make sense of what is happening with JQC. The discussion of the amount and type of leverage being used was helpful. I will be selling out of my position.
Nick Ackerman profile picture
@wiuser - glad to help out! Thank you for reading and sharing your thoughts.
bough it held it for 2 years made a few $$ sold it
Nick Ackerman profile picture
@alohabernie - great to hear! Making profits is what it's all about.
I see NAV widening as declining distribution leads to selling by the uniformed.
Nick Ackerman profile picture
@hdh12 - I suspect some investors don't know what is going on and will have only bought in because of the large yield. In which case, they will find this year that it is going to only trend downward.
@Nick Ackerman Agreed. When yield bottoms discount to NAV will be higher for that reason, and the right time to enter. Scaling in with larger buys the closer that point might also work.
Nick Ackerman profile picture
@hdh12 - agreed here! Definitely worth revisiting once we get closer to the end of the year to see where things are shaking out.
mrmedusa profile picture
I bought some when the plan was announced, but have been selling off as the end of the program approached. Hindsight tells me I should have done something else- it is the biggest loser post 2020 crash, and by far the slowest to recover. It hasn't. I would expect the price to drop as the dividend drops, so I'm taking my lumps and putting that capital somewhere better.

Thanks for the write up, Nick.
Nick Ackerman profile picture
@mrmedusa - thank you! I never invested in this one though it was interesting with the initiatives that they took. Perhaps it would have worked out better without the market selloff of 2020 - but now we'll never know. Good luck with your reduction of the position and moving it elsewhere. A lofty market, but certainly still some appealing places to put capital to work for the longer-term investor.
smurf profile picture
This might be the understatement of the year, but AVOID!

Thanks,Nick, for giving us the good, the bad and the ugly.
Nick Ackerman profile picture
@smurf - glad you enjoyed! Thank you for reading and sharing your input. Indeed - I suspect at this point it is better left untouched.
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