I Bought 6 Closed-End Funds A Year Ago - Revisiting Where They've Come, Where They Could Go

Summary

• Looking at how 6 choices since February 29th, 2020 have performed to February 21st, 2021.
• I still own 5 of the 6 funds and had even been adding more to these positions since then.
• Just as I was then, I'm still focused on being a long-term investor.
• This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »

Written by Nick Ackerman, co-produced by Stanford Chemist

Almost a year ago I had shared an article about what I was buying during the initial market correction. That market correction turned into a bear market rather swiftly. At which point, I took further opportunities to put cash to work. Several of the funds I touch on today I took the chance and added to again as the market had declined further. I wanted to revisit how these funds are doing almost a year later.

The original article was published on February 29th, 2020 to members of the CEF/ETF Income Laboratory. That wasn't necessarily the exact date I bought these funds but was rather close. Several of these positions are in the CEF/ETF Income Laboratory model portfolios as well.

Of course, what was so special about last year is when the market saw the fastest bear market ever - followed by one of the fastest recoveries ever - that was all preceded by the longest bull market ever. This was all brought about by the shutdown of economies around the globe - as COVID 19 wreaked havoc.

In that previous piece a year ago, I had touched on my view of what long-term investing really means to me. My thoughts and opinion remain the same. To highlight some of these points, I'll share a couple of paragraphs here:

What does a correction or bear market in 2020 really mean to an investor like me? An investor that is looking for income and long-term total return? When we have 5, 10, or 20 years+ to invest? There are even those investors that are looking only to pass on their accounts and investments to their heirs. Those fortunate enough, never even have to touch the original principal. That is a tremendous accomplishment too.

I believe the long-term strategy could be summed up by a mantra of "buy low, possibly never sell." This mindset was important to preface before jumping into the list of positions I added to. This was for the fact that it isn't about exactly timing the market perfectly. Which, no one is really able to do consistently for extended periods of time anyway. This also feeds into the "compounding income on steroids" strategy employed by Stanford Chemist. That's why the strategy is equally as appealing to me, too, no market timing required! Instead, let the opportunities come to you and trade when there is a potential.

Long-term investing for me is still the name of the game. Of these 6 positions, I still hold 5 of them and have continued to add to them along the way. I even see them all as potential buy candidates today still.

I also wanted to touch on how the S&P 500 has performed over the year too. Primarily because I know it will come up, and I want to hopefully touch on the subject to answer this question beforehand. Only 1 of these funds has outperformed the benchmark if we measure it by the S&P 500 SPDR ETF (SPY).

Data by YCharts

The primary reason that these funds have lagged relative to SPY was that only 2 of these 6 funds have really any meaningful exposure to tech. As we know, SPY is heavily invested in tech positions. Nearly 28% of the portfolio is tech. These had worked out incredibly well. The funds I had been buying a year ago were more what could be classified as "value" plays or those that are more sensitive to economic conditions. This is the type of area that took a bit longer to recover but has been making headway.

With that being said, we can move onto the funds and how they performed. The list is in order of the weakest performer to the best performer.

(Source)

PIMCO Dynamic Credit and Mortgage Income Fund (PCI)

Data by YCharts

PCI could be viewed as quite a disappointment. On a total NAV return basis, the fund is actually still negative - only slightly - but still negative, nonetheless. Yet the fund can still trade at a 4.55% premium at the moment. It is also still paying a 9.78% distribution rate or 10.22% on a NAV basis. They have maintained their distribution along the way - despite the weakness the fund has faced.

(Source - CEFConnect)

A portion of this is related to the fact that they had to deleverage during the lows. This means they basically locked in losses at the bottom of the market and subsequently didn't have these assets there to bounce back from as the recovery took hold. They have increased leverage once again, though the damage had been done.

As they invest in mostly non-agency MBS, it really shouldn't come as a shock as to why they had struggled over the last year. That is certainly one area of the market that is sensitive to economic conditions. As non-agency MBS doesn't have government-sponsorship to back these underlying mortgages, they can be seen as riskier.

The heaviest portion of their portfolio is in non-agency MBS. However, at 21%+ in high yield credit listed, this has been increasing in their portfolio since we last visited the fund.

I can still see this as a buy today. The premium isn't significantly expensive compared to its 1-year average. The fund is still paying an attractive distribution, and considering they made it this far, I don't anticipate them about to change it now.

Macquarie Global Infrastructure Total Return Fund (MGU)

Data by YCharts

MGU is the one fund I sold since originally buying it. The fund did have its own punch in the face as they slashed their distribution by around 46%. To ease the blow they had switched the distribution to a monthly rate. This does make it one of the lower-yielding funds at just a 4.33% distribution yield.

(Source - CEFConnect)

While the discount is quite attractive at 15.17%, I believe holding this fund back is primarily the weak distribution rate. This also is around the same range as the funds 1-year average discount of 16.49% and 5-year average discount of 13.63%.

This fund also suffered from some deleveraging that hindered the recovery and locked in losses at lows. The other factor here was the fund's investments in utilities/infrastructure and energy investments. Energy had performed extremely poorly through 2020. In fact, for the last 3 years, energy has been the weakest performer.

Due to the attractive discount and global focus, I could see adding MGU back to my portfolio again at some time. However, I'm content with my exposure in these sectors at this time.

Cohen & Steers Quality Income Fund (RQI)

Data by YCharts

RQI is about the luckiest fund on the list. Lucky because they had just sealed a rights offering right as we were heading into the downturn. Thus, they had ample cash to put to work at some of the lows we were presented with last year.

Though they utilize leverage, it is rather modest at around 22%. They did increase leverage throughout 2020 and weren't at fear of deleveraging either. Partially because they are modestly leveraged and because they had just raised all that new cash heading into the lows. That would have provided a sufficient cushion too.

No distribution cut was required for them either in 2020. That left in place the same or equivalent amount of their distribution that goes back to 2015.

(Source - CEFConnect)

Still, they are invested in REITs. Generally, that is an economically sensitive area of the market. That being said, I view RQI as more sheltered overall from the more volatile names. This is because they are invested in REITs in more recession-resistant industries.

Data by YCharts

I believe this is reflected by the outperformance that RQI could put up against the Vanguard Real Estate Index Fund ETF (VNQ). The leverage would have also been a positive factor as well.

To be completely fair though and not cherry-pick data. RQI had fallen from February 19th, 2020 to March 23rd, 2020 at an accelerated rate as well. Once again, highlighting the downside potential of leverage.

Data by YCharts

I could easily see still adding to RQI today. Though the discount has converged a bit and is at just 4.19%. This can be compared to its 1-year average of 8.88%, and the 5- year average of 6.88%.

BlackRock Enhanced Equity Dividend Trust (BDJ)

Data by YCharts

BDJ is more of a diversified approach with a covered call strategy that is utilized. That being said, they are overweight in the financial sector. I do believe this is what makes them especially attractive at this time. I believe they still have some ways to go as the economy continues to recover. That is why I believe that it is one of the more attractive positions for 2021.

With no leverage to worry about, the biggest risk is that the covered call strategy tempers the investment's returns would be due to positions being called away. Though they are overwritten by 51.59% as of when they last reported, meaning they aren't the most aggressive choices when it comes to utilizing the options strategy.

The fund's discount remains attractive at 9.51% - compared to its 1-year average of 10.41% and the 5-year average of 8.62%.

The distribution rate also isn't one of the highest yielding funds at this time at a 6.86% rate and NAV rate of 6.20%. Still, this has been maintained since the last economic crisis of 2008/09 saw cuts take place a few years after.

(Source - CEFConnect)

Eaton Vance Buy-Write Strategies Fund (EXD)

Data by YCharts

EXD is a fund that has performed rather well. This is especially true once they switched their name and investment strategy in 2019. We have written on that subject several times in the past. As the fund holds a heavier exposure to tech, it isn't too much of a surprise that it made it to the 5th spot of 6 on this list; that is as we ordered them from weakest performs to best performers.

The fund last reported its tech allocation at a whopping 36.3% on June 30th, 2020. So one might even be surprised it didn't perform even greater. Several of the names they held at that time included Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), NVIDIA (NVDA) and Netflix (NFLX). These were a few of some of the biggest winners in 2020 overall as their businesses flourished.

This was evidenced by their stock returns overall for the year which we can see below.

Data by YCharts

The question would then be why didn't EXD do even better? And that is quite simple. One of the reasons being is they are also a covered call fund. They don't have to necessarily worry about the added risks (or benefits) of leverage. However, in a significantly rising market as we had through 2020 their options strategy can work against them. They utilize index option writing as well - meaning that it is possible to actually create losses.

(Source - Semi-Annual Report)

Above I have highlighted the losses the portfolio generated due to options strategy. Even though option premiums increase significantly during times of volatility, it wasn't enough to offset the cash-settlement they were sending out or losses generated from closing out positions. Since they write against almost 100% of their portfolio, this was significant. A ~$9.5 million loss might not seem like a lot, but when the fund is around $100 million in assets - that is a meaningful amount.

At the current discount of 4.17%, I still view this fund as having plenty of room left to buy. That is despite the 1-year average discount of 6.14% or the rather useless 5-year average of 8.41%. Useless in this case as the fund switched their investment strategy in 2019. Relative to the other similar fund Eaton Vance offers; Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV). This is because ETV and EXD share quite the same strategy, but ETV trades at a 3.94% premium.

EXD yields an attractive distribution rate of 8.22%. On a NAV basis, this works out to 7.87%. Again, the longer-term distribution history is less of meaning here as it was a different fund previously.

(Source - CEFConnect)

BlackRock Science and Technology Trust (BST)

Data by YCharts

Finally, we have BST. A true beauty as they surpassed even my greatest expectations for total return figures. As an all tech fund, it isn't surprising - but it is still welcomed.

The total return price has actually outpaced the total NAV return figure. This has resulted in the fund's premium creeping higher. Currently, this works out to a premium of 4.68%. The 1-year average premium is 0.69%, and the 5-year average comes to a slight discount of 1.59%. One of the more interesting points here is that between 2014 around when it launched to the end of 2017, the fund had actually traded at quite meaningful discounts.

Some of the top holdings we see in BST are the same ones we saw in EXD as well; AAPL, MSFT, and AMZN. However, they also hold some of the higher performers that put even those impressive total return figures of 2020 to shame. The ones I'm looking at are Twilio (TWLO) and Square (SQ).

Data by YCharts

Due to this incredible strength, the fund's distribution rate is 3.76% - on a NAV basis, this comes to 3.93%. That is even after they raised the distribution last year. These are the types of yield that keep most income investors away.

(Source - CEFConnect)

However, for the lack of income investors, it seems it is more than made up by growth and total return investors. In my opinion, this is evidenced by its current premium.

With BST, it does make it a harder call to say I would buy it today based on its valuation and the overall valuation of tech. That being said, if it wasn't already a significant holding in my portfolio - I would probably be viewing this differently. In fact, probably would consider buying anyway. This is one of those that I could rationalize through the long-term perspective. Surely it seems expensive now - but in 10 years I would bet it is even higher.

Conclusion

Last year presented us with a huge opportunity, for an unfortunate reason. These were the 6 funds that I initially started putting my cash to work in around one year ago as we hit correction territory. I wanted to revisit these funds to see how the purchases turned out. While PCI seems to have really been a weak performer, it really doesn't come as too much of a surprise as deleveraging did hit the fund. PIMCO does leverage up rather aggressively in most of their funds.

We subsequently hit bear market territory after the initial correction level reached, and I continued to buy. Of course, at that time we didn't know how long the recession and bear market would last. Luckily enough, Congress and the Fed stepped in and put a floor under our free fall. Eventually, these forces switched to an elevator (a rapid elevator) that propelled the market higher. The market has moved up so much higher that we have been hitting new all-time highs rather regularly on the broader indexes for months now.

Analyst’s Disclosure: I am/we are long BDJ, BST, EXD, PCI, RQI, MSFT. 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.

This article was originally published on February 21st, 2021 to members of the CEF/ETF Income Laboratory.