HIO Looks Appealing For Unleveraged High-Yield Exposure


  • HIO looks attractively valued for unleveraged high-yield exposure.
  • HIO yields 7.77% with 94% coverage, -7.89% discount.
  • Note that the fund is not purely invested in high-yield bonds.
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Author's note: This article was released to CEF/ETF Income Laboratory members on March 1, with numbers updated where indicated.

Western Asset High Income Opportunity Fund (NYSE:HIO), a former Tactical Income portfolio holding and the 2nd ranked DxYxZ fund in February's "High-High-Low" report, looks appealing here at a -9.87% discount and 7.95% yield that is 94% covered per their 9/30/20 earnings numbers [March 11 update: discount is -7.89% and yield is 7.77%]. It pays a $0.030 monthly distribution, which it last reduced from $0.0325 (-7.7%) in February. Due to the fund's discount, the NAV yield is lower at 7.14%.

Though no reason was cited by the managers, it is probably due to the declining earnings of the fund as older bonds mature and are replaced by newer, lower-yielding paper. Just a week or two ago, the US High Yield Master II Index nearly touched a record low of 4% (!) - the dash for yield is truly on.


Data by YCharts

Since HIO is an unleveraged fund, this means that it was unable to take part in the decrease in short-term rates which brought down leverage expenses (thus boosting income) for its leveraged peers. In 2020, HIO's net investment income dipped slightly to $0.34, down from $0.35 the year before.

(Source: HIO annual report)

Given that the distribution was not fully covered, I agree with the manager's decision to lower the distribution back to a more sustainable level. HIO is a fund that regularly adjusts its distributions to match its earnings (note the dip in distributions 2018 which coincides with the drop in NII in the financial highlights above), which I think is a prudent distribution policy, rather than trying to sustain an overambitious yield at all costs.


Data by YCharts

The fact that HIO is unleveraged means that it is

Data by YCharts

Data by YCharts

Data by YCharts

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