(This report was issued to members of Yield Hunting on July 12th. All data herein is from that date).
Here are some relative value trades that investors should consider. In the current CEF market, relative value as opposed to absolute values is the best way to generate alpha as valuations remain very tight. Credit spreads are also tight so we are in a quadrant of our valuation model where future returns will be low. For now, we are keeping out allocation to CEFs fairly stagnant while trading around to the best opportunities we see. This is a large part of the Yield Hunting service today while we wait for a correction.
If you own the first one, consider swapping to the latter. Of course, consider any tax consequences you may have in doing so.
Currently, SDHY is sitting at a -1.3% discount while the sister fund, ISD, with a much longer track record, is trading over a -6% discount. SDHY was recently added to a CEF Composite index which is followed by PCEF, the ETF of CEFs. So the valuation went bonkers and is now extremely above our fair value estimate.
These are all sister funds with only minor variability between them. BSL is a different fund type setup as a term fund that liquidates in 2027. But that shouldn't be a consideration here. BSL and BGX are trading very close to par while BGB still trades at nearly a -6.4% discount. I like the space and the NAV trends and would even consider purchasing BGB without the swap consideration.
PHD was a fund we made some good money and was a Core component up until a few months ago. The fund has seen a recent rise in price from a discount of ~4% to a premium of nearly 2%. We would recommend taking that 6% and running and rotating to something like JRO, which is still near a 6% discount and has a higher yield of 7.1% (vs 6.25% for PHD). PHD chart below:
This is a simple defensive trade that could save maybe 100-150 bps. AFT is slated to be merged into AIF, should shareholders vote for it. AFT is trading at a -6.7% discount while AIF is at a -8.05% discount. So there is some relative value for AFT shareholders to move into AIF ahead of the merger. Additionally, we should get the distribution announcement for both funds for the next month. Should they boost, the yield on CEF Connect will go up and newbie CEF investors will see the relatively much wider discount and a higher yield to buy. AIF performs better than AFT too - and better than most of the floating rate space over the last year with just the esoteric funds remaining.
EV is currently undergoing a tender offer for up to 25% of shares plus is undergoing the merger with Morgan Stanley. I also think that the distribution will be "right sized" at some point. It was raised for June to sweeten the deal for EVG shareholders to vote for the merger. But the news release and docs I've read do not stipulate a duration that the fund will pay the higher rate. In any case, it really doesn't matter. Prior to lifting the distribution, it paid $0.30 over the prior four months, of which 73.5% of net investment income and 26.5% return of capital "roc." With the higher rate, it will just be a much larger ROC component and you'll lose NAV. GHY was chosen because I think the fund is relatively cheap for the taxables space and has a high NAV correlation to EVG. So you're trading a rich fund for a cheaper one with similar NAV movement (total return).
BGIO is liquidating at the end of the year at NAV - which is two months earlier than anticipated. They are doing so because the fund does NOT have any shot of hitting its target NAV return of $9.83. The fund is currently trading at a 1% premium. The fund should be winding down its portfolio currently and will be paying periodic distribution between now and the end of the year (they already announced once large "special" distribution.) Given the premium, it makes sense to sell out and rotate into JHAA. JHAA is another target term that liquidates in late 2023 (so an additional 2 year term). It is already above the target with a NAV at $10.13. The shares are also at a discount of 1.8% so you get that kicker as well over the next 26 months. The yield is a bit lower which may turn off some but it's a safer play on the high yield market.
(7) Sell RiverNorth/DoubleLine Strategic Opp (OPP), Pioneer High Income (PHT), BNY Mellon High Yield Strat (DHF), MFS Interm High Income (CIF), Invesco High Income II (VLT), BlackRock Limited Duration (BLW), Neuberger Berman High Yield Strat (NHS), Western Asset High Income II (HIX), BlackRock Multi-Sector Income (BIT)
Buy Pioneer Diversified High Income (HNW).
The high yield (and sister limited duration) sectors have some very rich funds in it. From a relative value trade, there is a lot of opportunity to rotate out of those expensive funds and move into what we think are cheaper ones. OPP is a bit different and has a slightly different NAV correlation than the rest of the crowd listed above. But given the pending shareholder vote to convert to a mutual fund that will start next month, and will be done at NAV (the fund is over a 3% premium), there is some risk there. I do think the vote will fail but you never know. The other funds are more traditional leveraged high yield funds in, primarily, the corporate bond space.
HNW is a great option from a relative value perspective to move into. The fund still yields nearly 8.7% and trades at a -4.3% discount. I think it could eventually hit a premium to NAV given where some of the other competitor funds are trading. The distribution is close to being earned with 94% coverage but the fund has some UNII safety with 6.8 cents in the bucket. Duration is relatively low at 3.5 years. CCC accounts for about 16% of the portfolio.
Karpus continues to sell out of the fund and still owns nearly 2mm shares so that is a slight headwind.
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