Quality Closed-End Fund Report, January 2022: Sell-Off Brings Value To Munis

Jan. 31, 2022 9:58 AM ETBANX, BFZ, BGB, BGH, BGX, CEV, CMU, CXE, CXH, DBL, DHF, DSL, DTF, EHI, ENX, ETX, EVM, EVN, FDEU, FPF, HYB, IVH, JPC, JPI, JPS, KIO, LEO, MAV, MHI, MNP, MYD, MYI, NAN, NXC, OXLC, PGP, PHT, PMF, PMX, VFL, VTN, WEA, WIW25 Comments20 Likes

Summary

  • Only funds with coverage >100% are considered.
  • Top lists of discount, yield, DxY and DxYxZ are given.
  • Top DxYxZ funds are DSL, MAV and MYD.
  • CEF sell-off brings value to munis.
  • Looking for a helping hand in the market? Members of CEF/ETF Income Laboratory get exclusive ideas and guidance to navigate any climate. Learn More »

Author’s note: This article was released to CEF/ETF Income Laboratory members on January 24, 2022. Please check latest data before investing.

"Quality" Closed-End Fund Report

Quantitative screens help to rapidly narrow down attractive candidates from the database of 500-plus closed-end funds for further due diligence and investigation.

Based on feedback from members, it seems that a very many number of investors, understandably, place a great emphasis on coverage and return of capital. While I'm not going to rehash the entire ROC argument here (it is suffice to say that the issue is much more complicated than "ROC = bad"), some investors may consider a fund with over 100% coverage to be attractive simply because they know that the distributions are being covered by earnings. Such a fund may be at lower risk of a distribution cut, which can cause devastating impacts to a fund's market price and may even afford to raise its distribution in the future.

What does the "quality" label indicate? Simply put, it means that the distribution coverage is greater than 100%. However, please note these caveats: Firstly, coverage ratios are calculated using earnings data from CEFConnect. Although there are sometimes discrepancies with CEFConnect's data, this allows us to automate the calculation process for the entire universe, and we consider it to be sufficient for a preliminary screen anyway. Before buying or selling any fund, it's recommended to independently verify the coverage ratios from the individual fund annual/semi-annual reports themselves. Secondly, having a coverage ratio >100% does not guarantee that the fund's distribution is secure. Many funds reduce their distributions periodically in line with market conditions in order to maintain good coverage. Thirdly, a coverage cut off ratio of 100% is, ultimately, an arbitrary number. A fund with 99.9% coverage will be excluded from the rankings, whereas funds with 100.1% coverage will be considered, even though only a sliver of coverage separates the two.

The coverage ratio is calculated by dividing the earnings/share number provided by CEFConnect on the "distributions" tab by the distribution/share. CEFdata also provides earning coverage numbers as well.

I hope that these rankings of quality CEFs will provide fertile ground for further exploration.

Key to table headings:

P/D = premium/discount

Z = 1-year z-score

Lev = leverage

BE = baseline expense

Cov = coverage

Data were taken from the close of January 21st, 2021.

1. Top 10 widest quality discounts

The following data show the 10 CEFs with the highest discounts and coverage >100%. Yields, z-scores and leverage are shown for comparison.

CEF Category P/D Yield Z Lev BE Cov
(BFZ) California Munis -12.35% 3.82% -2.4 39% 1.05% 104%
(ENX) New York Munis -11.81% 3.71% -2.5 35% 1.06% 106%
(DTF) National Munis -11.54% 2.90% -2.3 38% 1.51% 114%
(VTN) New York Munis -11.46% 4.59% -2.6 37% 1.18% 104%
(NAN) New York Munis -11.14% 4.33% -2.5 37% 1.15% 100%
(CXH) National Munis -11.05% 4.12% -2.1 34% 1.18% 109%
(EVM) California Munis -11.01% 4.46% -2.5 41% 1.11% 102%
(MNP) National Munis -10.97% 3.89% -1.5 34% 1.85% 107%
(WIW) Investment Grade -10.76% 4.75% -0.8 32% 0.76% 106%
(VFL) National Munis -10.65% 4.09% -0.9 31% 1.02% 102%
Data

Income Lab

2. Top 10 best quality z-scores

CEFs with the best (most negative) z-scores are potential buy candidates. The following data show the 10 CEFs with the lowest z-scores. Premium/discount, yields and leverage are shown for comparison. Only funds with coverage >100% are considered.

CEF Category Z P/D Yield Lev BE Cov
(ETX) National Munis -3.7 -4.32% 4.23% 36% 1.57% 107%
(EVN) National Munis -3.5 -8.73% 4.53% 35% 0.00% 112%
(PMX) National Munis -3.4 1.63% 4.92% 42% 1.18% 105%
(MAV) National Munis -3.4 -9.58% 4.46% 39% 1.18% 101%
(MYD) National Munis -3.2 -9.31% 4.78% 37% 0.91% 102%
(PMF) National Munis -3.1 3.48% 4.85% 42% 1.24% 107%
(LEO) National Munis -2.9 -9.14% 4.66% 34% 1.00% 110%
(MHI) National Munis -2.9 -10.57% 3.92% 33% 1.15% 117%
(MYI) National Munis -2.7 -9.59% 4.59% 37% 1.17% 104%
(CMU) National Munis -2.7 -10.55% 4.33% 36% 1.25% 111%
Data

Income Lab

3. Top 20 highest quality yields

Some readers are mostly interested in obtaining income from their CEFs, so the following data presents the top 20 highest yielding CEFs. I've also included the premium/discount and z-score data for reference. Before going out and buying all 10 funds from the list, some words of caution: [i] higher yields generally indicate higher risk, and [ii] some of these funds trade at a premium, meaning you will be buying them at a price higher than the intrinsic value of the assets (which is why I've included the premium/discount and z-score data for consideration). Only funds with coverage >100% are considered. To make the charts more manageable, I've split the funds into two groups of 10.

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

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CEF Category Yield P/D Z Lev BE Cov
(OXLC) Senior Loans 10.14% 21.32% 0.3 28% 7.68% 119%
(DSL) Global Income 8.60% -8.02% -2.6 31% 1.50% 123%
(EHI) High Yield 8.50% -5.11% -1.6 32% 1.37% 103%
(PHT) High Yield 8.41% -4.90% -1.5 32% 1.06% 107%
(PGP) Global Allocation 8.03% 2.79% -1.4 33% 1.66% 104%
(KIO) High Yield 7.84% -3.19% 0.1 35% 2.12% 109%
(BGH) High Yield 7.81% -8.76% -1.3 30% 0.00% 122%
(DHF) High Yield 7.46% -7.45% -1.1 29% 1.27% 110%
(DBL) Multisector Income 7.18% -1.08% -2.4 17% 1.43% 101%
(BANX) Sector Equity 6.99% 1.72% 0.6 27% 3.49% 133%
(JPC) Preferreds 6.89% -3.95% -1.3 37% 1.32% 104%
(HYB) High Yield 6.80% -6.94% -0.3 27% 1.20% 109%
(JPS) Preferreds 6.65% -4.50% -2.5 37% 1.29% 102%
(FPF) Preferreds 6.64% -4.83% -2.4 31% 1.33% 102%
(BGX) Senior Loans 6.50% -5.69% -0.2 38% 2.14% 113%
(JPI) Preferreds 6.33% 1.14% 0.2 35% 1.33% 105%
(IVH) High Yield 6.28% -8.75% -0.6 2% 1.51% 114%
(WEA) Investment Grade 6.03% -5.80% -2.5 30% 0.96% 109%
(NXC) California Munis 5.93% 4.22% 0.9 2% 0.00% 105%
(BGB) Senior Loans 5.86% -6.69% 0.0 37% 2.26% 125%
Data

Income Lab

Data

Income Lab

4. Top 10 best combination of quality yield and discount

For possible buy candidates, it's probably a good idea to consider both yield and discount. Buying a CEF with both a high yield and discount not only gives you the opportunity to capitalize from discount contraction, but you also get "free" alpha every time the distribution is paid out. This is because paying out a distribution is effectively the same as liquidating the fund at NAV and returning the capital to the unitholders. I considered several ways to rank CEFs by a composite metric of both yield and discount. The simplest would be yield + discount. However, I disregarded this because yields and discounts may have different ranges of absolute values and a sum would be biased toward the larger set of values. I finally settled on the multiplicative product, yield x discount. This is because I consider a CEF with 7% yield and 7% discount to be more desirable than a fund with 2% yield and 12% discount, or 12% yield and 2% discount, even though each pair of quantities sum to 14%. Multiplying yield and discount together biases toward funds with both high yield and discount. Since discount is negative and yield is positive, the more negative the "DxY" metric, the better. Only funds with >100% coverage are considered. The DxY score is scaled by 100.

CEF Category P/D Yield Z DxY Lev BE Cov
(DSL) Global Income -8.02% 8.60% -2.6 -0.7 31% 1.50% 123%
(BGH) High Yield -8.76% 7.81% -1.3 -0.7 30% 0.00% 122%
(FDEU) Global Equity -10.54% 5.30% 0.7 -0.6 23% 1.71% 114%
(DHF) High Yield -7.45% 7.46% -1.1 -0.6 29% 1.27% 110%
(IVH) High Yield -8.75% 6.28% -0.6 -0.5 2% 1.51% 114%
(VTN) New York Munis -11.46% 4.59% -2.6 -0.5 37% 1.18% 104%
(WIW) Investment Grade -10.76% 4.75% -0.8 -0.5 32% 0.76% 106%
(EVM) California Munis -11.01% 4.46% -2.5 -0.5 41% 1.11% 102%
(NAN) New York Munis -11.14% 4.33% -2.5 -0.5 37% 1.15% 100%
(CEV) California Munis -10.61% 4.45% -2.1 -0.5 37% 1.10% 100%
Data

Income Lab

5. Top 10 best combination of quality yield, discount and z-score

This is my favorite metric because it takes into account all three factors that I always consider when buying or selling CEFs: Yield, discount and z-score. The composite metric simply multiplies the three quantities together. A screen is applied to only include CEFs with a negative one-year z-score. As both discount and z-score are negative while yield is positive, the more positive the "DxYxZ" metric, the better. Only funds with >100% coverage are considered. The DxYxZ score is scaled by 100.

CEF Category P/D Yield Z DxYxZ Lev BE Cov
(DSL) Global Income -8.02% 8.60% -2.6 1.8 31% 1.50% 123%
(MAV) National Munis -9.58% 4.46% -3.4 1.4 39% 1.18% 101%
(MYD) National Munis -9.31% 4.78% -3.2 1.4 37% 0.91% 102%
(EVN) National Munis -8.73% 4.53% -3.5 1.4 35% 0.00% 112%
(VTN) New York Munis -11.46% 4.59% -2.6 1.4 37% 1.18% 104%
(LEO) National Munis -9.14% 4.66% -2.9 1.3 34% 1.00% 110%
(CMU) National Munis -10.55% 4.33% -2.7 1.2 36% 1.25% 111%
(EVM) California Munis -11.01% 4.46% -2.5 1.2 41% 1.11% 102%
(CXE) National Munis -9.92% 4.59% -2.7 1.2 37% 1.24% 109%
(NAN) New York Munis -11.14% 4.33% -2.5 1.2 37% 1.15% 100%
Data

Income Lab

Commentary

The CEF sell-off over the last few weeks has brought value, especially to munis that have been struck by concerns over high rates. However, munis are still valuable as safe-haven ballasts for an equity portfolio, and are also particularly attractive to high-earners investing in a taxable account.

Two funds that I'd like to highlight as being particularly attractive are the Pioneer Municipal High Income Advantage Fund (MAV) and Eaton Vance Municipal Income Trust (EVN). Both funds are holdings of our Taxable Income portfolio.

We can see that MAV and EVN both sold off hard alongside the equity markets, falling by nearly -7% on the month, compared to SPY (-7.81%) and QQQ (-11.40%). However, on a NAV basis they fared much better with only a -2% decrease in their NAV total return performance.

Chart

YCharts

MAV was the 2nd-ranked DxYxZ fund in this month's "Quality" report. It last closed at a discount of -9.58% and with a yield of 4.46% on 101% coverage. The 1 year z-score is -3.4, indicating that it is severely undervalued relative to its recent history. For reference, the 1, 3 and 5-year average discounts are -2.76%, -7.13% and -6.43% respectively.

Note that as a high-yield muni fund, MAV will have the ability to invest in non-investment grade munis. According to CEFdata though, most of the fund is still allocated to investment grade holdings totaling over three-quarters of the fund, consisting of AAA (17.5%), AA (43.6%), A (9.4%) and BBB (6.0%).

Chart

CEFdata

EVN was the 4th-ranked DxYxZ fund in this month's "Quality". It last closed at a discount of -8.73% and with a yield of 4.53% with 101% coverage. The 1 year z-score is -3.5, indicating that it is severely undervalued relative to its recent history. For reference, the 1, 3 and 5-year average discounts are -3.03%, -6.55% and -6.75% respectively.

Data

CEFConnect

While EVN isn't billed as a high-yield muni fund, the managers still have the ability to invest in junk or unrated debt. The fund's latest factsheet shows that 79.5% of the fund is investment grade-rated.

Data

Eaton Vance

EVN also has the distinction of being a historically very strong performing fund, ranking 1st (!) out of 53 muni funds over 10 years per CEFdata. Its more recent performance has been a mixed bag, with underperformance over the 1-year time frame, but it's still near the top at the 3- and 5-year time intervals.

Data

CEFData

If I had to pick one of the two, it would be EVN. We may add to our EVN position in our Taxable Income portfolio this week.

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Disclosure: I/we have a beneficial long position in the shares of EVN, HYB, MAV either through stock ownership, options, or other derivatives. 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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