JPS: A Healthy Blend Of Junk And Income

Summary

• JPS fund can provide your portfolio a much needed income boost.
• The underlying holdings have exposure to an international portfolio of financial company preferred shares.
• However, it travels down the rungs of credit quality to deliver that yield.
• Prospective investors should be armed with an asset allocation plan to deal with high volatility.

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Investment Thesis

In this article we review the popular Nuveen Preferred & Income Securities Fund (NYSE:JPS). If you're investing strictly for the high yield, you must diversify your exposure with negatively correlated assets. The distribution is nice but has been steadily decreased in response to sometimes poor financial performance.

Fund Overview

Nuveen

Because banks are one of the largest issuers of preferred securities, JPS subsequently offers targeted international exposure to the financial sector. Notwithstanding the jitters about an economic recession, rising rates are a tailwind to lenders.

Although the fund overall has a rather intermediate duration (sensitivity to changes in benchmark rates), the use of leverage does amp up the volatility as it will magnify gains and losses. Furthermore, the fund managers have selected to allocate assets to the lowest rung of investment grade preferred securities. This means that JPS is highly sensitive to both changes in interest rates and perceived economic conditions.

Analysis of the Distribution

With a current yield of 7.19%, JPS can offer income investors some much needed steady cash flow. It does, however, behoove us to look under the hood to determine how they're able to offer such a yield and whether one can rely on it in the future.

Nuveen Annual Report

Nuveen Annual Report

When analyzing closed-end funds, there are only a few key data points to consider. Of course, it is nice that they have covered the distribution well over the years. But if you look at the above charts, you can see that things have been trending the wrong direction. They sport a negative Undistributed Net Income figure, have steadily cut the distribution, and Net Investment Income has decreased YoY in a data sample of 5 years.

While there are various moves that the fund manager can make, the bottom line is that something has to give in order for the cutting cycle to end. Indeed, it is telling that a 27% drop from its previous peak in August 2021 has only resulted in a current yield of 7.19%.

Asset Allocation Strategy

TradingView

If you are smitten with JPS in spite of some weak data points, you can certainly invest in the fund and achieve a very attractive return over the long haul. Indeed, most mainstream indicators are saying that the market is oversold.

As a leveraged fixed income play, I implore you to please consider having a diversified portfolio in which your assets have negative correlation to smooth out performance and still get a fair current yield. Periodically (let's say every quarter) you can take profits on the winner and use some of the proceeds to buy more of the other position while it is cheap.

To illustrate my point, if you were to have bought JPS at any of its previous peaks, you would have been subject to massive losses even after the distribution is accounted for.

Conclusion

All things considered, prospective investors that don't mind a patient, diversified approach should consider JPS for their income needs. The distribution is not that well established but maybe there is hope for a turnaround in the future.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.