In my quest for high-yielding income-generating investments to help provide me with continuing cash flow in my retirement years, I found a relatively new CEF (closed-end fund) from Nuveen. I was looking for a fixed income fund that holds at least some level of investment grade bonds and pays out a high current yield of at least 9%. Using a fund screener on the CEFConnect website, I came across one that I would like to share with my readers.
The Nuveen Core Plus Impact fund (NYSE:NPCT) is sure to make an impact on your core retirement income. The inception date of the fund was April 27, 2021, and it seeks total return through high current income and capital appreciation. With a current monthly dividend payment of $.1030, the annual yield is about 9.6% at the current price of $12.65 as of market close on 8/5/22.
NPCT invests primarily in fixed income investments while giving special consideration to ESG (environmental, social, and governance) criteria. The fund’s holdings consist of investment grade (core) fixed income investments and (PLUS) up to 50% of below investment grade, or junk bonds.
The fund uses leverage (~38% effective leverage as of 6/30/22) and has a 12-year term with an option to convert to perpetual. The inception NAV in April 2021 was $20. The current NAV is estimated at $14.42 as of 8/4/22 which gives investors buying the fund today a discount of -11%. The timing of the fund’s introduction was not particularly propitious, as the bull market turned bearish shortly after the fund went public. It is only just in the past few weeks that the NAV has recovered from its all-time low of $13.44 on July 14, 2022.
With the continuing risk of recession looming, and overall slowing economic growth being further impacted by inflationary pressures and more rate increases expected by the Fed, one strategy that is suggested now is to invest in high-quality and mostly shorter-duration bonds. This recent publication from J.P. Morgan Asset Management dated June 13, 2022, outlines the rationale behind such a strategy.
With both rates and credit stabilizing over the last month, the group felt that this may be an opportunity to ready portfolios for fatter left tail risks. Consequently, high quality, short-duration bonds were the favorite. Short-dated investment grade corporate bonds and securitized credit may offer appealing yields with limited downside. The group also looked at government bonds as a place to add duration. Yields on 10-year U.S. Treasuries more than doubled this year and should offer some flight-to-quality benefits at a yield above 3%.
In the case of NPCT, the mix of fixed income investments in the portfolio offers an average effective leverage-adjusted duration of 11.7 years, which may be a bit longer duration than what is suggested above but may be feasible for income investors with a longer-term horizon, with the largest allocation of the portfolio holdings including investment grade and high-yield corporate bonds.
On Thursday, August 4, the yield curve inversion reached its widest point in over 22 years. This reading fueled fears of a recession coming soon to a market near you once again. However, the jobs report on Friday morning showed that the labor market is still tight, and unemployment remains low, sending a mixed signal to markets. Nevertheless, the yield curve inversion bears watching as it has been a cautionary signal preceding recessions that occurred in 2001 and again in 2008.
Nuveen, the investment manager of TIAA, offers a comprehensive range of outcome-focused investment solutions designed to secure the long-term financial goals of institutional and individual investors. Nuveen has $1.1 trillion in assets under management as of 30 June 2022 and operations in 27 countries. Its investment specialists offer deep expertise across a comprehensive range of traditional and alternative investments through a wide array of vehicles and customized strategies.
Nuveen is one of the largest fund sponsors with 56 CEFs offered, according to the CEFConnect website. BlackRock is the 2nd largest with 48 funds. Nuveen has an excellent track record and reputation and offers a weekly commentary on the state of fixed income investments. The latest weekly installment suggests that high-yield corporate and investment grade bonds rallied (again).
Investment grade corporates rallied again, returning 0.50% for the week, though they marginally underperformed similar-duration Treasuries, by -1 bps. The asset class snapped a streak of 18 consecutive weekly outflows, with a positive inflow of $1.5 billion for the week, which contributed to the buying pressure.
High yield corporates capped off a strong July with another weekly rally, returning 1.53% for the week and outperforming similar-duration Treasuries by 85 bps. July’s total return ended at 5.90%, the strongest monthly performance since 2009. As in investment grade markets, the asset class was boosted by a large inflow of $4.8 billion, the largest since June 2020.
Even though the timing of the fund’s inception may not have been the best for investors seeking to establish an initial position, now it appears that the timing is good for income-oriented investors looking for a high-yield fixed income fund with a monthly distribution that is relatively low risk given current market conditions.
Other similar funds such as BlackRock Corporate High Yield fund (HYT), and KKR Income Opportunities Fund (KIO), are also worth considering as the credit markets begin to turn bullish again after the June swoon. HYT is trading near par and pays a 9.2% yield, and KIO is trading at a discount of -8.5% to NAV with a 10% yield. All 3 funds pay monthly distributions.
Over the past year, all 3 of these high-yield funds have underperformed the broader market as defined by the S&P 500, and NPCT has been the biggest laggard. But that is based mainly on the widening of the discount more than the underlying value of the fixed income holdings. I believe that NPCT is worth consideration for starting a new position or adding to an existing one while the market is punishing high-yield fixed income due to continuing fears of a recession.
The majority of the fund’s holdings are of very high credit quality with most rated BB or higher.
The ESG impact of the fund helps to ensure that the investments meet certain criteria that are aligned with SDGs (Sustainable Development Goals) as defined by the United Nations. For example, about 76% of the fund’s assets under management are aligned with the Affordable and Clean Energy SDG. A document on the fund’s website explains how alignment with SDG goals by holding bonds that demonstrate leadership in ESG within their industries helps to contribute to performance and mitigate risk.
Environmental and societal impact: Strategic allocation to bonds with direct and measurable impact within affordable housing, community and economic development, renewable energy and climate change, and natural resources.
The impact objectives and four impact themes of our global fixed income strategies predate the development and adoption of the SDGs. However, given the global relevance and increasing interest by stakeholders to understand investors’ contribution and alignment to these global goals, we expanded our impact reporting in 2016 to clearly communicate and demonstrate how our approach aligns to the SDGs.
The fund holds a total of 131 investments as of June 30, 2022, and the top 10 issuers include:
The fund’s annual expense ratio is 1.72% as of June 30, 2022. Total managed assets amount to $631 million as of June 30, 2022. A regular distribution of $0.1030 has been paid every month since July 2021. The most recent 19a notice (issued July 29, 2022) indicates that the distributions include about two-thirds NII and one-third ROC. The YTD sources of the distributions from the fund’s fact sheet indicate roughly 63% NII and 37% ROC.
There is one Wall Street analyst covering the fund, according to Seeking Alpha, who gives the fund a Strong Buy rating. The fund has been in existence as a publicly-traded CEF for less than 18 months, so there is not a lot of history or coverage from other authors on SA. One article from March discussed the relative underperformance of several recently launched funds and did briefly mention NPCT. Another newer fund that was also mentioned in that article is a short duration high yield corporate bond fund, PGIM Short Duration High Yield Opportunities Fund (SDHY). That fund went public in November 2020, pays a regular monthly dividend of $0.1080 offering an annual yield of about 8%, and is currently trading at a -8% discount. The YTD total return is better than NPCT although it holds lower credit quality bonds.
The NAV of the NPCT fund declined considerably in the first half of 2022 due to bearish sentiment in the fixed income market, leading to an even wider discount. The discount reached a low of -17% in June. Now, as the NAV begins to rise again, the discount is narrowing somewhat to -11% in early August.
I rate NPCT as a Buy at the current price based on the discount to NAV, the high yield monthly dividend, the high credit quality of its holdings, and the ESG criteria that helps to identify holdings that should lead to better performance and lower risk over a longer time frame. The timing of the fund’s inception date was unfortunate and has led to significant underperformance so far in its young history, but I believe that bigger discount presents an opportunity for investors with a longer time frame.
In the short term, as fears of a recession remain and the Fed continues to consider raising rates, the fund’s performance may continue to lag. But the best time to buy a high-quality CEF is when the discount is wide and the NAV is rising, which is the current situation for NPCT. More conservative investors may wish to stay on the sidelines and wait for the fund to demonstrate better performance and a longer history before jumping in. In my case, I am willing to accept a little risk for a big reward and I believe that Nuveen is a high-quality fund manager that has a good concept in the NPCT fund.
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Disclosure: I/we have a beneficial long position in the shares of NPCT, HYT 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.