Closed-End Funds Ripping

Summary

• Closed-end funds ("CEFs") have been going bananas in the last few weeks as discounts experience a delayed January Effect.
• We are advising some of our more risk sensitive members on our service to rotate out of some expensive CEFs into open-end funds.
• In our service, we detail which funds are cheap, which sectors are worth holding, and where to go to as a "placeholder" until things cheapen up.
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Futures are essentially flat after another record-setting day yesterday. Crude continues to march higher hitting $58.20 in early trading. Gold is recovering a bit too at $1,847/oz. 10-yr backed off from interim highs yesterday of 1.20% to 1.146% this am. VIX remains stubbornly high at 21.8.

Yesterday, the reflation trade inspired by the stimulus plan was the theme with strength in momentum and cyclicals. Bitcoin hit all time highs as well after Tesla bought $1.5B worth of it. . 30Y hit 2% before catching a bid; yields now identified as one of the largest market risks. With 293 S&P co. reporting for 4Q, EPS growth (+6.8% y/y vs -7.0% 3Q) and revenue trends (+2.4% vs -1.2% 3Q) are better than consensus (-10% EPS, -1% Sales).

It was another good day for CEFs yesterday with most sectors seeing positive NAVs (utilities and agency MBS the only one's down thanks to the rise in rates). Discounts were also mostly in the green. Munis were again up 0.05% on NAV and another 0.4% on discount return. Like a broken record. National munis are now sub-3% in discounts. I still think they could head to a premium.

In the last (trailing) month, munis have closed 1.8% in discount return alone. NAVs have been up 1.6%. That is a very strong 30 days. I've been pounding the table on them for some time and we're finally seeing the move.

Loans have been another areas i've been bullish on. Discounts there have closed by 2.2% in the last month plus another 1.8% on NAV return for a 4% move. Obviously that is not sustainable but i'll take it. The best group has been convertibles which I have also been making a lot of comments on. The discounts there have closed by an amazing 4.2% in a month. Plus 6.1% of discount tightening for 10.3% of total return. Just crazy!

From a valuation perspective, loans and convertibles are still relatively cheap compared to their historical averages. Munis are now at a 5-yr z-score of 0.7. Not crazy expensive but definitely on the rich side of average. Again, i think there's another 2-3 points possible. That doesn't mean you leave your entire allocation to munis the whole time but you can slowly toggle off some exposure if you're more tactically inclined as they continue to rise.

Loans and convertibles are still cheap. I'll have a report on convertibles coming out later today. The sector is mainly trading with equities at this point given the run up in underlying NAV values. Real estate debt also remains pretty cheap (equity as well). JRI had a nice move yesterday closing the discount a couple of points in the last few days.

HY from a CEF sector perspective remains right at the average discount valuation. But with the BofA HY Master Effective Yield hitting 4% (all time record low) there isn't a whole lot of upside in the NAVs from here. Spreads are down to 354 bps which is essentially where we were before Covid. Now is not the time to be adding to HY. Loans are catching up quickly and will essentially be in the same boat soon. PHD, my largest loan CEF, is now at a -5.9% discount. Just a few weeks ago it was -10%. Massive moves. My second largest position is FCT which is now threatening to go under 8% and hit 52-wk highs in discounts. A month ago it was -11%.

The only fund that looks mildly attractive is ARDC which saw the discount widen in the last two days back to -11% from -9%. I added to it small yesterday from other sales.

There's really not much to buy. I'll continue to hunt for other ETFs/OEFs to move into that are suitable placeholders until better buying opportunities arise in the CEF sector.

Have a great day!

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