- Welcome to another blog post from Systematic Income where we touch on some of the recent CEF rotations we implemented in our Income Portfolios.
- These rotations have allowed us to generate additional yield or returns without taking on more risk.
- Take a 2-week free trial of our service Systematic Income to explore our Investor Tools and Income Portfolios.
Welcome to another blog post from Systematic Income. In this post we discuss some of the recent rotations we have done in the CEF space.
The total returns across the CEF market over the last month or so have been unexceptional, in contrast to what we have seen earlier in the year.
Our expectation has been that forward returns are not going to match what we saw coming out of the lows in March. And with higher asset prices / lower yields across the board our strategy has been to take advantage of relative value opportunities to generate additional returns in our portfolios without taking on additional risk.
Our first example took place in our Defensive Income Portfolio in August when we rotated between two Public Storage preferreds from PSA.PL to PSA.PM. This rotation allowed us to capture a nearly 1% higher yield-to-call but also took advantage of the new-issuance dynamic which often sees new issues outperform. This is exactly what we saw happen as PSA.PM outperformed the other series allowing the portfolio to generate additional returns and enhance yield without taking on more credit risk.
Our second example was in the High Income Portfolio where we recently cut our exposure to the CLO Equity CEF OCCI. We liked this fund over its other counterparts: OXLC and ECC because it traded at a substantial discount (see this article about how we estimate daily discounts for these funds since they are not available on CEFConnect). Shortly after entering the trade the estimated discount tightened to zero which caused us to cut our position and reallocate to OXSQZ - a fund that holds some CLO equity alongside loans with significant asset coverage making it a much more defensive position. Since then OCCI has sold off about 4% which makes it more attractive to re-enter the position.
Another recent rotation we implemented was with DMO - a RMBS CEF. Once the fund hit a double-digit discount - highly unusual for this CEF we added to our position. Shortly after that the discount tightened back to about 3% and we decided to reallocate some of the position to PCI which at the time was trading at a premium not far from zero. This allowed us to pick up yield and enter PCI at a more attractive valuation.
We expect the market to deliver more rotation opportunities which can allow investors to continue to generate additional returns and enhance the yield of their portfolios without having to take on greater amounts of risk.
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Analyst's Disclosure: I am/we are long DMO, OCCI.
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