Squeezing Alpha From CEFs: Our ARDC -> DMO -> PCI Rotation Last Month
Value, CEFs
Seeking Alpha Analyst Since 2014
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Summary
- Welcome to another weekend blog post from Systematic Income where we touch on how investors can generate alpha in CEFs via fund rotations.
- With higher CEF prices and tighter discounts investors may feel compelled to take on more risk in order to generate higher returns.
- An alternative to taking on more risk is to be attentive to some of the rotation opportunities in the CEF market that offer potentially strong rewards without additional risk.
- Take advantage of our max-20% discount this weekend and take a 2-week free trial of Systematic Income.
Welcome to another weekend blog post from Systematic Income where we discuss ways to generate additional returns in CEF portfolios without necessarily taking on more risk. We use a recent CEF rotation in our High Income Portfolio over the last month as a case study.
With CEF prices grinding higher and discounts moving tighter it seems like investors have to take on more risk in order to continue generating strong returns. Our view is that with significantly tighter credit spreads and renewed risk appetite this is the wrong time to do it. Instead, investors should remain attuned to the rotation opportunities offered up by the CEF market.
Our first rotation was outlined before market open on August 27th where we suggested a partial reallocation from ARDC to DMO after DMO discount widened to double digit levels. This switch worked even quicker than we expected, delivering a 6% relative and absolute return.
The strong return of this rotation was driven entirely by the tightening of the DMO discount after which we spotted another opportunity in a different RMBS fund - PCI which was trading at a sub-1% premium. We made a full rotation from DMO to PCI which also performed well out of the gates, delivering about a 3% return in short order.
A good dose of this strong high singe-digit return over just one month is clearly luck in timing but also due to the fact that these opportunities do in fact exist and they are not all that rare. Liquidity in CEFs is not always terrific so investors do often face slippage costs and, as always, they should be aware of any tax considerations.
To avoid the accusation of cherry picking we have made three other rotations in our portfolios all of which are also in the green. None is as interesting as this one as they are not chained together.
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Analyst's Disclosure: I am/we are long PCI.
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