Please note this article was first released to members of CEF/ETF Income Laboratory one week ago, so data may be out of date. Please check latest data before making investment decisions.
Christmas may have arrived early for closed-end fund (“CEF”) investors as discounts are blowing out across the board as investors irrationally and indiscriminately sell all of their investments. While there’s the saying “Stocks take the escalator up but the elevator down,” there’s also the important addendum – “Just make sure you don’t get out at the basement!” In my view, this bout of panic-induced selling is the perfect opportunity to buy into a higher-yielding income stream. As our own Steven Bavaria wrote in the chat today:
As a former journalist, I can tell you from experience it is much more fun to write “the sky is falling” articles (and they attract a bigger readership) than ones that say “the sky is cloudy, it may rain, but it is hardly about to fall.” Jerome Powell’s comments yesterday affirmed that the economy itself is pretty steady. I think much of the panic and nervousness relates to non-economic factors (like a presidency that is unravelling, trade wars, geopolitical uncertainty, loss of US leadership in the world, government shutdown, etc.). Of course, once it starts it builds on itself. In illiquid markets like closed end funds, with complex asset classes that attract lots of investors who want the high yields but who often have little real knowledge about the underlying assets, when panic hits a lot of people will head for the hills. But a portfolio that pays you cash distributions at 10-11% (or a 12 or 13% re-investment rate at current bargain prices) makes it a lot easier to keep your head down and wait it out then if you are sitting on a portfolio only yielding 2-3% (like the typical DGI portfolio) while prices are dropping…and dropping.
Meanwhile, one of our members asked for a “shopping list” to take advantage of the market turmoil. Without further ado…
Most discounted funds
I’d normally consider a discount of under -15% to be deeply discounted (although whether or not such a fund can be considered a “buy” depends on many other factors as well), but as of yesterday, there were an incredible 182 CEFs with discounts less than -15%, or over one-third!
The following table shows the 41 CEFs with discounts of under -18%.
Lowest z-score funds
Similarly, we have 116 CEFs in the “-3 club” (cf. 25 members in the market turmoil right after Trump’s election win), indicating extreme undervaluation.
Restricting the list to CEFs with z-score under -4 still gives 41 funds.
Lowest “price-NAV” funds
The volatility table sorts by 1Y price-NAV. In other words, how much did the market returns lag the NAV returns? (A Douglas Albo favorite!)
For 33 funds, the market returns lagged the NAV returns by over -12%. Less than 10% funds had price returns exceeding NAV returns (i.e., becoming more expensively valued over the last year).
Top D x Y x Z funds
Bringing in our favorite metric from the monthly CEF series, the table below presents the top 30 ranked D x Y x Z funds from the database currently.
I’ve attached my Excel spreadsheet here in case anyone wants to delve into the lists further (ranked by z-score currently): 21_Dec_2018.xlsx
Strong buys in the portfolios
We just added to Nuveen Preferred & Income Securities Fund (JPS), Eagle Point Credit Company (ECC), Invesco Dynamic Credit Opportunities Fund (VTA) and bought Ellsworth Growth and Income Fund (ECF) yesterday in the Tactical Income-100 portfolio.
Besides the above funds, here are some other funds that I think are highly undervalued in the Tactical Income-100 portfolio. Note the risk ratings provided for these CEFs; in volatile times such as these, any security can fall down much more at any time, so please assess your own risk tolerance accordingly!
- Macquarie Global Infrastructure Total Return Fund (MGU): -20.22% discount, -3.5 z-score, 9.10% yield, and risk rating 9
- Ares Dynamic Credit Allocation Fund (ARDC): -19.58% discount, -3.2 z-score, 9.40% yield, and risk rating 5
- AllianzGI Convertible & Income 2024 Target Term Fund (CBH): -13.39% discount, -4.2 z-score, 4.77% yield, and risk rating 5
There are some other deeply discounted equity funds as well such as Aberdeen Total Dynamic Dividend Fund (AOD), Kayne Anderson Midstream/Energy Fund (KMF), Tekla Healthcare Opportunities Fund (HQH) and NexPoint Strategic Opportunities Fund (NHF), but given these track the more liquid equity markets, they aren’t suffering from the same illiquidity-induced panic that I think some of the fixed income funds are. Meaning, that should stock markets fall further, these equity funds would likely track the market down. However, for those newer members looking to follow the portfolios, these funds are still much better buys now than they were several months ago.
Besides the funds in the portfolios, I would be most interested in the top ranked D x Y x Z fixed income CEFs right now.
Note: Discount and z-score metrics for CLO equity funds such as ECC and OXLC are inaccurate since their NAV values are only reported monthly (some other funds only report NAV weekly as well).
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Disclosure: I am/we are long AOD,ARDC, CBH, ECC, HQH, KMF, MGU, NHF, VTA. 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.
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