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For income investors, closed-end funds or CIFs constitute an attractive asset class promising high incomes generally ranging between 6 and 10%, broad diversification in terms of types of assets and returns totals equivalent to those of the long-term market. , if carefully selected.
However, the CEFs have their own set of risks that investors should be aware of. First, the majority of these funds, although not all, use a debt level generally between 15% and 40% that can act in both directions. They usually charge high fees, partly because of leverage, so the quality of management becomes an important factor to take into account. One way to assess the quality of management is to look at their long-term track record. We should pay special attention to the returns of their NAV (net asset values) over the past 5 and 10 years. The other risk factor is higher volatility than broader indices caused by leverage. Another risk factor may come from the concentration risk of the assets. However, it is easy to mitigate this phenomenon by diversifying the types of EFCs, be they equities, preferred shares, preferred shares, mortgage bonds, government bonds and government bonds. companies, energy MLPs, utilities and municipal revenues.
For equities, we can use several well-known indicators to determine whether the stock has been overvalued or undervalued at a given time, even if it is not easy. But it is even harder to understand the same thing for CEF funds if they are attractive purchases at any one time. That's what this series of articles does. to try to separate the wheat from the chaff.
Since last month, we have launched a new periodic (monthly) series, in which we highlight five relatively inexpensive CEFs, offering "excessive" discounts on their NAV, paying high distributions and having a strong track record. We also write a monthly series to identify the actions "5 DGI safe and cheap". You can read our latest article of this type here.
We use our multi-step filtering process to select only five CEFs from approximately 500 available funds. The five FECs selected this month, as a group, offer an average distribution rate of 9.87% and an average reduction of -8.39%. Since it is a monthly series, some selections may overlap from one month to the next. For example, three of the funds selected this month also appeared in the list of five last month.
Please note that these are not buying recommendations, but should be considered as a starting point for further research.
Our goals are simple and fit in with most conservative income investors, including retirees. We want to pre-select five closed-end funds that are relatively inexpensive, offer good discounts to their net asset value, pay relatively high distributions, and have solid and substantial experience in maintaining and growing their net asset value. We take a methodical approach to filter the more than 500 funds into a small subset.
Objectives of the selection process
We want to emphasize our goals before we arrive at the selection process itself.
Here are our main objectives:
- High income / distributions
- Reasonable long-term return on NAV
- Less expensive valuation, determined by the "excess" discount offered in relation to history
A well-diversified portfolio should probably have more than five FECs. We believe that a CEF portfolio can be an important part of the overall portfolio. It should preferably have a DGI portfolio as a basis, and the CEF portfolio could be used to increase the income level to the desired level. How much should you allocate to CEF? Each investor must answer this question himself according to his personal situation and factors such as portfolio size, income requirements, risk appetite or risk tolerance. As always, we recommend that you exercise due diligence before making any investment decisions.
Selection process
We have more than 500 CEF funds from which to choose, which belong to different asset classes such as stocks, preferred shares, mortgage bonds, public funds. and corporate bonds, energy MLPs, utilities and municipal revenues. As in other situations in life, even if the widest choice is always good, but it is more difficult to make a final selection. The first thing we want to do is shorten this list of 500 CEFs into a more manageable subset of about 100 funds. We can apply certain criteria to shorten our list, but the criteria must be sufficiently broad and loose at this stage to retain all potentially good candidates. In addition, the criteria we establish should be focused on our initial objectives.
Selection criteria:
|
criteria |
Reduces the number of funds to .. |
Reason for criteria |
|
Basic expenditure < 2.0% and Avg. Daily Volume > 100,000 |
About. 435 funds |
We do not want excessive funds. In addition, we want funds that have fair liquidity. |
|
Market capitalization> 100 million |
About. 400 funds |
We do not want funds that are too small. |
|
History / History of more than 10 years (date of creation 2007 or earlier) |
About. 300 funds |
We want funds that have a long history. |
|
UNII * Balance> – $ 1.00 |
About. 280 funds |
A large negative balance from the UNII (undistributed net investment income) would indicate that this fund is having difficulty paying its distributions. |
|
Discount / Premium <+ 5% |
About. 250 funds |
We do not want to pay a high premium; in fact, we want bigger discounts. |
|
Since inception Annualized NAV Return> 0% And 5-year annualized return on NAV> -5% |
About. 230 funds |
We want funds that have a reasonably good track record of maintaining their NAV. |
|
Distribution rate (dividend)> 5% |
140 funds |
The current distribution (income) must be reasonably high. |
We still have about 127 funds on our list, which is way too long to present here or to make a wise choice of five funds.
Reduce to less than 50 funds
To reduce the number of funds to less than 50, we will apply the following criteria:
Excess Discount / Premium:
We certainly love funds that offer significant discounts (not bonuses) on their NAV. But sometimes, we can consider paying a premium close to zero or a small premium if the fund is great otherwise. So, what is important is to see the "discount / premium in excess" and maybe not the absolute value. We want the discount (or premium) to match their past record, averaging 52 weeks.
Subtracting the 52-week average reduction / premium from the current discount / premium, we will get the excess reduction / premium. For example, if the fund has a current discount of -5% while the 52-week average was + 1.5% (premium), the excess discount / premium would be -6.5%.
Excess Discount / Premium = Current Discount / Premium (less) Average of 52 weeks Discount / Premium
So, what is the difference between the Z score over 12 months and this measure of the excess discount / premium? Both measures are quite similar, perhaps with a subtle difference. The 12-month Z-score would indicate the cost (or cost) of the CEF compared to the 12-month period. The Z-score also takes into account the standard deviation of the discount / premium. Our measure (discount / excess premium) simply compares the current valuation to the average of the last 12 months.
Once we calculate the excess discount / premium, we will apply the filter that we will only choose funds that are negative (or <0%). This will ensure that we pay less than the average of 52 weeks.
After applying this filter, our number is only 38 funds. The list of 38 funds is presented below:
|
Teleprinter |
Excess Discount / Prem |
Leverage% |
Basic expenditure |
Distr. Rate |
Current record / Prem |
Return of the NAV since the creation |
Creation date |
Name of the fund |
|
ETW |
-7.41% |
– |
1.09% |
8.93% |
-4.78% |
5.72% |
9/28/2005 |
BdB Bd W with tax management |
|
ASG |
-6.15% |
0.86% |
1.28% |
7.19% |
-5.76% |
6.61% |
14/03/1986 |
All-Star Liberty Growth |
|
CHI |
-6.01% |
34.58% |
1.29% |
9.46% |
-4.83% |
9.40% |
6/28/2002 |
Calamos Convertible Opps & Inc |
|
CHY |
-5.70% |
34.54% |
1.28% |
9.40% |
-3.21% |
8.14% |
5/30/2003 |
Calamos Convertible & High |
|
EFT |
-4.37% |
35.33% |
1.27% |
6.32% |
-12.99% |
5.23% |
6/29/2004 |
Variable rate income EV |
|
QQQX |
-3.84% |
– |
0.92% |
7.00% |
0.45% |
10.32% |
1/30/2007 |
Nuveen NASDAQ 100 Dynamic Over |
|
RFE |
-3.43% |
34.46% |
1.30% |
6.59% |
-12.20% |
5.42% |
24/11/2003 |
Senior floating rate EV |
|
HQL |
-3.25% |
– |
1.19% |
7.71% |
-8.30% |
9.23% |
08/05/1992 |
Tekla Life Science Investors |
|
BGT |
-3.05% |
29.51% |
1.20% |
6.07% |
-12.60% |
5.11% |
30/08/2004 |
BlackRock Floating Rate Inc Tr |
|
ETY |
-2.72% |
– |
1.07% |
8.95% |
-3.99% |
6.29% |
11/27/2006 |
EV Equity Tax Managed Div Equity Inc |
|
SPXX |
-2.68% |
– |
0.91% |
6.85% |
0.06% |
6.14% |
23/11/2005 |
Nuveen S & P 500 Dynamic Overwri |
|
JFR |
-2.52% |
37.93% |
1.37% |
7.66% |
-12.37% |
5.24% |
3/25/2004 |
Nuveen Variable Rate Income |
|
JRO |
-2.49% |
37.43% |
1.40% |
7.82% |
-12.10% |
5.71% |
7/27/2004 |
Nuveen Floating Rate Inc Opps |
|
JDD |
-2.47% |
30.61% |
1.42% |
8.40% |
-9.12% |
7.36% |
25/09/2003 |
Nuveen Diversified Div & Inc |
|
EOI |
-2.08% |
– |
1.10% |
7.50% |
-3.36% |
6.87% |
10/26/2004 |
Improved equity income |
|
NSL |
-1.92% |
38.40% |
1.44% |
7.76% |
-11.72% |
5.84% |
10/29/1999 |
Nuveen Senior Income |
|
RMT |
-1.89% |
5.99% |
1.07% |
8.64% |
-11.00% |
9.62% |
12/14/1993 |
Royce Micro Cap Trust |
|
EOS |
-1.65% |
– |
1.09% |
7.20% |
-0.54% |
8.11% |
26/01/2005 |
EV Enhanced Equity Income II |
|
ETG |
-1.54% |
24.98% |
1.18% |
7.92% |
-7.99% |
6.93% |
1/30/2004 |
EV Tax Adv Global Dividend Inc |
|
GLQ |
-1.53% |
40.74% |
2.14% |
10.62% |
-6.90% |
6.14% |
4/27/2005 |
Clough Global Equity |
|
CGO |
-1.53% |
35.69% |
1.67% |
9.81% |
4.00% |
7.31% |
10/27/2005 |
Calamos Global Total Return |
|
EVF |
-1.42% |
35.84% |
1.81% |
6.44% |
-12.89% |
5.01% |
30/10/1998 |
EV Senior Income Trust |
|
LGI |
-1.31% |
13.63% |
1.45% |
6.90% |
-9.70% |
6.76% |
4/28/2004 |
Lazard Glb Total Return & Inc |
|
MGU |
-1.30% |
31.68% |
1.75% |
7.57% |
-15.37% |
7.41% |
8/26/2005 |
Macquarie Glb Infrast TR Fund |
|
BDJ |
-1.10% |
0.00% |
0.84% |
6.55% |
-8.85% |
5.35% |
8/26/2005 |
BlackRock Enhanced Equity Div |
|
GDV |
-1.06% |
23.03% |
1.35% |
6.20% |
-8.24% |
7.78% |
11/28/2003 |
Dividend and income Gabelli |
|
EVT |
-1.00% |
21.33% |
1.14% |
7.81% |
-2.79% |
8.62% |
30/09/2003 |
EV Dividend with tax benefits inc. |
|
BOE |
-0.86% |
– |
1.06% |
7.07% |
-10.83% |
5.38% |
5/26/2005 |
BlackRock Enhanced Global Div |
|
United States |
-0.62% |
0.00% |
1.00% |
9.82% |
-6.72% |
8.08% |
31/10/1986 |
Liberty All-Star Equity |
|
SWAMP |
-0.47% |
26.12% |
1.56% |
10.67% |
-2.95% |
8.79% |
6/17/2004 |
First Trust Energy Inc & Growth |
|
SCD |
-0.47% |
26.01% |
1.25% |
9.61% |
-10.66% |
5.76% |
24/02/2004 |
LMP capital and income |
|
IGR |
-0.19% |
7.77% |
1.16% |
8.03% |
-13.74% |
5.15% |
2/18/2004 |
CBRE Clarion Global Real Estate I |
|
IIF |
-0.14% |
– |
1.35% |
14.35% |
-11.85% |
9.22% |
25/02/1994 |
MS India Investment |
|
FOF |
-0.13% |
0.00% |
0.96% |
8.45% |
-5.65% |
5.10% |
11/20/2006 |
Cohen & Steers Opp closed |
|
HQH |
-0.11% |
– |
1.03% |
7.98% |
-9.48% |
10.96% |
4/23/1987 |
Tekla Healthcare Investors |
|
IQN |
-0.03% |
26.43% |
1.32% |
7.50% |
-7.38% |
9.37% |
2/28/2002 |
Cohen & Steers Qty Inc. Realty |
|
FTF |
-0.02% |
25.50% |
1.22% |
10.85% |
-7.58% |
5.67% |
8/27/2003 |
Franklin Limited Duration Inco |
|
DSU |
-0.01% |
31.49% |
0.91% |
7.67% |
-11.26% |
5.53% |
27/03/1998 |
BlackRock Debt Strategy Fund |
Reduce to 15 funds
Three-step process:
We will select the top 5 funds based on each of the three criteria.
Excess Discount / Premium:
We sort our list (of 38 funds) by discount surplus / premium in descending order. For this criterion, the lower the value, the better it is. We therefore selected the 5 most important funds (most negative values) in this sorted list.
|
Teleprinter |
Excess disk / first |
Leverage% |
Basic expenditure |
Distr Rate |
Distr Freq |
Current record / Prem |
Return of the NAV since the creation |
Creation date |
|
ETW |
-7.41% |
– |
1.09% |
8.93% |
M |
-4.78% |
5.72% |
9/28/2005 |
|
ASG |
-6.15% |
0.86% |
1.28% |
7.19% |
Q |
-5.76% |
6.61% |
14/03/1986 |
|
CHI |
-6.01% |
34.58% |
1.29% |
9.46% |
M |
-4.83% |
9.40% |
6/28/2002 |
|
CHY |
-5.70% |
34.54% |
1.28% |
9.40% |
M |
-3.21% |
8.14% |
5/30/2003 |
|
EFT |
-4.37% |
35.33% |
1.27% |
6.32% |
M |
-12.99% |
5.23% |
6/29/2004 |
High current distribution rate:
We sort our list (of 38 funds) on the current distribution rate. We select the top five funds from this sorted list.
|
Teleprinter |
Excess disk / first |
Leverage% |
Basic expenditure |
Distr Rate |
Distr Freq |
Current record / Prem |
Return of the NAV since the creation |
Creation date |
|
IIF |
-0.14% |
– |
1.35% |
14.35% |
S |
-11.85% |
9.22% |
25/02/1994 |
|
FTF |
-0.02% |
25.50% |
1.22% |
10.85% |
M |
-7.58% |
5.67% |
8/27/2003 |
|
SWAMP |
-0.47% |
26.12% |
1.56% |
10.67% |
Q |
-2.95% |
8.79% |
6/17/2004 |
|
GLQ |
-1.53% |
40.74% |
2.14% |
10.62% |
M |
-6.90% |
6.14% |
4/27/2005 |
|
United States |
-0.62% |
0.00% |
1.00% |
9.82% |
Q |
-6.72% |
8.08% |
31/10/1986 |
High return on NAV:
We then sort our list (of 38 funds) on the performance of NAV since inception and select the 5 largest funds.
|
Teleprinter |
Excess disk / first |
Leverage% |
Basic expenditure |
Distr Rate |
Distr Freq |
Current record / Prem |
Return of the NAV since the creation |
beginning Date |
|
HQH |
-0.11% |
– |
1.03% |
7.98% |
Q |
-9.48% |
10.96% |
4/23/1987 |
|
QQQX |
-3.84% |
– |
0.92% |
7.00% |
Q |
0.45% |
10.32% |
1/30/2007 |
|
RMT |
-1.89% |
5.99% |
1.07% |
8.64% |
Q |
-11.00% |
9.62% |
12/14/1993 |
|
CHI |
-6.01% |
34.58% |
1.29% |
9.46% |
M |
-4.83% |
9.40% |
6/28/2002 |
|
IQN |
-0.03% |
26.43% |
1.32% |
7.50% |
M |
-7.38% |
9.37% |
2/28/2002 |
We now have 15 funds in total from the selections above. We should see if there are duplicates among the selections above. In our current list, there is a duplicate [CHI]So we remove it and we have 14 funds left.
Last step: reduce to only 5 funds
In our list of 14 funds, we already have the best candidates as probable purchases. So, how can we get the best 5 from an already good list?
We will apply weights (from 0 to 10) to each of the four criteria:
- Current distribution rate
- Current discount / premium
- Excess of reduction / premium
- Return of the NAV since the creation
Once we have calculated the weights, we combine them to calculate a "total total weight". The sorted list of 14 funds on the combined weight is shown below. The five most important funds are highlighted.
|
Teleprinter |
Distr. Rate |
Current record / Prem |
Excess record / Prem |
Return of the NAV since the creation |
Combined weight |
Distr. Rate |
Dis / Prem |
Excess Ret |
NAV Ret |
|
RMT |
8.64% |
-11.00% |
-1.89% |
9.62% |
30.15 |
8.64 |
10.00 |
1.89 |
9.62 |
|
CHI |
9.46% |
-4.83% |
-6.01% |
9.40% |
29.70 |
9.46 |
4.83 |
6.01 |
9.40 |
|
IIF |
14.35% |
-11.85% |
-0.14% |
9.22% |
29.36 |
10.00 |
10.00 |
0.14 |
9.22 |
|
HQH |
7.98% |
-9.48% |
-0.11% |
10.96% |
27.57 |
7.98 |
9.48 |
0.11 |
10.00 |
|
ETW |
8.93% |
-4.78% |
-7.41% |
5.72% |
26.84 |
8.93 |
4.78 |
7.41 |
5.72 |
|
CHY |
9.40% |
-3.21% |
-5.70% |
8.14% |
26.45 |
9.40 |
3.21 |
5.70 |
8.14 |
|
EFT |
6.32% |
-12.99% |
-4.37% |
5.23% |
25.92 |
6.32 |
10.00 |
4.37 |
5.23 |
|
ASG |
7.19% |
-5.76% |
-6.15% |
6.61% |
25.71 |
7.19 |
5.76 |
6.15 |
6.61 |
|
United States |
9.82% |
-6.72% |
-0.62% |
8.08% |
25.24 |
9.82 |
6.72 |
0.62 |
8.08 |
|
GLQ |
10.62% |
-6.90% |
-1.53% |
6.14% |
24.57 |
10.00 |
6.90 |
1.53 |
6.14 |
|
IQN |
7.50% |
-7.38% |
-0.03% |
9.37% |
24.28 |
7.50 |
7.38 |
0.03 |
9.37 |
|
FTF |
10.85% |
-7.58% |
-0.02% |
5.67% |
23.27 |
10.00 |
7.58 |
0.02 |
5.67 |
|
SWAMP |
10.67% |
-2.95% |
-0.47% |
8.79% |
22.21 |
10.00 |
2.95 |
0.47 |
8.79 |
|
QQQX |
7.00% |
0.45% |
-3.84% |
10.32% |
20.39 |
7.00 |
-0.45 |
3.84 |
10.00 |
Final list
(RMT), (CHI), (IIF), (HQH), (ETW)
Our last 5 are the first five of the table above. The only additional factor to take into account in ensuring that our top five stocks belong to a diverse set of asset classes. For example, if we find two funds representing very similar assets (say MLPs), we will exclude one of them. (Data are as of March 29, 2019.)
|
Teleprinter |
RMT |
CHI |
IIF |
HQH |
ETW |
AVERAGE of 5 funds |
|
CREATION DATE |
12/14/1993 |
6/28/2002 |
25/02/1994 |
4/23/1987 |
9/28/2005 |
|
|
CATEGORY |
Micro Cap |
Income – Bonds |
Asia (India) |
Health care |
Covered call |
|
|
DISTRIBUTION. FREQ. |
Quarterly |
Monthly |
half-yearly |
Quarterly |
Monthly |
|
|
LEVER EFFECTIVE% |
5.99% |
34.58% |
– |
– |
– |
8.11% |
|
DISTRIBUTION RATE |
8.64% |
9.46% |
14.35% |
7.98% |
8.93% |
9.87% |
|
BASIC EXPENDITURES |
1.07% |
1.29% |
1.35% |
1.03% |
1.09% |
1.17% |
|
REDUCTION / PREMIUM |
-11.00% |
-4.83% |
-11.85% |
-9.48% |
-4.78% |
-8.39% |
|
SHARE CAPITALIZATION |
$ 331 million |
$ 710 million |
$ 291 million |
$ 862 million |
$ 1048 million |
$ 648 million |
|
UNII BALANCE |
($ 0.01) |
($ 0.09) |
($ 0.12) |
$ 7.14 |
($ 0.48) |
$ 1.29 |
|
52 WK AVG Discount / Premium |
-9.11% |
1.18% |
-11.71% |
-9.37% |
2.63% |
-5.28% |
|
Z-SCORE- 3 MONTHS |
0 |
-0.6 |
-0.08 |
0.2 |
-1.2 |
-0.34 |
|
Z-SCORE- 6 MONTHS |
-0.1 |
-0.3 |
0.1 |
0.3 |
-1.2 |
-0.24 |
|
Z-SCORE – 1 YEAR |
-0.8 |
-1.0 |
-0.1 |
-0.1 |
-1.8 |
-0.76 |
|
RTN ANNUALIZED ON 5 YEARS ON NAV |
3.93% |
5.17% |
9.49% |
6.07% |
5.29% |
5.99% |
|
RTN ANNUALIZED OVER 10 YEARS ON NAV |
13.85% |
12.46% |
12.36% |
14.71% |
9.42% |
12.56% |
|
RTN ANNUALIZED ON NAV since creation |
9.62% |
9.40% |
9.22% |
10.96% |
5.72% |
8.98% |
It goes without saying that CEFs generally involve certain risks that the investor should be aware of. They usually use some leverage, which increases the risk. This leverage also results in higher fees because of interest expense added to the base fee. In the tables above, we used the base expense only. However, three of our selections this month do not use leverage. We also want to ensure that the management team uses leverage effectively – the best way to find out is to look at the long-term returns of the net asset value. The net asset value is the "net asset value" of the fund after counting all fees and after paying distributions. Thus, if a fund pays high distributions while maintaining or increasing its net asset value, it should bode well for its investors. In addition, FEC market prices may be more volatile as they may move from higher pricing to pricing to discount (and vice versa) in a relatively short time. Market prices may fall much faster than NAV (underlying assets), especially during corrections. In general, we should avoid paying premiums in excess of the net asset value, except for very compelling reasons.
Conclusion
The underlying goal of this exercise is to find each month 5 best probable funds for investment, using the filtering process. The term "best funds" may be too strong, because they are only the best if you believe in the filtering and selection criteria. Please also note that these selections are dynamic in nature and may change from month to month (or even from week to week). As you can see, our current month list has kept three names compared to last month but has replaced two with new ones.
Nevertheless, we have tried to find funds that have a solid long-term history, offer high distribution rates, are relatively cheaper and offer a better discount / premium compared to their average of 52 weeks. We also tried to be careful not to allow duplicity of asset classes among the five funds and we selected them from a diverse group. So we think this group is an excellent watch list for future research.
Warning: The information presented in this article is for informational purposes only and should in no way be construed as financial advice, a recommendation to buy or sell shares. The author is not a financial advisor. Please always do more research and do your own due diligence before investing. Every effort has been made to present data / information accurately; However, the author does not claim 100% accuracy. The stock portfolios presented here are model portfolios for demonstration purposes.
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Disclosure: I am / we have long been ABT, ABBV, JNJ, PFE, NVS, NVO, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, EPP, D, DEA, DEO , ENB, MCD, BAC, UPS, WMT, WBA, CVS, BAS, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, XOM, VLO, ABB, ITW, MMM, LYB, HCP, HTA, O , OHI, VTR, NNN, STAG, WPC, HAND, NLY, ARCC, DNP, GOF, PCI, PDI, PFF, RFI, RNK, STK, UTF, EVT, FFC, HQH, KYN, NMZ, NBB, JPS, JPC , JRI, TLT. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.
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