Closed-End Fund Distribution Cuts For August Slow

Every first of the month we see a the larger fund sponsors report their distributions for the next month. Those include Blackrock, Nuveen, Guggenheim, PIMCO, Eaton Vance, Dreyfus, Invesco, Ivy, and MFS.

Last month, we saw Blackrock cut the distribution at many of their funds including a slew of taxables. This month there was just one change across the entire fund complex, for Blackrock Income Trust (BKT).

Eaton Vance had 3 funds cut and one fund increase their distribution. PIMCO, one of the most widely followed CEF sponsors, had no changes. There was also no changes at Nuveen for the second month in a row. But recall that in June Nuveen cut many funds, some fairly deeply. There was no changes in the distribution at Ivy or Dreyfus as well.

At MFS, many of their funds have an almost variable distribution that is dependent on earnings. We recently discussed two of them with our members in the muni space that are currently attractive.

The distribution changes in August greater than 2%:

Distribution Increase

Blackrock Income Trust (BKT): Monthly distribution increased by 29.8% to $0.0344 from $0.0265.

EV CA Muni Income (CEV): Monthly distribution increased by 13.5% to $0.0421 from $0.0371.

Voya Prime Rate Trust (PPR): Monthly distribution increased by 6.4% to 0.025 from $0.0235.

Templeton Global Income (GIM): Monthly distribution increased by 5.2% to $0.0325 from $0.0309.

MFS CA Muni (CCA): Monthly distribution increased by 2.6% to $0.04 from $0.039.

MFS Investment Grade Muni (CXH): Monthly distribution increased by 2.6% to $0.04 from $0.039.

Distribution Decrease

Invesco Muni Investment Grade (VGM): Monthly distribution decreased by 14.1% to $0.0516 from $0.0601.

EV Senior Income (EVF): Monthly distribution decreased by 3.1% to $0.031 from $0.032.

EV Floating Rate Income (EFT): Monthly distribution decreased by 2.9% to $0.067 from $0.069.

EV Senior Floating Rate (EFR): Monthly distribution decreased by 2.8% to $0.07 from $0.072.

Why Staying On Top Of Distribution Changes Is Key

The closed-end fund market is highly inefficient. In our service, we immediately send out an alert for funds that we cover when a cut happens. This is due to the inefficiency of the market which often has a large lag between when the release occurs, and when the price reacts. In some cases, it can take days for the largely retail shareholder base to realize that their income stream is going to decrease.

For example, two such instances recently included Invesco Investment Grade Muni (VGM) and Putnam Intermediate Master (PIM). PIM cut their distribution for the second time on May 18th. The first cut, on March 16, didn't effect the discount very much. The cut itself was relatively small from $0.026 to $0.025 (-3.9%) which could be why it didn't react. The second cut was deeper at -12%, going from $0.025 to $0.022.

Again, the price didn't react, at least initially. The price on the day of the second cut was $4.79, or a discount of -4.77%. The price fell 6 cents the next day in response the cut, or about 1.25%. Over the course of the next month, the price fell very slowly to $4.63, for a total loss of 3.34%. For a high quality investment grade bond fund, that is 9 months of distributions.

Compare that to VGM which reported their distribution cut on Wednesday afternoon. It only took a couple of hours before the price fell. We had immediately alerted members of the cut so that they could unload their shares. The price fell from $12.38 to $12.11 by the end of the day, a fall of 2.2%.


We've noticed that it can take anywhere from 30-120 days for a discount to "bottom".

Blackrock taxables saw general improvement in their coverage and UNII trends:


As did Nuveen taxables:


The Nuveen floating rate funds look compelling and we recently recommended one to our members. These funds cut in April and July as coverage ratios fell to the ~80% level but are now back to, or close to, 100%.

In our recent update on our Core Portfolio, we highlighted three opportunities that we issued to our members.

Opportunity #1: A closed-end fund that yields over 8% with a solid YTD performance and what we think is a great portfolio for the current interest rate environment. It is one of the few funds to raise their distribution this year. The current discount is very attractive and we think this is a great time to add the fund.

Opportunity #2: A CEF that has been pummeled in price in the last few weeks. The portfolio is a short duration, high yield strategy of mostly floating rate loans. The distribution was recently cut opening up the opportunity. The coverage is back to ~100% and there is the potential for a reversion to the mean trade as the discount appears too wide by at least 2 points.

Opportunity #3: A target term fund that will liquidate at NAV in the future. The discount has widened recently due to a small cut to the distribution a few months ago. The coverage though is now over 107% with a strongly positive UNII figure. A similar fund that is a target term for one year earlier trades at a premium. If this fund moves to a similar position, the total return will be close to double digits with relatively low risk.

In our most recent weekly commentary (out every Sunday evening), we highlighted several buying opportunities and several funds that should be sold.