Mutual Funds Review - First Quarter 2019


This is a review of the funds we typically promolgate to investors.  If we were to create a "Mutual Fund Core", these funds would constitute the bulk of the portfolio.  

Municipal Open-End Funds (Investment Grade Only)

These are investment grade only muni fund choices.  No changes to the current crop of high yield munis were made.  

Existing Holdings

1)  Oppenheimer Rochester Int Term Municipal (ORRYX)

  • ttm yield 2.57%

  • Duration 5.90 years

  • Avg Credit Quality:  BBB

  • Avg Coupon:  5.12%

  • Expenses:  1.05%

  • Performance was okay for the institutional share class (MUTF:ORRYX) but the retail version (ORRWX) suffers from higher fees.  The y-institutional share was up 74 bps last year while the retail share only 52 bps.  We would pass on the retail share class.  

2)  Performance Trust Muni (PTIMX)

  • ttm yield of 2.87%

  • Duration:  5.1 years

  • Avg Credit Quality: BBB

  • Avg Coupon:  4.93%

  • 2018 Performance 0.56%

  • Lower expenses at 55 bps.

  • For those looking for a lower minimum, use PTRMX

3)  Nuveen Strategic Muni (NSAOX

  • ttm yield 2.61%

  • Duration 8.43 years

  • Credit Quality: BBB

  • Avg Coupon:  4.88%

  • Expenses:  0.84%

  • 2018 Performance:  3.07%

  • Strong performance as it focuses on long-term munis.  


1)  BNY Mellon Municipal Opportunities Inv (MOTIX)

  • ttm yield 3.13%

  • Duration 4 years

  • Avg Credit Quality:  BBB

  • Avg Coupon:  5.22%

  • Expenses: 0.90%

  • 2018 Performance:

  • Fees are a bit high at 1%

2)  Eaton Vance Municipal Opportunities (EMOAX)

  • ttm yield:  2.29%

  • Duration is 4.35 years

  • Avg Credit Quality:  BBB

  • Avg Coupon:  4.41%

  • Expenses: 0.95%

  • 2018 Performance:

  • Fees are a bit high at 0.95% and investors should NOT pay a load.

3)  Goldman Sachs Dynamic Municipal (GSMIX)

  • ttm yield 2.76%

  • Duration 4.1 years

  • Avg Credit Quality: A

  • Avg Coupon: 4.48%

  • Fees are lower at 76 bps.  Again, do not pay a load.  Very strong performance.

On Watch

1)  Blackrock Strategic Muni (MAMTX)

  • A bad year, performance fell to the 91st percentile. 

Almost every top performer spends some time in the bottom quartile so we are not overly concerned right now.  We will keep an eye on it for now.  

Concluding Muni Thoughts

We would not make any wholesale changes to the portfolio and would continue to focus on long-term munis as they are still relatively cheap when compared to treasuries.  We still prefer to use closed-end funds for our muni exposure but the opportunities right now aren't the best.  We have been adding to open-ends as discounts have tightened, funds have cut (or we believe will cut in the case of MHI) and there's a lack of opportunities.

Taxable Bond Mutual Funds

All the taxable funds did very well on a relative basis.  While PIMCO Income (PONAX), a core fund, was modestly positive, most of the funds we picked below were up 1-4% providing much better bang for the buck.  

Summary Performance:

The funds we selected nicely outperformed the market in 2018 (six for six).  We think that will continue.  The AGG is up 1.05% this year mostly because interest rates have fallen.  Should they reverse, you'll likely see the six funds above the index outperform again.  


This is a traditional multisector fund that is approximately 10-12% leveraged and invested across a host of asset classes.  The fund was previously like AlphaCentric Income Opportunities (IOFIX) with a large non-agency MBS position.  However, the fund has grown rapidly over the last several years diluting out that position.  Today, the fund is similar to other "total bond" funds with a mix across most sub-asset classes.

Fund Characteristics:

  • $111B AUM

  • 5.17% Yield

  • 1.14% Expense Ratio

  • 2.36 years Duration

The five-star fund is made up primarily of securitized credit, government bonds, and some corporates across the credit quality spectrum.  


ver the last year, the fund performed in line with the benchmark index.  The fund is unlikely to perform as it did in years past as the primary driver was those non-agency MBS.  Still, the fund should outperform the Barclays US Aggregate over a multi-year period.  

This is a great fund to hide out in for the investor who likes to lighten up on CEFs during times of rich valuations (sort of like now).  The fund generates a 5%+ yield.  

You can see the fund manager's fact sheet on PONAX here.

Semper MBS Total Return (SEMMX)(SEMPX)

The Semper MBS Total Return Fund seeks to provide a high level of risk-adjusted current income and capital appreciation.   Under normal market conditions, the Fund invests at least 80% of its net assets in mortgage-backed securities (MBS), including residential MBS (NASDAQ:RMBS) and commercial MBS (NYSEARCA:CMBS). RMBS and CMBS include securities issued by government sponsored entities (Agency MBS), and by private entities (Non-Agency MBS). 

Fund Characteristics:

  • $1.9B AUM

  • 4.12% Yield 

  • 1.09% Expense Ratio

  • 1.29 Duration

The fund is comprised mainly of 69% non-agency MBS with another 22% of commercial MBS.  The ratings on the funds are mostly subprime and new issues.  



The fund has performed extremely well over the 3 year look-back.  When compared to the benchmark, we have used the Barclays Capital US MBS Index Fund, SEMPX has outperformed handily.  The below one year chart shows the steadiness of the NAV.  In the fourth quarter, the NAV fell less than 1%.  

Over the past 5 years, the fund has a positive alpha of 5.41. This means that managers in this portfolio are skilled in picking securities that generate better-than-benchmark returns.  Lastly, the fund's 3-year standard deviation of 2.05% compared to the average of 8.93%, means the fund is far less volatile than the average.

Overall, this fund continues to be a great piece of a diversified portfolio.  It helps ballast out the more volatile CEFs in the fixed income bucket.  My largest worry is how long they can continue to accept new cash and how they will deploy it.  The fund should continue to generate 3-5% total returns over the next year-plus.  

You can see the fund manager's fact sheet on SEMPX here.  

Performance Trust Strategic Bond (PTIAX)

PTIAX is a multi-sector bond fund that seeks to provide income and capital appreciation by investing in undervalued domestic fixed income securities.  The Fund can invest in a variety of domestic fixed income sectors including mortgage-backed securities (MBS), corporates, municipals, other structured credit securities, treasuries, and cash. 

Fund Characteristics:

  • $1.7B AUM

  • 5.60% Yield

  • 0.83% Expense Ratio

The fund is similar to SEMPX in that its made up of mostly Non Agency rMBS and other MBS.  They invest in a mix of undervalued MBS, as well as munis, corporate securities, and some treasuries.



The fund performed well in the last year, especially during the sell-off in the fourth quarter.  The fund takes on significantly less credit risk than other multisector bond funds.  As spreads widened, the fund was far less susceptible to declines.  The fund also has 17% in taxable munis , 12% in tax-free munis and 6% in treasuries, all providing a boost in the fourth quarter.  


Objective: To purchase undervalued fixed income assets and achieve investment returns through investment income and potential capital appreciation.

The fund is a great place to park capital in larger quantities and get widespread exposures with a stellar portfolio made up of non-agency MBS at its core and also some munis, high yield and other assets.  

Fact sheet here.

AlphaCentric Income Opportunities Fund (IOFIX)

The fund seeks to generate current yield and total return via investments in often overlooked segments of RMBS, ABS, and securitized markets.  AlphaCentric looks to achieve current income by implementing an alpha-driven, "principles-based" investment process focusing on complex and hard to source asset-backed investments. 

The Fund focuses on non-agency RMBS, although the Fund can invest where management finds value. The management team's clearly-defined, niche focus is the core of the RMBS strategy's success. These ABS may encompass aircraft, shipping, and transportation assets, and may include many other sectors as well. The Fund's allocations in these various asset classes depends on the management team's assessment of the risk-adjusted return potential in the marketplace at a given time. Securities in the Fund will generally have an average duration of less than five years. (Source:

Fund Characteristics:

  • $2.54B AUM

  • 5.07% Yield

  • 1.52% Expense Ratio

  • 2.7 Duration

This fund differs in that almost the whole fund is RMBS.  


The fund has outperformed the index by a whopping 22% over three years and has been the number one fund in the category the last two years.  The fund is already up 83 bps this year.  

This is a solid article on IOFIX:

The fund's non-agency MBS focus is at the core of its strategy.  Expenses are a bit high but that is partially by design to keep fund flows manageable and not hurt returns.  Turnover is just 31% which shows the fund's buy-and-hold strategy within the MBS and ABS sectors.  This fund is a bit more volatile than SEMPX but very similar in its focus and execution.  

American Beacon Sound Point FlRtIn Inv (SPFPX) 

The fund invests primarily in floating-rate instruments of non-investment grade U.S. corporate issuers, broadly diversified across industry and sector.  They use an in-depth, bottom-up, fundamental approach with the goal of minimizing credit and default risks.  Sound Point believes alpha generation is driven by active management and being highly selective in the new issue market and nimble in how it invests. They aim to achieve lower volatility than the overall market, particularly in periods of dislocation. (source:

 Fund Characteristics:

  • $1.94B AUM

  • 4.86% Yield

  • 1.09% Expense Ratio

  • 0.2 Duration


The composition is spread over almost the whole range of sectors, weighted most heavily in the consumer (35%), Communications (16%), and Tech (15%).

The fund has mostly B rated bonds.

The performance over the last year is indicative of the floating rate sector in general.  Floaters saw a strong first nine months of the year followed by a disastrous December and recovery YTD.  

We would much rather play the floating rate space from the closed-end side, especially given the wide discounts.  For example, some of Nuveen's floaters recently raised their distributions and trade at double-digit discounts which are about 2-3 points below their 52-week average.  Check out JRO, NSL, and JFR.  

Angel Oak Multi-Strategy Income A (ANGLX

The fund seeks the best risk-adjusted opportunities in fixed income that offer the potential for both stable, monthly dividends and price appreciation. The Fund employs a top-down strategy to identify relative valuation opportunities within the structured credit markets and a bottom-up credit selection process to selecting individual issues. The managers will invest opportunistically across a wide range of credits and issuer types based on relative value within fixed income. 

Currently, the Fund has a bias towards credit and low duration assets to manage interest rate risk. This bias is not set for the long-term and may change over time as the managers’ view on the global economy, interest rates and capital market conditions change. The team does not manage the portfolio’s asset allocation to resemble the Fund’s benchmark in a relative sense, but instead positions the portfolio with a focus on absolute return.

Fund Characteristics:

  • $7.4B AUM

  • 4.34% Yield

  • 1.24% Expense Ratio

  • 1.7 Duration

The fund is two-thirds Non-Agency RMBS with the balance being mostly  CMBS. Quality is mostly speculative with over 60% high yield or not rated.


Another fund that slowly generated positive return throughout the year and saw only a mild drawdown in the fourth quarter.  

Concluding Thoughts

These funds are what we believe are the best positioned without taking on significant amounts of undo risks.  They have large allocations to the areas of the fixed income market where we want to be, namely non-agency MBS.  They should offer up 2-4% returns, at a minimum, over the medium term.  While we believe the CEF space offers up better total return, for those that need lower volatility, pairing the mutual funds with the CEFs can help produce more ballast.  

Please let me know if you have any questions.


YH Power Rankings Report | February 2019

For those that are familiar with the ESPN NFL Power Rankings, which rank the teams from 1-32 based on the opinions of several staff members, than this analysis will be familiar to you. Here we are ranking the entire CEF universe (~580 funds) using several factors and then applying a scoring methodology to it in order to rank the funds.

We will be doing this each month in order provide a starting point for analysis and due diligence.

What are we looking for here and how are we ranking?

Coverage: > 99%, 
UNII: > 0 Yield: Higher is better, 
Discount: Lower is better, 
Z-Score: < -1 (lower is cheaper)


In aggregate, we had only 15 funds meet the screen.  Thus, we relaxed the UNII threshold (eliminating it) and the z-score screen to -0.5 to include more funds in our results.

That widened the field to some 36 funds.

10 Largest Discounts

But where the coverage is above 99% and the shares trade at a discount. Sorted by discount ascending.


10 Highest Yields

But where the coverage is above 99% and the shares trade at a discount. Sorted by descending yield.


10 Lowest Z-Scores

But where the coverage is above 99% and the shares trade at a discount. Sorted by ascending z-score.

10 Highest Overall Score

But where the coverage is above 99% and the shares trade at a discount. Sorted by descending overall score.  The scoring takes into account the all four factors that we look at:  discount, earnings coverage, total yield, and one-year z-score.  By combining the four factors we are able to produce a total score.  

Looking Deeper Into RMR Real Estate Income (NYSEMKT:RIF)

RMR Real Estate Income (RIF) is a relatively illiquid fund (35K daily shares traded) that invests primarily in real estate companies.  These are so-called eREITs that dominate the REIT sector.  

The investment policy:

Generally, in normal market conditions, we expect that: (I) at least 90% of the Fund’s managed assets will be invested in income producing securities issued by real estate companies, including common shares, preferred shares and debt; and (II) at least 75% of the Fund’s managed assets will be invested in securities issued by REITs, and (III) no more than 10% of the Fund’s managed assets will be invested in securities denominated in currencies other than the U.S. dollar or traded on a non-U.S. stock exchange.

The portfolio has 80% in stocks and 20% preferreds of REITs.  

The top ten holdings are skewed towards the larger REITs in the sector with a large and diverse holdings base.  



  • Total Net Assets:  $339M

  • Leverage:  31.2%

  • Expense Ratio: 2.57% (including interest expense)

  • Daily Trading Volume:  35,000

  • Current Discount to NAV: 22.6%

  • 52-Avg Discount to NAV:  19.75%

  • Distribution Amount:  $0.33 paid quarterly

  • Distribution Yield:  7.42%

As we noted the fund invests in securities that pay a high level of current income on common stock.  The second primary objective is to earn capital appreciation.  

In September of 2017, the fund completed their rights offering issuing another 2.5 million shares at an average price of $17.75 raising another $45 million in common equity capital.  At the same time, they raised their borrowing capacity to $88 million from $28 million through their revolving credit facility at BNP Paribas.  The interest rate on that leverage is libor plus 95 bps.  

About RMR:

RMR Advisors LLC, the adviser to RMR Real Estate Income Fund (RIF), was founded in 2002 and is focused on investing in real estate securities, including real estate investment trusts (REITs) and other dividend paying securities. As of September 30, 2018, RMR Advisors LLC had approximately $336 million of assets under management. RMR Advisors is a wholly owned subsidiary of The RMR Group LLC.

About The RMR Group LLC The RMR Group Inc. (Nasdaq: RMR) is a holding company and substantially all of its business is conducted by its majority-owned subsidiary, The RMR Group LLC. The RMR Group LLC is an alternative asset management company that was founded in 1986 to invest in real estate and manage real estate related businesses. RMR’s business primarily consists of providing management services to:

  • Five publicly traded eREITs

  • One publicly traded mREIT

  • Three real estate operating companies

  • One closed-end fund focused on investing in real estate securities

  • Other private funds and accounts that invest in real estate securities


When analyzing a fund that invests in equities, one of the first things one should do it compare the total return NAV performance against key benchmarks.  This fund incepted back in late 2003 and has been around for more than 15 years.   Below shows that cumulative performance.  


Remember, RIF is a levered CEF, meaning that they are allowed to 'amplify' their returns.  But you can see a simple Vanguard passive ETF, the (VNQ) did far better without the leverage.  This tells me that either the addition of leverage on an already volatile asset class isn't helpful or the management team at RMR isn't strong at selecting securities (the active management). 

Fees are another consideration.  A pure equity CEF that charges 1% in management fees with no leverage, should trade at a sizeable discount.  While this exercise is not exact, think of it this way.  If you can get plain vanilla beta exposure through VNQ for 12 bps, you save nearly 1% per year.  If total returns are expected to be around 6% per year, then you are giving up 16.6% of the return.  All else equal, a $10 NAV fund with a $0.50 annual payout (5%) then should trade around $8.33 for a 16.6% discount in order to generate a distribution yield of 6%.  That is a warranted discount and one investors should not expect to close.

We have mentioned this several times about some big name CEFs including the Boulder Growth and Income (BIF) which trades around a 16% discount.  The fund owns some plain vanilla large-cap equity names including Berkshire Hathaway, JP Morgan, Cisco Systems, Yum Brands, Caterpillar, and Wells Fargo, amounting to over 58% of the total portfolio.  It would be very easy for an individual investor to replicate that portfolio themselves and avoid the egregious 1.28% management fee.  

Given these aspects, we do not think the fund is investable even at these levels.  Nor do we think BIF is a good investment.  

You may be asking why we analyzed a fund we did not like.  The exercise was on purpose as RIF was the top scoring fund, from a quantitative perspective.  However, when we delve into the fundamentals, the fund is a dog.  This is why investors should focus on both fundamentals and the quantitative aspects.


Monthly YH CEF Report | Distribution Cuts Slow Significantly In February

In the February Monthly YH CEF report we highlight distribution cuts for February that were significantly reduced with only two funds reducing their payout this month by more than 2%.  This was down from 5 funds last month and the 27 we saw in December.  Last month, there was only one fund increase of 3% or more while February had six.  Have we turned a corner?  

Last month, the big winners were municipal funds as interest rates fell back from interim highs and the safety of munis were once again realized.  At the start of January, the average muni fund traded at an 11.4% discount to NAV.  Today, that number is down to just over 6%.  

We recently gave a muni update where we highlighted the funds that were likely to make the largest 'convergence trade.'  Those are funds that were trading well below their 52-week average and likely to close that spread (as there was no fundamental reason for the spread widening other than tax loss harvesting in December and thin trading).  One of those funds (number 2 on our list) was the Eaton Vance Muni Opps Trust (EOT).  At the time, the fund was trading over a 7% discount, well below the 52-week average, which was less than 2%. Often when we see that type of spread in a muni fund, it is due to a recent distribution cut but that was not the case for EOT.

Well, EOT rose from that large discount to a recent premium (hitting a 1% premium on Friday February 3rd).  We then got hit with a distribution cut after the market closed to the tune of 5.8%.  It remains to be seen how the price will react on Monday morning. 


Here are the rest of the distribution changes from February 1st:

Distribution Increase (greater than 2%)

Templeton Emerging Market Income (TEI): Monthly distribution increased by 8.9% to $0.0713 from $0.0655.

Templeton Global Income (GIM): Monthly distribution increased by 8.1% to $0.0401 from $0.0371.

Eaton Vance CA Muni Income (CEV): Monthly distribution increased by 5.9% to $0.0446 from $0.0421.

Nuveen Floating Rate Income (JRO): Monthly distribution increased by 3.31% to $0.0625 from $0.0605.

Nuveen Senior Income (NSL): Monthly distribution increased by 2.8% to $0.0365 from $0.0355.

Nuveen Floating Rate Income (JFR): Monthly distribution increased by 2.5% to $0.0615 from $0.06.

Distribution Decrease (greater than 2%)

Eaton Vance NY Muni (ENX): Monthly distribution decreased by 7.4% to $0.0415 from $0.0448.

Eaton Vance National Muni (EOT): Monthly distribution decreased by 5.8% to $0.0809 from $0.0859.

The Nuveen floaters saw another round of modest distribution increases in February after they increased it in October of last year- again modestly.  We wrote in mid-January in "Why Floaters Look Attractive Despite Lowered Rate Expectations" that we were likely to see a rebound in floaters and potentially higher distributions given the continued increases (at the time) in libor. 

Discounts on taxable and tax free bond funds continue to contract as calm returns to the market.  We use the VIX (volatility index) as a gauge for discounts.  On Friday, the VIX fell to a two-month low of 16.1, supporting the trend.  


The chart below shows the weekly discounts for bond CEFs going back to early November.  


All 34 sectors on the CEFConnect database showed positive performance on price and NAV for the month of January.  In addition, all 34 sectors saw discount tightening.  The best performer was the MLP sector which had a price increase of 23.7% and NAV increase of 21.6%.  The worst performer was taxable munis which saw prices rise by 2.7% while NAVs were essentially unchanged.  

Latin American equity finished the month at the largest discount to NAV at -13.9%, followed by global real estate at -12.8%, and convertibles at -12.6%.  

Few sectors finished the month with a negative z-score and those that did were only at a marginally negative value.  This is a far cry from where we were 31 days ago as nearly all sectors were negative and most below -1 with several at -3 or lower.  Today, the most expensive sectors are the Taxable Muni space, Asian Equity, Latin American Equity, and Preferreds.  The most undervalued are non-US Equity, Global Growth and Income, and Senior Loans.

The question now becomes, is the January effect all but over?  

We opined to our members in December that this year (2019) could be the largest 'January Effect' in quite some time. The January Effect is the rebuying of closed-end funds after the wash sale window passes. Many investors sell their losers in November/ December and rebuy them in January in order to capture the tax loss. The chart below shows the movement in discounts in the given months. November typically sees the greatest amount of tax loss selling while January sees a sharp snap back.


We will have a report out shortly discussing various top ten statistics in the fourth quarter and so far YTD.

As we have been discussing, we do think that discounts could tighten beyond their 52-week averages and likely rival their 52-week highs.  We recently issued a convergence trade report that we will now do regularly on a monthly basis.  Those are a great start to hunt for some total return opportunities with idle cash that you want to put to work.  

The Takeaways

There are two narratives here.  The first is that there aren't many screaming bargains anymore.  Discounts have tightened back towards their averages and those that were too fearful to buy during the depths of the bear market are now kicking themselves for now doing so.  It is always very difficult to buy when everything is dropping and the financial press is calling for Armageddon.  I mean, how many people were calling for a recession just 30 days ago?!

The fourth quarter was a great lesson in behavioral trading and contrarian investing.  Buying when these funds are at a deep discount can reap significant rewards.  While I didn't expect that to be one month later, it is always impossible to know with foresight how exactly things will play out. 

The second, and probably more important lesson, are the distribution changes and where they were derived.  Floating rate funds again saw some distribution increases which gives us some confidence in our call about floating rate funds being severely undervalued despite given that the Fed appears to be on hold.  On the same note, municipal funds again saw little in the way of distribution cuts for the second month in a row.  Are we done with those given the move higher in rates?

The chart below shows the relative UNII for tax-free muni funds over the last several years.  The flattening of the trend is not a surprise.  In fact, it is expected after all the distribution cuts were saw in the last year.  It gets back to the cycle that we continue to see.  1)  Pay out a higher dividend and drain UNII until calls force you to cut the payout.  2)  Coverage goes back to 100% or greater and UNII balances stabilizes (perhaps grow a little).  3)  Calls then erode earnings and distribution coverage falls again.  Repeat back to 1.


In other words, we are sanguine on the cessation of distribution cuts to the muni space.  On the taxable side, we could be seeing less simply due to average yields on corporate bonds rising back to the 5-7% range.  When you combine the wider spreads and overall higher rates on treasuries, effective yields across the corporate yield curve is higher.  Those higher yields could be enough to stem the headwinds from rising leverage costs.    

The fourth quarter was frustrating for many investors.  Countless noobie CEF investors gave up and decided to "change investment strategies" or "go in a different direction for yield."  Those are the marginal CEF investor that really shouldn't be in the space in the first place.  We wrote an article last year titled, "CEF Investing:  Is Your Stomach Strong Enough?".   Investors should read it twice before considering investing in closed-end funds.  That said, the opportunities that were apparent a month ago are gone.  However, we do think there is still significantly more upside to go.  


Weekly Commentary | February 10, 2019


Stocks managed to eek out another weekly gain last week, the seventh consecutive as the bear market of the fourth quarter seems like a distant memory.  Energy lagged while utilities and industrials outperformed.  

For us, the important points to highlight first and foremost is the VIX which hit a 5-month low on Wednesday before inching higher the rest of the week.  At 15.7, the index is less than half what it was during the week of Christmas.  


Global growth concerns remain the most pressing risk the market is facing.  Last week, Eurozone policymakers cut their economic growth forecasts to a 1.3% annual rate in 2019, down from 1.9%.  The bulk of the slowdown is being blamed on slowing Chinese demand for their products.  

We have also been fading the trade deal optimism in the last couple of weeks as news came a few days ago that President Trump and President Xi will not meet when Trump visits Asia later this month.  Nonetheless, top trade officials including Lighthizer and Treasury Secretary Mnuchin are flying to Beijing this week to continue talks.  

Lastly, the Fed Chief Powell said this week that the economy is "in a good place".  We received ISM services data last week that while still at a high level, did slow for the second consecutive month.  Powell had dinner with Trump at the White House where they discussed recent economic developments and forecasts.

Some other key news during the week was a federal judge approving the restructuring of $17B of bonds backed by Puerto Rico Urgent Interest Fund Corporation, known as COFINA.  Bondholders agreed to a deal that would split revenues from the sales-tax backed debt and the government.  It was one of the largest deals done so far in the Puerto Rican bankruptcy process.  PR muni bonds rallied on the news.

Concluding Thoughts

Nothing has changed from the narrative of the last few weeks.  We still have the trade overhang, the government shutdown looming, and global growth slowing as the major risk impediments.  The market doesn't seem to be too phased by them.  The major trends in the market are in place and incremental news on any of those three subjects can move it but not de-rail the trend.  

High yield bond spreads are still elevated above the post-recession lows.  The index sits at 429 bps as of last Thursday (Friday's data isn't posted yet).  This is still ~90 bps above the 3.35% registered in September.  As the VIX cools and the risk-on sentiment in corporate bonds continues, the spread should continue to inch lower.  That should be supportive of bond CEF NAVs across or portfolios.  

The same could be said of the investment grade option adjusted spread which sits at 134 bps, well above the levels set in early 2018 when it reached just 90 bps.  

From JP Morgan: 

US equity outlook – the SPX is consolidating and digesting but the rally isn’t over just yet (although the upside potential isn’t dramatic). ~$172-173 (EPS) and 16x (PE) are still reasonable numbers and they support the SPX at ~2750 (investors should be wary of chasing beyond 16x/~2750 but given how emotional this market can get, an overshoot could easily occur and ~16.5x would put the index at ~2800). Investors have plenty to be nervous about (including the ongoing growth softness in Europe and the risk this drags the other major geographies down with it) but US trade policies shouldn’t be high on the list (trade rhetoric will stay a problem though). • Some of the next major macro events to watch in the weeks ahead: China’s Jan trade data (Thurs morning 2/14), US gov’t funding expiration (Fri 2/15), FOMC minutes (Wed 2/20), flash PMIs for Feb (Thurs 2/21), Powell’s Senate testimony (Tues 2/26), Powell’s House testimony (Wed 2/27), TrumpKim summit (2/27-28), US Q4 GDP (Thurs 2/28), US-China ceasefire deadline (3/1), US jobs report for Feb (Fri 3/8).

Closed-End Fund Analysis

Distribution Increase

Pioneer High Income (PHT):  Monthly distribution increased by 3.9% to $0.0675 from $0.065.

Distribution Decrease

Pioneer Muni High Income (MAV):  Monthly distribution decreased by 19% to $0.0425 from $0.0525.

Delaware Div & Income (DDF):  Monthly distribution decreased by 2.9% to $0.0887 from $0.0913

Delaware Enhanced Global Div & Income (DEX):  Monthly distribution decreased by 2.2% to $0.0887 from $0.0907

IPO/N-2 Filing

Cushing Real Income & Preferred Fund - the fund filed an N-2 on Feb 1 to list their shares.  The ticker and the IPO date will be announced shortly.  

Activist Trading

First Trust Portfolios 


SIT Investment Associates



Tender Offer

China Fund (CHN):  The fund announced the expiration of their tender offer to purchase up to 30% of the fund's issued and outstanding shares.  

  • Based upon current information, approximately 11,800,248 Shares, or approximately 75.05% of the Fund's Shares, were tendered and not withdrawn through the Termination Date, including shares tendered pursuant to notices of guaranteed delivery. Because the number of shares tendered exceeded 30% of the Fund's outstanding Shares, the Fund will repurchase the maximum number of Shares covered by the Offer (4,716,803 Shares) using the pro-ration procedures described in the Offer to Repurchase included in the Fund's tender offer materials provided to stockholders.


Alliance CA Muni Income (AKP):  The fund announced that the board of directors has approved the liquidation of he fund, subject to shareholder approval. 

  • It is anticipated that the Plan of Liquidation and Dissolution will be submitted to ACMIF's stockholders at a special meeting to be called for that purpose on April 26, 2019. The close of business on February 19, 2019 has been fixed as the record date for the special meeting of stockholders.

 Investment Policy Change

Blackrock Credit Allocation Income (BTZ):  The board changed the non-fundamental investment policy.  The change is meant to increase the flexibility of the fund to continue to invest in what Blackrock thinks are the most attractive credit opportunities.  The change is expected to take place as of Feb 8th.  

The main shift in policy changes the amount that the fund can invest in non-US securities from 35% to 50%.  This may include dollar-denominated and non-dollar denominated securities.  

  • New Policy: Under normal market conditions, up to 50% of the Fund’s Managed Assets may be invested in non-U.S. securities, which may include securities denominated in U.S. dollars or in non-U.S. currencies or multinational currency units. Average Credit Quality. The Fund’s existing investment policies permit it to invest, under normal market conditions, without limitation in securities rated below investment grade at the time of purchase.

  • Notwithstanding this policy, the Fund has previously disclosed that it was anticipated, under then-current market conditions, that the Fund would have an anticipated average credit quality of at least investment grade. BlackRock currently intends to manage the Fund’s credit quality in accordance with its stated investment policy, which means that at times the Fund’s average credit quality may be at or below investment grade. There are no changes to the Fund’s investment objective or to other investment policies of the Fund.

Weekly CEF Statistics

First, the stats on the Core funds showing the top and bottom 5 price movers, NAV movers, highest premiums, largest discounts, highest and lowest yields, and z-scores.


We extend that to all ~580 closed-end funds and show the same statistics across the entire CEF space.

The largest NAV gainers by sector this week were real estate and taxable munis.


The largest NAV decliners on the week:


The largest price gainers on the week:

The largest price decliners on the week:

The top ten funds that saw the most discount change in the last week to the positive side (meaning discount tightening or premia build):


The top ten funds that saw the most discount change in the last week to the negative side (meaning discount widening):



We have moved from "everything is a buy" to a slightly overvalued position in a relatively short amount of time.  It was only a few weeks ago that EVERYTHING on the Google Sheets was rated "Buy".  We even had 3 "Strong Buys" at the time.  Today, just four positions are rated "Buy" and we have three that are rated "Sell".  This tells me the paradigm has shifted drastically.  While there can be some dislocations in the CEF space, in general, discounts tend to gyrate together.  In other words, discounts tend to tighten in unison and widen in unison.  

Overall, credit is in risk on mode and that is very much apparent in CEFs.  Funds that traded at 10-15% discounts just a couple months ago are now trading near par.  And yet nothing has changed as they have the same risks within them today.  

Let's again look at some pricey CEFs that have run up considerably in the last month.  The taxable bond CEF space is one of the more 'expensive' with z-scores routinely above 1.5 and several above 3.0.  We think this is the time to start lightening up on exposure if you are heavily in "risk on" mode and are aggressively positioned.  Here are some suggestions:

Bancroft Fund (BCV):  This is a fund we've owned for more than a year now and it has been a turbulent time.  Still, the trade has been a profitable one with a total return of over 15%.  Most of this was made during the first three months of last year, then it promptly erased those gains in the fourth quarter.  However, YTD, the fund is up over 13.8%.  The fund is largely tied to the tech sector given most convertibles are issued by tech companies.  At a 9.5% discount, the fund is still trading at a relatively wide absolute discount but is tighter than its 1, 3-, and 5-year average discounts in the 11-12% range.  Much of that discount is likely due to the lower distribution the fund pays (quarterly).

Guggenheim Taxable Muni (GBAB):  This fund has been extraordinary!  In the last 3 months, the total return on price is up over 14%.  As we have noted, this fund has zigged while the market has zagged.  I think investors have recognized that and are adding this high quality fund to their portfolios, regardless of the valuation.  That said, they recently released their semi-annual report that showed some weakness in net investment income.  NII was down to $1.30 annualized, from $1.48 last year.  In addition, they have a likely call wall coming up in the near future (less than 2 years).  We are doing some research (they do not report calls but apparently will be doing so shortly).  For now, we are holding or even taking some small gains.

Other Notes:

Eagle Point Credit (ECC):  This is a popular fund with the retail investor community.  It is a high yield, high risk fund trading at a 28% premium.  The fund only reports its NAV quarterly and in the fourth quarter, saw an 18.6% decline.  Clearly the market believes that given the market rebound, the NAV is going to jump significantly when reported in late April.  That is likely but I do think it's unlikely it jumps by 28% to leave the shares at par.  Plus, things have to stay on the same track as they are now for another 45 days.  It just seems like this is priced for perfection and even then over-valued. 

EV Enhanced Equity Income II (EOS):  This is a fund that has a slight overweight to tech shares and has performed well over long time periods (3-, 5-, and even 10-years).  The fund is up an astronomical 16.4% YTD while the NAV is up 8.6%.  That has resulted in a 6.1% premium and a one-year z-score of +2.20.  The last time the fund was this overvalued, it underperformed the S&P significantly.  


Those that own it, including myself, may want to consider swapping to similar funds like ETY, SPXX, EOI, and BOE.  From the chart below, you can see that the funds all showed similar performance on NAV over the last six months.  BOE did a bit better given its more conservative holdings and strategy.  

Instead of owning EOS at a +2.20 one-year z-score, you could swap to a fund like EOI which has performed similarly and yet trades at a 3.15% discount and has a -0.40 one-year z-score.  While -0.40 isn't a screaming bargain, it is a lot cheaper than EOS.  

MAV/MHI Distribution Cut

The big news on the week was the cut to the distribution of MAV.  This is something we had anticipated given the material deterioration of the financials.  The alert when out when MAV cut and the price fell sharply.  The price went from $11.05 to $10.46 in four trading days, a decline of 5.3%.  That is well below the 19% cut in the distribution.  The yield is down to 4.88% from almost 5.55%.  We would not be adding here as we've seen discounts widen for over 2 months after a large cut.  


MHI saw a decline in sympathy but is still near its 52-week average in discount and yielding 5.60%.  We still think a distribution cut is likely coming though the NAV is rising nicely.  For now, better to be safe and cautious and move into better situated funds that are less likely to cut.  


Yield Hunting Newsletter | February 2019 Commentary And Sheets

Yield Hunting Newsletter | February 2019 Commentary And Sheets


  • We saw one of the sharpest rebounds in the market (all markets) that I can personally ever remember.

  • Discounts on closed-end funds have recovered substantially with the average fund closing in on their 52-week average.

  • Our call on the economy not going into recession seems to be the correct one and the market swoon a Fed-induced bear market.

  • The game plan for the next month is to continue to heal our portfolios and hopefully get back close to new highs, then de-risk some.

  • YH has a bunch of exciting things coming in 2019 so stay tuned!

YH Convergence Trade Report | February 2019

Dear Members:

This is the first in will be a monthly report on the funds that appear to have a convergence trade opportunity.  A convergence trade is a closed-end fund that is trading at a wider-than-usual discount and is likely to close that discount.  On some occasions, the discount is warranted, most likely because they cut the distribution.  Other times, they are trading wide because of the sector being out of favor or general market weakness.

We look at our table to see those funds that are trading well below their 52-week average.  We further looked at how far off fund were from their 52-week highs.  Given the favorable Fed backdrop - basically a green light for CEFs- we think it is highly possible that they re-reach those 52-week highs in premiums.

Please note, this is not a blanket buy recommendation of these funds but a starting point for further analysis.  

There is a lot of data below- do not be intimidated!  The keys here are the two grey columns on the right side of the table.  The "convergence opp" column (third from the right) shows the amount of potential discount closing if the fund were to get back to their 1-year discount (recall that we said we thought discounts could exceed their 1-year levels and approach 52-week highs).  The second to last column (green labeled "52W Disc High %") on the right shows the 52-week high in discount/premium.  The last column shows the amount of discount tightening that would be needed in order for it to reach those 52-week highs again.  

Remember, sometimes discounts exist for a reason - most likely because the distribution has been cut.  I'd love to start a discussion and get a conversation going on some of these opportunities.  Please leave comments below or join us on the chat during the market hours.  

Image 1 Categories:  Convertibles, Covered Calls, Energy/Natural Resources, Equity, European Equity, General Equity, Global Equity


Image 2 Categories:  REITs, Healthcare, High Yield Bonds, Hybrid/Balanced, Investment Grade, Limited Duration, Loan Participation, Non US Equity

Image 3 Categories:  MLPs, Mortgage Bonds, Multisector, US Government - TIPs, Utilities, Municipals


For those that are looking for a quick and reduced universe of funds to investigate, check out these funds.  Watch for those that have recently reduced their distribution.  

Again, if you think you've found a gem in the rough, comment below or send me a quick personal message and we dig deeper.


Guest Post Blue Harbinger: Attractive Income As Healthy Blue Chip Sells Off (Options Trade)

This is the second of our dividend stock series of exclusive articles from Blue Harbinger's The Value and Income Forum.


We just placed a new high-income-generating options trade on a healthy dividend paying blue chip stock that just sold off.

We believe this is an attractive trade to place today, and potentially tomorrow, as long as the share price doesn't move too dramatically before then.

We just placed a new high-income-generating options trade on a healthy dividend paying blue chip stock that just sold off. We believe this is an attractive trade to place today, and potentially tomorrow, as long as the share price doesn't move too dramatically before then.

The Trade:


We Sold PUT Options on Caterpillar (CATwith a strike price of $115 (7.5% out of the money), and expiration date of February 15, 2019, and for a premium of $1.05. That’s an extra 10.7% income for us on an annualized basis (1.05 / 115) x 12 months). If the shares get put to us before the options contract expires then we're happy to buy the shares of this blue chip dividend-payer at the lower price of $115. And if the shares don't get put to us, we still get to keep the extra income we generated no matter what.

Your Opportunity:

We believe this is an attractive trade to place today and potentially tomorrow as long as the price of Caterpillar doesn't move too dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 10%, or greater.


Our Thesis:

Caterpillar is an attractive long-term investment with a healthy dividend and trading at an attractive price relative to its long-term value. Near term technical conditions and fear related to the China "trade war" have already caused the share price to sell off too far (management just provided weaker 2019 guidance than previously expected). But because of the attractive premium income, and because we understand near-term volatility can drive the share price lower, we've elected to sell the puts (instead of buying the shares outright), which gives us the chance to pick up the shares at an even lower price (if they fall below the strike price and get put to us before expiration). Important to note, because near-term volatility and fear are higher, so too is the premium income available in the options market and on this trade specifically.

Near-Term Volatility:

Caterpillar announced earnings on Monday, and the market didn't like it. In particular, the company's revenue continued to grow across segments (construction revenue was up 8%, the resource industries segment grew 21%, and the energy and transportation segment grew 11%), but margins were weaker than expected (particularly in the construction segment where operating margin declined to 14.8% from 15.8%) and management provided lower than EPS guidance for 2019 than the Street was expecting (2019 GAAP EPS guidance of $11.75 to $12.75, versus the Street's expectation of 12.73). Global trade headwinds and fear (particularly related to China "trade wars") have been impacting the stock. However, in the long-term, the shares are increasingly attractive.

Long-Term Value:

In the long-term, Caterpillar shares are attractive because revenue is growing (and is expected to keep growing), but near-term volatility and fear have caused the shares to sell-off to an increasingly attractive price. In particular, even though margins, earnings and guidance came in below expectations, revenue continue continues to grow, and revenue and EPS are expected to keep growing.

About Caterpillar:

Briefly, if you don't know, Caterpillar engages in the manufacture of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It operates through the following segments: Construction Industries, Resource Industries, Energy and Transportation, Financial Products, and All Other. The Construction Industries segment supports customers using machinery in infrastructure and building construction applications. The Resource Industries segment is responsible for supporting customers using machinery in mining and quarrying applications and it includes business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The Energy and Transportation segment supports customers in oil and gas, power generation, marine, rail, and industrial applications. The Financial Products segment offers a range of financing alternatives to customers and dealers for Caterpillar machinery and engines, solar gas turbines, as well as other equipment and marine vessels. The All Other segments includes activities such as; the business strategy, product management and development, and manufacturing of filters and fluids, undercarriage, tires and rims, engaging tools, and fluid transfers. The company was founded on April 15, 1925 and is headquartered in Deerfield, IL.

Attractive Qualities:

1. Revenue and Earnings Growth

As mentioned above, Caterpillar's revenue continues to grow. Here are more specific details from a recent Morningstar report, by segment, emphasis ours:

Caterpillar shares declined nearly 10% after the company reported fourth-quarter adjusted EPS of $0.44, 15% below consensus estimates. The main contributor to the miss was lower operating margin in construction industries. Management also shared its 2019 GAAP EPS guidance of $11.75 to $12.75, which was below our estimate of $12.81.

The performance of the construction industries segment during the quarter was the biggest disappointment. While revenue grew approximately 8% year over year, operating margin declined to 14.8% from 15.8%, well below our estimate of 20.7%. Issues cited for the margin decline included weak demand in Latin America and the Middle East. At the same time, freight and materials costs were elevated. Consistent with our research, management was upbeat on U.S. construction activity for 2019.

Caterpillar's resource industries segment maintained its upward growth trajectory, increasing revenue 21% year over year, and segment operating margin increased to 14.3% from 9.1%. Mining customers continued to invest in capital equipment as commodity prices remain supportive. Management remained positive about its 2019 outlook for the segment due to ongoing reductions in customers’ idle assets. Additionally, there are early indications of strong demand for quarry and aggregate machinery.

Caterpillar’s energy and transportation segment also showed healthy growth in the quarter. Revenue increased 11% year over year, while operating margin increased to 17.2% from 15.5% in the year-ago period. Strong power generation sales, especially to data centers, contributed to the segment’s performance. Rail service revenue also increased. A strong U.S. economy and robust demand for gas compression equipment are likely to boost 2019 segment revenue 2019.

2. Attractive Growing Dividend

Also very important, Caterpillar continues to generate plenty of healthy income to support its continuing long-term dividend growth.


Here is a look at Caterpillar's uses of cash, which shows after debt servicing and dividend payments, the company has plenty of cash to support share repurchases and growth.

And for reference, Caterpillar's debt is rated fairly highly according to the rating agencies. This is an indication of the company's long-term strength and health, despite the good, but softer than expected, earnings announcement.

3. Attractive Valuation:

Also important, Caterpillar's valuation is currently reasonable, and will be even more reasonable if the shares get put to us at the lower price, ceteris paribus.


For example, here is a look at the price targets set by Wall Street analysts covering the stock.

And as you can see many of these price targets have been updated since the earnings announcement (see table below), and they are still expecting upside for the stock (although there may be near-term volatility, which is why we elected to sell the puts instead of buying outright).

For more perspective, here is our previous Caterpillar article from many months ago (9/27/17) when we elected to sell our CAT shares for a very large gain. We sold the shares at a slightly higher price than they trade at now, but the earnings have grown dramatically since then, making the current valuation even more attractive, in our view. Here is an excerpt from that article:

Caterpillar has a lot more long-term upside potential, but we sold 100% of our Caterpillar shares this morning for a gain of +110% after owning them for 19 months.

Important Trade Considerations:

Two important considerations when placing options trades are upcoming earnings announcements and dividend dates because they can increase volatility and dramatically impact the value of your options contract in unexpected ways. However, in the case of Caterpillar, they are largely non-issues. First, CAT just announced earnings, therefore we don't have to worry about earnings surprises for this trade considering the next announcement comes after the options contract has expired. And with regards to the dividend, CAT just went ex-dividend on its quarterly dividend last month, so we don't have to worry about any quarterly dividend payments impacting the options value during the life of this options contract which expires in less than one month.


Caterpillar is an attractive, long-term, blue chip, dividend-paying company (we believe the dividend will keep growing). However, the shares just sold-off dramatically because the latest 2019 earnings guidance provided by the company was weaker than expected. Nonetheless, CAT is still expected to grow, and the valuation is relatively attractive by historical standards. Rather than purchasing shares outright, we have elected to sell income-generating put options. The premium income on these options is attractive because short-term fear and volatility is high. And if short-term fear and volatility drive the share price even lower, then we're happy to purchase shares at the lower price, per our options contract. And if the contract never gets executed, and the shares never get put to us, then we're still happy to simply keep the attractive premium income we just generated, no matter what (i.e. we keep the premium income whether or not the shares get put to us).

Disclosure: I am/we are short CAT Puts. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.


Weekly Commentary | January 27, 2019

For all the new members, we break down our weekly commentary in a few different sections.  

  1. Week in review of the markets

  2. Macro economic update

  3. Closed-End fund news/corporate actions

  4. Statistics of the week (showing CEF data)

  5. Commentary on CEFs

  6. Deep dive analysis on specific areas of CEFs or other securities


After four consecutive weeks of strong gains in the equity markets, stocks took a breather on the shortened holiday week.   They did end the week on a high note as news about the U.S. and China being "miles and miles apart" was offset by the possibility of the Fed ceasing the roll-off of the balance sheet. and the government shutdown coming to an end.

The Dow and Nasdaq rose slightly but the S&P 500 fell 5 points.  YTD, the S&P 500 remains up 6.30%, the Dow +6.04%, and the Nasdaq +7.98%.  Midcaps are up 9.29%, and small caps +9.89%.

Given the shutdown, there has been a dearth of government data so the only thing we have seen is overseas.  Given the increasingly globalized world, Japan, China, Germany, UK, and France are key drivers for our economy.  Those economies appears to be slowing rather dramatically.  Germany appears to be entering full blown recession, joining Italy who entered several months ago.  France is likely not far behind.

Earnings season continues to ramp up and the early part of the reporting season has been better than expected.  The reported numbers are coming in ahead of lowered expectations but guidance is decent and the tone by management upbeat.  That is especially true of the banking sector where a number of the largest bank CEOs were positive on domestic growth for the year. 

Also more positive - and something that could be an upside surprise catalyst for 2019- is Chinese growth stabilizing.  The country has been slowing down over the past two years but there are signs it could be bottoming.  December retail sales and industrial production results both came in ahead of expectations.  In addition, President Xi has been pulling multiple stimulus levers to increase growth.  If we see a 2H 2019 increase in Chinese output, it would definitely be a surprise and counter the current negative narrative. 

Onto the Fed which has moved in a dovish direction compared to two months ago.  It appears that they are now fully on pause in terms of raising rates- the next possibility is likely the June meeting allowing another six months of data to flow in before moving again.  If the economy continues to chug along, they will raise rates.  But watch the bond market.  If spreads remain wide, they will likely pause further.  

The timeline of events the last two months is interesting.  Following the last increase in the Fed Funds Rate in December, the post 12.19 press conference was likely the driver of the markets lower.  In it he indicated that the balance sheet would continue to shrink regardless of the macro environment.  Just a few days later, Powell was on a panel with Yellen and Bernanke and read off notecards that walked back the 'autopilot' comments.  On the 25th, the WSJ published an article summarizing the recent (last four weeks) comments by Fed officials.  

I would think that the Fed is likely to continue the current policy of roll-off, as the market has stabilized.  Credit spreads have stabilized around 4.45 but are not falling back further (they did reach 4.27 on Tuesday).  Interest rates were also stable on the week down two bps compared to last Friday's close.  

In general, the year is shaping up to be another where large caps do better than small caps, domestic better than international (EM may be the exception), and interest rates slowly rise.  

Below is the ECRI Weekly Leading Index.  This is a private economic research firm that puts out their own leading indicators.  It has turned negative several times this cycle and so far it is only modestly negative though it bears watching.

The 10-year remains in no-man's land and is looking for direction.  This is something to keep a close eye on over the next week or two, especially as the Fed has their January meeting on Wednesday.  Remember, all Fed meetings in 2019 are "live" events.  While there is virtually zero chance of a rate hike, the presser and the Q&A session will provide a lot of insight into their current thinking and courses of action.  

Closed-End Fund Analysis

Distribution Increase


Distribution Decrease

ClearBridge Nrg Midstream Opp (EMO):  Quarterly distribution was decreased by 28.1% to $0.23 from $0.32.

ClearBridge MLP & Midstream TR (CTR):  Quarterly distribution decreased by 24.1% to $0.22 from $0.29.

ClearBridge MLP & Midstream (CEM):  Quarterly distribution decreased by 16.9% to $0.295 from $0.355.

Activist Buying

MFS CA Muni (CCA):  Saba Capital Mgmt owns 387K shares or 13.9% of the outstanding shares, a 12.6% increase.  


These are the top and bottom funds in our Core set of funds:

These are the top and bottom funds across the entire CEF universe:


Discounts across the CEF universe tightened by another 20 bps this week to an average of -6.88%.  One thing we look at on a weekly (and monthly) basis are the changes in the general CEF space for a health reading.  Below is the data for the last two weeks.  You can see aggregate price rose by a couple of pennies while aggregate NAV fell by one penny- closing the discount a bit.  Of note, we are now at a positive z-score reading for the first time in many months.  

On the Core, ARDC was one of the best NAV movers, again.  From most perspectives, this is still one of the best opportunities in the taxable bond space today.  At a 14.35% discount, nearly 4 points below the one-year average, a yield of ~9% and strong NAV trends.  The one-year z-score is still -1.40, one of the few "bargains" left after the strong run in January. 

From a technical perspective, many of the indicators we follow are bullish at the moment.  MACDs are squarely positive (as they have been for a few weeks) and money flow is helping.  In addition, if the Fed is done or nearly done (including with the balance sheet- again we are skeptical of this and think the market is too dovish), it would be superbly positive for fixed income CEFs.  

While we wont be buying much this week- if anything- we likely won't be selling much either.  The best opportunities today remain in the funds that are "high quality" (meaning they have high coverage, higher NII yields, still value z-scores and are in sectors we like).  

  • ARDC

  • AFT

  • DSU

  • TSLF

  • BGB

Another fund that appears attractive is Western Asset High Yield Def Opp (HYI).  This is a term trust fund meaning it self liquidates at a certain date in the future.  This is different than a target term fund that liquidates at a certain date in the future and at a certain price.  HYI will liquidate at whatever NAV it is on the date of expiration.  That date is September 30, 2025.  

At a discount of -13.25%, the fund is giving you over 2% of "juice" per year between now and liquidation.  Anytime a term fund gives you over 2% per year in added return, it becomes attractive.  

And at the same time, this fund meets all our criteria with high coverage, high yield, and one of the lowest z-scores in the taxable space at -2.20.  The NAV has been stable to slightly increasing in the last two weeks while price is down giving the current opportunity.  Watch for further analysis in the near future.  

Nuveen CEFs Update

Nuveen recently released the December numbers for their closed end funds, both taxable and tax-free.  

On the taxable side, the floaters took a hit to coverage, which is not surprising given the fall in the index.  Still, most ratios are above 100% except for JSD.  From a coverage and UNII perspective, I do not see anything that would concern me for a distribution cut, especially since January has been such a strong month.  On the preferred side, coverage has been consistent for over six months now.  All four funds have been growing UNII comfortably.

Recently merged NBB, their taxable muni fund, saw coverage decline despite the scale that is typically achieved in combining funds.  

On the muni side, Nuveen's high yield muni bent has been a benefit to their fund complex.  Coverage has been relatively stable and not seen the same magnitude of decline as in years past.  On the nationals, there are nine funds out of sixteen with coverage in excess of 100%.  Only three funds have a positive UNII balance.  

The 3-month stacks on both UNII and coverage are great trend indicators for us.  And obviously the color-coding conditional formatting helps identify the outliers.  In coverage, our call on Nuveen Municipal High Income (NMZ) appears well timed.  The fund continues to build both its sponsor-leading coverage (106.1%, up from 105.8% last month) and its UNII bucket (+2.2 cents, up from +1.7 cents last month). 

Further thoughts on NMZ

The fund continues to close its discount to NAV after reaching a 12.3% discount in late December.  We had it as our top fund to buy today for discount capture.  Since that update (read HERE), the discount has halved and is close to the 52-week average.  The fund had cut the distribution twice in the last year which created the opportunity as the discount blew out.  

Why did they cut when the distribution was covered with room to spare?  Perhaps they modeled 100% of the calls being replaced with lower coupons and perhaps that didn't occur.  The call schedule for the next several years is decent with just 7-8% each year for the next three years.  We opined a few weeks ago that the average bond price of $99 being under par suggested that half of the portfolio would not be hurt by a par-call.  In other words, the call of those funds that are trading near par isn't a significant negative for the fundamentals. 

Credit quality is mostly investment grade with ~17% in non-investment grade and another ~26% in unrated positions.  

The z-scores show that the fund, after making such a strong move higher, is only now fairly valued, not over-valued.  One-year z-score is +0.20.  

While a large part of the discount convergence trade is likely mostly done, there is probably still some juice left, in our opinion.  In the meantime, the distribution is one of the best offering a yield of 5.48%.  The one thing we want to watch closely is the NAV performance which hasn't been all that stellar compared to other high yield funds.  

Quick Muni Update

On the note about Nuveen funds above, we thought it would be good to revisit the muni space given the movement of the funds in the last month.  

This is from our January 8th Muni Market Update:

Buy Today For Discount Capture:

Nuveen High Income Opps (NMZ)Eaton Vance National Muni Opp (EOT)Delaware Invest CO Muni Income (VCF)Blackrock MuniYield Invest (MYF)Blackrock Muni Income Inv (BBF)

Buy-And-Rent (HOLD)

Mainstay McKay DefTerm Muni Opps (MMD)MFS High Income Municipal (CXE)Dreyfus Muni Bond Infrastructure (DMB)Invesco PA Value Muni (VPV)Nuveen High Income (NMZ)

Many of those discount capture opportunities have closed significantly.  For example, EOT was trading at a -7.3% discount a few weeks ago.  Today, the fund is right at par.  That is a massive move higher in a short amount of time.  

Another, VCF, went from an 8.3% to a 5.03% discount.  That one, we think, still has a bit more room to run.  We think there is at least another point or two to go.  

MYF was at a -7.7% discount and is now at a 4.1%.  This is another one that has moved nicely but probably has a point or two left to go so we wouldn't sell.

BBF was near a 10% discount and today trades at 4.8%, below the 52-week average of 5.7%.  This one is probably close to being done.  

We will be doing more of an update next week with further analysis including on how much beyond the 52-week average some funds could go.  


A Look Back At 2018 | Assessment, Strategy, Predictions, And Opportunity


At the start of 2018, the main story of the markets was the synchronized global growth story.  Couple that with the recently passed tax reform bill and you had analysts expecting earnings growth in the 20-25% range.  For the first 9 months of this year, things looked very much like Goldilocks.  GDP growth in the U.S. finally surpassed the 3% mark and everything seemed a-okay for the most part. 

By the start of the fourth quarter, the underlying political and economic risks started to foam to the top.  We all knew of these risks which included trade wars, the Federal Reserve, the executive branch, emerging market weakness, and growth slowing globally.  

One of the key lessons we learned this year was the replay of the same 'type' of correction that occurred in late January and early February repeating- and not being more nimble when it began to happen.  In January 2018, interest rates jumped causing a scare in the equity markets as yields jumped to multi-year highs.  This caused a widening of spreads and other risk-off portfolio moves. 

In September, the 10-year yield began another sharp move higher culminating in a peak of 3.25% in early October.  This again spooked the equity markets and caused some dislocations that caused even greater risk off sentiment.  

Lesson #1:  Don't fight the Fed! Quantitative tightening finally mattered to the market.  

The increases in interest rates had already been decimating emerging markets but then began to spill into the developed markets of Europe and Asia.  The U.S. was in isolation with a rising market throughout the summer.  That compares to both the EAFE and EM indices which never saw a rebound from the declines in the first two months.  Those indices just kept making new lows and never saw a bottom.  The S&P finally played catch up and made a large moves lower to close that gap.  

Additionally, the market just dislikes the new Fed Chairman who is definitely more hawkish than his predecessor.  That became more readily apparent in the back half of 2018 as he telegraphed many more rate hikes, gaining the ire of the President.  

Lesson #2:  Don't let near-term results cloud your judgement and derail your strategy.

There are two behavioral factors that can really hurt your portfolios:  fear and greed.  Fear can be a massive deterrent and cause you to prevent losses by 'selling everything'.  Conversely, greed can also throw investors off track by providing false confidence that can entrap us during good times.  

Maintaining that balance between fear and greed can help reduce the chances of a massive move that results in catastrophic damage to your portfolio.  Dalbar has done several studies on this over the last several years detailing actual investor returns compared to the indices.  The large shortfall is mostly the reaction by individual investors to volatility in the markets.  

During boom times, people want to participate in the wealth growth.  That is why we have used the JP Morgan quote so often.  "Nothing so undermines your financial judgement as the sight of your neighbor getting rich.”  

That is greed, pure and simple.  

When the good times are rolling, it never ceases to amaze me how risk gets thrown out the window in favor of a want to participate.  This needs to be avoided in favor of a long-term plan.  

Lesson #3:  Time to say goodbye.  We hold on to positions too closely and need to let them loose quicker.  

Over the summer, valuations in closed-end funds were rich.  No other CEFs show this better than the PIMCOs where PIMCO Dynamic Income (PDI) reached a record premium of 17%.  The premium built over the course of much of the year rising from 3%-4% to that expensive level.  PIMCO Dynamic Credit and Mortgage (PCI) also showed the same valuations when it rose to a premium for the first time since it IPO'd.  The same valuations could be seen across much of the taxable bond CEFs as high yield and floating rate were going gangbusters. 

We should not be afraid to hold cash at the opportunity cost of cutting off the income stream.  It doesn't need to be a wholesale change.  For instance, on PCI above, we didn't need to sell the whole PCI position, but cutting it back was probably the more prudent move.  Another possibility is to hedge the position with highly correlated assets.  

The sell discipline is much more difficult than the buy strategy.  For many of my "clients" I simply buy at opportunistic discounts and then hold for long periods of time.  As long as the valuation doesn't get completely out of whack or if the security isn't in a sector we no longer wish to hold, then we do not sell.  But many would rather lock in the gains and redeploy elsewhere (this is where the Flexible Portfolio idea was born).  

Lesson #4:  Listen to intuition.  It tends to be right.

Adding portfolio insurance through hedging and other means seemed right during the summer, especially when you combine it with lesson 1.  Still, when good times are rolling, it is often difficult to see the dark clouds on the horizon.  For us, that resided in high yield bonds (and to a lesser extend floating rate) which continued to rip during the summer months.   We wanted to reduce our stake substantially but had no place to go.  

This gets back to the sell discipline, mentioned above.  Cash should be a good alternative that is acceptable, especially now that it actually earns something.  

Conversely, being more tactical on that intuition is important.  We missed a great opportunity to go long NHF.  I had the buy alert all ready to go a few weeks ago when it traded around an 18-19% discount.  I failed to pull the trigger on it.  That is on me.  

When there is blood in the streets, it is very difficult to be the one buyer.  The same goes the other way when markets are ripping and you are selling- only to watch your position go even higher and a feeling of regret sinks in.  These behavioral traits are innate to us all but can be overcome.  For some, it takes handing over the reigns to a trusted advisor to be that tool to overcome them.  For others, it just takes practice and discipline- knowing when you are at one of those periods of time.

Recognizing that you are in this situation- whether buying amid a sea of red or selling in a roaring market- and working through the different scenarios in your head- can mitigate that to some degree.  

Lets look back at the predictions for 2018:

These are the things that we think could see move the markets this year.

1. Valuations Start to Matter - They haven't for so long as the entirety of the market has melted up. This is what has been driving investors into ETFs as a low-cost mechanism into a broad basket of stocks at very low cost.  HALF RIGHT 

2. Value Will Outperform - Growth has outperformed value decidedly in the last couple of years. These indices tend to mean revert over time. We think value, led by financials, will be a good place to be in 2018.   WRONG

3. Quality Will Be the Best Factor in 2018 - Higher quality tends to outperform over longer periods of time, when measured from similar points on the business cycle. Given this stage in the cycle, we think we want to be in quality- both stocks and bonds- with actual earnings growth and defensive/sustainable business models.    CORRECT

4. China Becomes An Issue - The debt accumulation from their shadow banking system is likely to have reverberations. The leadership is cracking down on the 'grey rhino' strategy and other debt-fueled issues.   CORRECT

Predictions For 2019

I'll attempt to make some basic predictions - as I did last year.  Many of which weren't hard to make- along with some esoteric one's. 


1-  GDP grows in excess of 2% - Despite growing faster in 2018, and the market clearly expecting a recession, we think GDP will still grow at the post-recession average this year.  This would create the longest expansion in U.S. history.

2-  Yield curve inverts - We think the 10s minus 2s and 10s minus 3M will invert sometime this year.  It will be a brief inversion but still meaningful and alert us to the fact that the cycle is likely ending.

3-  Earnings Recession- similar to the definition of a recession, an earnings recession is two consecutive quarters of negative growth on the S&P 500 EPS number.  This would be especially true if oil falls back to the low- $40s or even high $30s.  We do not foresee an economic recession in 2019 but will definitely see a slowdown.  

4-  U.S. Dollar falls - We have been harping on the dollar a lot for some time saying we needed to see it peak before adding to international and emerging market stocks.  We think that is starting to happen and will only accelerate throughout the year.  EM equity will be the place to be.  

5-  Spreads tighten, then widen - After the widening from the post-recession lows, high yield spreads are on the decline again.  They have already retraced half of their 'loss'  (from 5.5% to 4.5%) and we think it will fall another ~0.75 - 1 point.  After that, we think it will widen back out.  


1-  Social Media Shakeup - The Facebook drama escalates further and Sheryl Sandberg exits the firm, possibly to run for public office.  Peak social media is likely to occur and Twitter, Snap, and other platforms see reduced usage.

2-  Stolen Identities - Similar to what we saw a few years ago with Equifax, we will see a re-emergence of identity theft and large public company hacks.  Personal data loss will be a big media item in the news.

3-  Crypto rebound-  I think we see renewed interest in the crypto currencies as the dollar sees weakness.  

4- Political and policy shocks increase - Both political and public policy risks increase significantly as we progress through 2019.  These can include trade wars, deteriorating fiscal picture, and policy missteps by the 4 largest central banks.  

5- Amazon splits into two-  The much more valuable AWS is likely to be spun out and split from the retail operation.  Down the road, I do think there could be multiple stocks with a media business also being created and traded separately to realize the full value of the underlying businesses.

Portfolio Specific Comments

While returns were nowhere near where we wanted them, there wasn't any big standout mistake (other than going to cash at the end of the third quarter) as virtually all risk assets were down.  The strategy, while not perfect, did indeed work as the NAV declines were about one-third of the market with price about two-thirds. 

Income is the main proponent.  The Core portfolio suffered paper losses of approximately 8% during 2018, most of which occurred in the fourth quarter.  But the portfolio generates over 8% in yield which meant a much further loss was avoided due to the high income.  We do not see this as a permanent impairment of capital nor have we realized any income stream reduction.  

We strive to educate members to focus on that income stream as it eventually overwhelms the market moves.  But trying to avoid the price volatility and focusing on the income stream is easier said than done.  It is never easy to watch the market value of your investments fall by 10% in a relatively short amount of time.  The chart below (created by a member) reiterates that thesis as the market value of the investment (in this case $1M) moves substantially over the 16 years.  However, the income production never ceases.  That is very important.  Over the time period, the value of the $1M placed into PTY oscillates from a high of nearly $1.5M and a low (during the financial crisis) of $380K.  Think of the investment in a high-yielding closed-end fund as an annuity that doesn't consume all of your principal.  Instead, you place it on the rollercoaster and the value can fluctuate but as long as it doesn't go to zero, you have principal leftover.  

The market reaction in the last month confirms our view that the market was simply a correction/bear market, not a recessionary crash.  The outlook may be hazy but a recession appears to be several quarters away.  As such, the additional allocation to risk assets has helped recoup a lot of what was lost in the final quarter of last year.  

The current yield on the Core Income Portfolio is now 8.24%.  That is about 15% more income than it was at the end of the third quarter.  The people who implement the portfolio today get that added income payout compared to late September.  Is the portfolio 15% more risky than it was?  Those that had the Core prior to October 1st could have added to their positions to increase their yield- essentially giving themselves a raise.  Reinvesting coupons opportunistically is a great way for those fully invested to take advantage of lower prices and higher yields.  If retired, you could pull from other sources and pool/reinvest distributions.  

In reality, the market is simply assigning a discount to risk assets given the large amount of uncertainty that remains.  Most of these are macro risks including slowing global growth, rising recession risks (especially overseas), trade war issues, political risks, and the new earnings season that is producing a string of under-performance reports.  Investors are just requiring added yield/return in order to accept a certain level of risk.  

To me, the strategy of the Core Portfolio, taking advantage of the best areas of the fixed income market through leveraged closed-end funds, is agnostic to macro events.  The decline in risk assets- virtually all risk assets in the Core- in the quarter means that there wasn't a fundamental defect in our process or investment philosophy.  While it is not assured that the market will reverse course and fundamentally re-rate the portfolio's value higher as these macro issues subside, we do foresee continued appreciation as we have so far in 2019.  All the while, we are collecting our income payments and overwhelming the price volatility.  

Opportunities and Outlook 2019

If you watch CNBC, Fox Business, or Bloomberg, you hear the same stories reiterated including the trade war with China, credit concerns, political stories regarding the President, Mueller investigation, government shutdown and debt ceiling 'talks', Fed tightening, worries about the length of the bull market and where we are in the cycle, and earnings under-performance.  What would they discuss if those five primary items were mitigated in the next two quarters?  Those impediments to the market, especially the trade war and government shutdown, if resolved, would likely help bring some of the $3T in net cash sitting on the sidelines.  

We do believe that some of these overhangs are likely to go away in the next several months.  Now that we experienced a sharp correction/mild bear market, President Trump is likely to do anything he can to prevent another and help buoy the market.  It appears that is already the case with him accelerating the trade talks and likely to declare an emergency for the border wall to receive its funding and reopen the government.  Those two actions alone could help bring about a much calmer environment in the markets in short order.  

My largest concern is global growth- especially in Europe and China which I believe are both potential large hot spots, both politically and economically.  The UK, France, and Germany have seen a marked rises in populism in the last 3 years that could shake the bedrock of the Eurozone.  That leaves out Italy which is again in recession, with Germany likely not far behind.  China remains problematic with a large debt burden and slowing growth and potential contagion for the U.S. and Europe.  

While we do not foresee a recession in the near future, we do think the next downturn is likely to be one of these rolling contraction starting overseas.  This will be something to watch closely, especially in Europe as that could spill over into the U.S. and China and crater this bull market.  Credit concerns remains at the top of mind as corporate balance sheets, while healthy, remains bloated and a potential source of danger.  

The Google Sheet with our positions and buy/hold/sell recommendations looks decidedly different than it did in late December.  Back then, we had 18 out of 19 positions in buy territory with 3 that were rated "strong buy" [PCI, KIO, ARDC].  The strong buy rating is a rarity and typically only happens once in a blue moon.  However, we utilize these formulaic ratings at 'strategic levels' to take the emotion out of the buying and selling decisions.  Since then, all three positions are up sharply double-digits.  Today, the sheet is more sparse with 5 buy ratings and has three sell ratings.  

There are still plenty of opportunities available in certain areas of the market.  We recently highlighted one in the floating rate space.  It appears the market is herding for the exits as they believe the Fed will no longer raise rates this cycle.  We do think they will likely do so again, likely in June, especially if the data is consistent to today and the markets continue to recover.  In addition, the loan index sits at $96 which continues to be over $3 below where it sat in September.  The implied default rate, while not nearly as high as it was back in mid-December, is still in the teens or 2008 levels.  The actual leveraged loan default rate is just 1.6%.  At the same time, discounts on senior loan closed-end funds were extremely wide with an average spread of 10.4%.  These funds looked especially attractive from a double-discount (underlying bonds are trading at a discount and the funds themselves trade below NAV).  This is a very attractive opportunity.  

Our Current Focus

  • We continue to like the non-agency MBS (mortgages) space and have a large overweight to it.  Those securities include PIMCO Dynamic Income (PDI)and PIMCO Dynamic Credit and Mortgage (PCI).  Both of those funds had allocations to the non-agency space in the high-60% range but have recently pared that back to take advantage of the sell-off in other assets classes. 

  • Included in that space is DoubleLine Opportunistic Credit (NYSE:DBL)which is a blend of different mortgage exposures including the non-agency sector.  It was an opportunity we took advantage of when they cut the distribution by a massive 34%.  The fund sold off by nearly 8% which was silly since all they did was eliminate the return of capital from the payout.  If a shareholder wanted to maintain their former distribution yield, they could have augmented the income yield by selling some shares. 

  • Western Asset Mortgage DefOpp (DMO) is a fund we've wanted to own for a long time but it traded at a ridiculous premium due to the payment of gains as it prepares for its liquidation (as a term trust).  The yield seduced many investors- it pays nearly 10%.  The fund has been seeing its premium decline slowly over time and it eventually reached near par in mid-November when we first bought shares.  It paid a large special distribution in December and has since been rebuilding its premium.  Now at a 12% premium, we have been redeeming shares and re-allocating to more beaten down areas.  

  • In the space of high yield and floating rate, KKR Income Opportunities (KIO), is one of the funds that hit the 'strong buy' rating in the last.  Although it has run strongly, we think it still has some juice left in it.  The fund also has the added advantage that its managers can toggle back and forth between bonds and loans to whichever it deems cheaper.  I would rather leave that decision to the managers who look at underlying trends all day.  

  • Preferreds have been a terrible trade for most of this year.  In the early part of 2018, they were clobbered by the rise in interest rates.  They then were damaged by declining bank and insurance company sentiment, especially in Europe (a large part of preferred fund holdings are European banks).  Near the end of the year, they were hit by tax loss selling and prices reached ridiculously low levels.  While we preferred to play this from the individual preferred space (focusing on high quality, 6%-7% yielding, domestic issues), some funds look attractive as well.  We have owned First Trust Preferred and Income (FPF)which has rallied strongly and is above the levels it traded before the bear market began.  Cohen and Steers Limited Duration Preferred & Inc (LDP) may be a better current opportunity with its 8.27% yield and rising NAV.  

  • Individual preferreds from KIMCO Realty (KIM-K), Oaktree Capital (OAK-A), Ares Capital (ARES-A), Apollo Global (APO-A), and Hersha Hospitality (HT-D) are some of the issues we've recommended that still look attractive.  Others like Pebblebrook Hotel (PEB-C) have already recovered.  

  • In our Core Income Portfolio, we want to maintain a balance between the highly risky and the defensive.   But we look for defensive positions that still produce a higher income return.  One such position is the Guggenheim Taxable Muni Fund (GBAB) which yields over 7%.  The underlying portfolio is primarily single and double A rated munis with an extremely low default rate.  This is a fund that saw significant appreciation in the month of November and is up nearly 9% during the market swoon.  Yes, the fund ROSE nearly 9% when the market fell nearly 20%.  Having these low or negatively correlated positions that still pay a strong yield can reduce that portfolio value volatility.  Watch this fund and when it trades at below a 5% discount, we recommend grabbing some shares.  That tends to happen when times are good which is typically when you want to add this type of fund in the first place.  

Concluding Thoughts

It is our contention that the days of just buying and holding are over- unless you just want to own the entire market.  Instead, you must be nimble and flexible in order for the current risks to be avoided.  We still contend that we are facing a potential retirement crisis as the sequence of returns risk appears more extreme than at any other period in history.  At the same time, millions of baby boomers are retiring or have just retired.  This seems like a 'perfect storm' of conditions that could create a potential disaster.  We hope we are wrong.  

The early part of 2019 has been favorable, especially compared to the end of 2018.  Still, there are a multitude of risks that we face and we should be cognizant of them while developing a plan to deal with that potential scenario.  Having a plan, keeping emotions in check, and being flexible at the same time is essential. 

“An ounce of prevention is worth a pound of cure” -Ben Franklin


Weekly Commentary | January 20, 2019


Stocks notched their fourth consecutive week of strong gains and built on their YTD figures.  The S&P 500 is now out of correction territory (down less than 10% from the peak).  The Nasdaq and small caps remain in correction territory.  We saw technology and financials lead the market while utilities and consumer staples lagged, something you want to see for a healthy market.  The S&P 500 is now up 6.54% YTD, the NAS +7.87%, and Russell 2000 (small caps) +9.80%.

The trade front saw further movement towards a resolution and sentiment continues to improve.  China trade officials offered to eliminate the country's trade surplus by 2024 but U.S. officials want it to be done sooner.  

Interest rates continue to rise back towards 3% (something we said was highly likely) and we do see the 2.90% area as a near-term target.  Given that the economic data is not nearly as dreadful as the markets and the media portrayed it, it made sense that bonds would sell off when the market began to recover.  Investment grade and high yield bonds also saw spreads tighten during the week as the high yield market saw the largest weekly inflow in almost two years.  

HY spreads are down to 4.4% and continue to slowly revert back towards the levels we saw in September.  The effective yield of the Master II index is now sitting right on 7%.  

The VIX (volatility index) continues to subside back towards normal levels hitting 17.8 after peaking on Christmas eve at 36. 

And the correlation with oil hasn't ceased with WTI rising another $1.20 this week to $53.10.

Spreads on the yield curve continue to meander instead of showing signs of further tightening.  The 10s-2s spread hovers in the teens.  While that is not a lot of cushion, the trend perhaps is showing that a recession is not imminent.  

Concluding Economic Thoughts

All in all, it was another solid week of recovery.  The bears are still out in force touting how this is a dead-cat bounce but as each session passes, it is looking less and less like it.  The media is hounding on Brexit, trade deals, and the government shutdown.  But in reality, none of those things matter to the market.  The market is being driven the 1) the Fed, and 2) technicals.  That's it.  However the media can only spend so much time on the Fed (which is also a dry subject) and technicals.  

The events in Europe are likely to play a role in our markets down the road but right now, the unfolding proceedings are just too nebulous.  The end-result is still far too unclear to matter.  When the populist uprisings in UK, France, and Germany (and soon to be Italy) foam to the top, we will likely see some reverberations in our markets.  Until then, they are just a sideshow.

Our markets only care about the Fed.  And with the multitude of Fed officials hitting the speaking-circuit in the last few weeks, all talking pause or doves or lower for longer, it is no surprise that the markets have responded favorably.  Even the most hawkish have come out and surrendered their hawkish tone in factor of "data dependence".  

The cherry on top came this week when Esther George, the Kansas City Fed President, stated that "we are close to neutral" and "we should proceed with caution and be patient as we approach our destination."  

If the Fed is close to the end of its tightening journey, then why are long-term rates rising?  Clearly, like the stock market, there was an overshoot in the flight to safety which sent the 10-year yield all the way to 2.56%, from 3.25% only two months prior.  It is looking more and more that lower for longer dovish policy is back- at least for a short while.  That would be highly supportive of NAVs of bond CEFs.   

Closed-End Fund Analysis

Distribution Increase (over 3%)


Distribution Decrease (over 3%)


Activist Trading - Buying

Nuveen Credit Strategies (JQC):  Saba continues to build a position and now owns 14.2M shares or 10.5% of the outstanding.  (more below)

Nuveen OH Quality Muni Income (MUO):  Ancora Advisors LLC owns 920K shares or 5.02% of the outstanding.  According to the 13D, they only believe the shares are undervalued.  

Mexico Fund (MXE):  City of London Investment Group own 3.59M shares or 24% of the outstanding, a 29.8% increase.  

Invesco Dynamic Credit (VTA):  Saba Capital owns 4.7M shares or 6.37% of the outstanding.  

Invesco High Income II (VLT):  Saba Capital owns 1.17M shares or 14.5% of the total outstanding.  A 10.2% increase.  

Western High Income (HIO):  Saba Capital owns 13M, or 10.1% of the total outstanding.

MS China A Share (CAF):  City of London Investment owns 2.36M shares or 10.8% of the outstanding.  

Nuveen Muni 2021 Target Term (NHA):  Karpus Management owns 924K, which is 10.7% of the outstanding.  

MFS Govt Market Income (MGF):  1607 Capital Partners owns 5.25M shares or 16.1% of the total outstanding.

First Trust Client Portfolio Trading:



Tender Offer

Nuveen Taxable Muni Income (NBB):  The fund commenced its tender offer commencement period which will expire February 12th.  They are tendering 20% of the outstanding shares (an effort to get their fund to a perpetual trust as it was slated to liquidate next year).  The tender is at NAV minus a net repurchase fee which is estimated to be less than $0.03 per share, assuming a fully subscribed tender offer.  

China Fund (CHN):  The fund announced an extension of their tender offer for up to 30% of the fund's outstanding shares.  The tender is at 99% of NAV as of the close of regular trading on the business day immediately following the day the offer expires- February 5th.

Closed-End Fund Commentary

Funds from the Core CEF lists that have made the largest price moves, NAV moves, largest discounts and premiums, and lowest and highest z-scores.

Funds in the entire CEF universe that have made the largest price moves, NAV moves, largest discounts and premiums, and lowest and highest z-scores.

Discounts are continuing to recover as indicated by the chart below.  They have nearly reached the levels achieved in early October.  At a 4.99% discount, it is nearing the one-year average of 4% and is close to the 5-year average of 4.59%.  

More importantly, NAVs are showing strong recoveries as well.  We are seeing investors take advantage of the double-discounts apparent in the CEF world with the underlying bonds at a discount to par and the fund itself at a discount to NAV.  Thus, when the underlying bonds start to appreciate, you get a compounded snap-back.  

I spent some time looking at what Saba has been doing including what they hold in their ETF (CEFS).  While our Core Portfolio has significantly outperformed the ETF over the last year, it could help to cherry-pick some of their best ideas.  For instance, Nuveen Credit Strategies (JQC) is their top holding.  They recently pushed for a new capital return program.  

The holdings for the fund are below with JQC, HIO, and GHY at the top of the list:


They continue to build positions in JQC, HIO, and EHI. The Saba track record for activism in CEFs has not been great.  Karpus and Bulldog are far more effective in pushing for change and winning.  In my mind, Saba has too many pots on the stove to be as effective on a percentage basis. 

PIMCO Commentary

The monthly release of the PIMCO UNII and EPS report was released this week showing some improvement to the muni side and a mixed report on the taxable.  In December, 7 of the 9 muni funds saw equal or improved coverage and UNII ratios.  On the taxable, 7 of 11 funds saw improvement on coverage ratio with all UNIIs flat or down due to the special distributions paid out last month.  

The average coverage ratio fell for the second straight month to 104.5%, from 116.3% in October.  The fourth quarter did see general weakness across most of the sub-sectors in their taxable CEFs including non-agency MBS, high yield, floating rate, and emerging markets.  

In terms of the absolute coverage ratios, PIMCO Credit and Mortgage (PCI)continues to run higher at 192%, up from 173% last month and 127% in September.  To us, it is likely that the fund has taken off their interest rate hedges that were betting on higher rates and cashed in the gains.  That does flow through net investment income ("NII") on these monthly UNII and EPS tables as they are done on a tax basis, not GAAP. 

PIMCO Dynamic Income (PDI) did not see as much of a coverage bounce.  It could be that they have not taken off the same hedges or simply did not have them in the first place.  Or, PDI has an at-the-market offering (essentially issuing new shares slowly into the market increasing share count).  As the fund increases in size, they may be leaving some of the hedges on as they will naturally decline as a percentage of the total portfolio.  Given the weakness of non-agency, HY, and EM debt, the lower coverage is not a surprise.  

On the muni side, the bleeding on UNII has abated slightly in recent months.  Of note is PIMCO CA Muni II (PCK) which swung from a -6 cent UNII to +1 cent as coverage rose over 100%, from 91.5%.  That caused us to change the rating on the muni core tab from 'hold' to 'accumulate'.  The price has run up in the last few weeks (like most muni CEFs) and is about 11 cents above our price target for a buy rating.  

The 3-month stacks (essentially the 3-month average vs. the 3-month average from 3-months ago) are showing much reduced changes recently.  Most of the PIMCO muni CEFs are down to the low-single digits in terms of UNII movement.  This compares to double -digit declines that we were seeing for most of the last two years.  But this is to be expected.  

The chart below is from a recent CEFAdvisors webcast showing relative UNII trends going back 6 years.  The recent flattening is to be expected as most muni CEFs have cut their distributions- in some cases significantly- in the last two years.  While calls have been forcing that for the better part of a decade, in the last two years muni CEFs have had to also contend with rising leverage costs- a one-two punch!


We have discussed this long-term secular cycle that muni CEFs have been in for some time.  They pay out a high distribution rate, refusing to make a cut until they absolutely have to, draining the UNII balance.  As bonds get called away with new bonds yielding far less than bonds issued ten years ago, they are forced to cut the distribution.  At which point, coverage goes back to 100% or higher and UNII balances stabilize.  Then, the cycle begins anew as calls eventually eat away at coverage again.

In aggregate, the muni CEFs have been doing better lately and we like the setup for them going into 2019.  We did last year as well and the first half of the year clobbered us, only to be redeemed later on.  The PIMCO muni CEFs have rallied strongly recently and z-scores, which were soundly negative earlier this year, are now showing slightly expensive.  


PIMCO Municipal Income II (PML) has run from an 8% premium to almost a 15% premium in the last couple of months.  In terms of municipals, there is much less transparency into the holdings compared to most other fund sponsors.  We get little in the way of call schedules, coupon yield, or most importantly, credit quality breakdown.  All they report is state breakdown, sector breakdown, and % in Puerto Rico.  If we go back to the Merrill Lynch CEF report from early May, Lanik (the analyst) appears to have put the holdings from the annual report into Bloomberg to get that data.  That output shows a lot of calls for 2018  and 2019 totaling 19% through May 2019.  Credit quality is also showing three-quarters investment grade and one-quarter non-investment grade.  

The fund pays out far above what it earns but continues to wind down its UNII bucket.   The UNII figure was 40 cents at the start of 2017 but has bled lower to the current 24 cents.  It was burning off over 1 cent per month for a while but has since been able to slow that burn losing only 1 cent since September.  That pushed out the date for when they would need to do a substantial cut to the payout.  

We prefer, from a fundamental standpoint, PIMCO Muni Income (PMF)currently as the fund is covering the distribution and has stabilized, and recently growing, UNII.  The yield is 5.48% tax free and the NAV has performed well.  Of course, the market has recognized this and sent the shares to over a 6% premium.  Watch this one and stagger your buys at or slightly above par.  

We would be cautious on two of the PIMCO NY munis, PNI and PYN along with PMX among the nationals. 

Getting back to the taxables, we recently launched our PIMCO CEF Comparison Sheet.  This is a quick and easy way to compare the differences in sector allocations of the multi-sector funds (PCI)(PDI)(PCM)(PCN)(PTY)(PKO)(PFN)(PFL).   For simplicity, PCI/PDI/PKO are very similar funds.  Then you have PTY/PCN/PFN/PFL being similar.  After that, you have PCM, which sits between the former funds and the higher-yielding, higher risk funds of RCS, PHK, and PGP.  PIMCO StocksPlus (PGP) is essentially is similar to PFN but with a long futures position in the S&P 500.

We would avoid PIMCO Strategic Income (RCS) which has rallied strongly but is likely going to need a significant distribution cut this year.  As a reminder, this fund is attempting to reclassify the way they account for mortgage rolls for income tax purposes.  PIMCO wants to classify them as a sale or exchange to use up their tax loss carryfowards in the fund.  This would increase the proportion of the distribution that would be classified as return of capital.  While most shareholders will sell because of the likely massive distribution cut, it is good for investors over the long-term.  Why is that?  The current payment is likely already ROC but being taxed to them as ordinary income.  So while it will benefit them long-term, in the short-term the price is going to get creamed.  

For the first crop of PIMCO CEFs including PCI and PDI who are exposed primarily to non-agency MBS, they struggled in the fourth quarter along with everything else.  This despite the fact that they were able to ignore the high levels of volatility earlier in the year.  Even with the slowing housing market and weaker prices, continued payments towards loan amortizations continues to reduce loan-to-value ratios.  The likelihood of default should another severe downturn occur characterized by skyrocketing unemployment is reduced.  

The non-agency MBS market is now down to approximately $400B, from $500B earlier this year, and $2.1T as the crisis began.  In addition, new issuance is starting to pick up for the first time since the crisis, exceeding the roll off from legacy issues.  This could be why PIMCO chose to reduce their allocation to the space.  Or, given how high yield, leveraged loans, and emerging market debt had been decimated in the fourth quarter, perhaps they see better relative value compared as non-agencies fell far less.  

With high yield spreads and leveraged loans recovering, we still believe the non-agency sector has one of the best risk-adjusted returns in the fixed income market.  Another area that PIMCO has allocated significantly is the asset-backed securities market, specifically the federally guaranteed student loan space.  


From a valuation standpoint, the recovery in the PIMCO taxables has been sharp and quick.  The values we saw around Christmas are all gone.  We were able to pick up some PIMCO Corporate and Income (PTY) very close to par.  It was then announced that the fund would be added in closed-end funds indexes.  That news and buying helped push the fund quickly back to a 10% premium.  

PCI reached a premium again on January 17th after hitting a 10% discount less than a month prior.  To us, the fund is fully valued.  The chart below shows the NAV total returns in the last year with the three non-agency MBS-based funds at the top of the list.  

Overall, this last PIMCO CEF tantrum was a very profitable one and now we will likely reduce our overweight and wait for the next one to occur.  It is always difficult to buy when the market is falling 500+ points and your quotes screen is a 'sea of red'.  However, that is the best way to make money- being a contrarian and putting emotions aside.  The Google Sheet helps with that as it takes the emotion out of buying and selling.  By ignoring the market noise and positioning the portfolio towards those target allocations and using the buy/sell flags, you can go against the grain.   

Member Comments - "Should I Sell?"

We are currently reducing our stake, slowly, in PCI and PDI to target or slightly below target levels.  Valuations are high and we want to be positioned for another downturn.  We get the question, "should I sell?" often, especially when the Google Sheet flips to a "sell" rating.  Remember, the sheet is formulaic with real-time quotes that calculate the discount/premium perpetually.  Once the discount/premium reaches the "sell over" level, the flag flips to a "sell".  

The answer to the question is a personal one.  If you are a buy-and-hold/rent investor, preferring the income and not caring much about the day-to-day changes in value, then holding is the answer.  Simply prefer to collect the income and consider the fund an annuity.  If you are a total return investor, or a more tactical trader that tends to go to cash and wait when valuations are high, then trimming/selling is the answer.  

Right now, there aren't many places to allocate that capital if you do indeed sell. The January effect is in full force and lifting all boats.  Discounts across the board have tightened materially in just 3 weeks leaving little behind.  We obviously would not be adding here.  Additionally, the NAVs of most of these funds are performing well from a technical standpoint with strong RSI and MACD indicators.  In other words, it's not just a recovery of discounts occurring, but a recovery of NAVs as well.  This could shift the decision on when to sell as, even though the discount isn't closing any more, the NAVs are rising further pulling up prices.  

In my personal portfolio, I had reached a 28% allocation to PCI when including the Flexible Portfolio allocation.  I have been reducing that allocation back towards the 18% level slowly.  I also did take some gains in PDI which was over target but did sell to below target, ~9.2%.  The proceeds of which are currently being allocated to cash while looking towards other opportunities, especially in the individual preferred space.  

A side note on the above chart which has PGP near the bottom of the list for NAV total return.  If you look at the corresponding price total return chart, PGP is near the top of the list, (fourth place) showing the benefit of buying funds cheap!  Even if they do not perform well on a NAV basis.  

Z-scores are back to being decidedly positive, a condition that we experienced for most of the summer.  They range from +2.60 (PNF) to 0.00 (PFL).  Only PCN, PTY and PCM are in negative territory at -1.2, -0.80, and -0.50.  Nothing that screams bargain but closer to that hold level mentioned earlier.  Most of the funds have simply returned to where they were towards the end of the third quarter.  If that is the case, then Z-scores won't show strongly positive and overvalued.  But, were the funds overvalued then as well?  The fourth quarter would suggest so as the funds sold off quickly at the sign of danger.  Or perhaps the anomaly was the fourth quarter- a non-recessionary bear market brought on by extraordinary exogenous factors.    

Certainly the dovish tone out of the Fed suggests a re-rating is needed for leveraged fixed income products.  That is supportive of both NAVs and spread products.  The question is, what valuation are you willing to pay?  There are a few alternatives paying that juicy yield but none with the long-term track record of the PIMCO twins.

JQC Commentary on New Capital Return Plan

Nuveen Credit Strategies (JQC) has adopted a capital return program meant to enhance the fund's competitiveness and reduce the large discount.  The fund will return 20% of its common assets or $240M over the next three years through supplemental distributions (essentially ROC).  The supplemental will be about twice the monthly income distribution. 

As of December 14, 2018, the total distribution of $0.1015 would result in distribution rates of 14.1% and 16.4% on net asset value and market value, respectively. Closed-end fund historical distribution sources have included net investment income, realized gains and return of capital.

The extra distributions would amount to approximately $1.75 per share.  The fund is attempting to increase the demand for their shares thanks to the increased yield thereby closing the discount materially.  Additionally, the fund revamped their portfolio last year in response due to the poor investment returns compared to the benchmark and peer group. 

From their Q&A release:

Q. How does the Plan enhance shareholder total returns? A. To the extent JQC continues to trade at a market yield comparable to current levels, the Plan enables JQC’s common shareholders to effectively capture, via an overall increase in the value of their overall JQC investment, a portion of the differential between the market price of the Fund’s common shares and their underlying net asset value. This represents a potential source of significant incremental common shareholder return in the current market environment. Based on the 14.3% discount to net asset value of the Fund’s common shares as of December 14, 2018, if common shareholders were to receive 20% of their portion of JQC’s capital under the Capital Return Plan they would receive a potential cumulative incremental return of approximately 3.3% over the life of the Plan.

The plan is clearly in response to Saba's activism which noted in their 13D SEC filing that they planned to engage in discussions with management about "strategic plans and matters relating to the open or closed end nature of the Issuer and timing of any potential liquidation of the Issuer."

To us, it looks like a bit of an opportunity as the activist are not likely to let up if the discount does not close in the next year.  In the meantime, you have a juiced up yield, similar to what drives the premium valuation of Western Mortgage Def Opp (DMO) to a premium.  That fund has a NII yield of approximately 7% but then is paying out capital gains to push the yield north of 10%.  That double-digit yield is like a siren song for many retail investors creating significant demand for the shares, and sending the valuation higher.

The same result could be seen with JQC and its SUPER-juiced 15.82% distribution yield.  

Coming This Week:

  • Open-End Fund Review

  • Screen of Tax-advantaged CEFs


Blue Harbinger: Kraft Heinz: Why This Hated 5.4% Yielder May Have 25% Upside (Guest Post)

This is the first of what we think will be a series of exclusive articles from Blue Harbinger's The Value and Income Forum.  


As the shares have sold off over the last 18 months, the dividend yield of Kraft Heinz (KHC) has climbed to 5.4%. And after reviewing why the market hates Kraft Heinz, this article provides 7 reasons why contrarians may want to consider investing, including why the shares may have more than 25% upside. We conclude with our views about investing in Kraft Heinz.



If you don’t know, Kraft Heinz manufactures and markets food and beverage products. For example, its products include condiments and sauces (e.g. Heinz Tomato Ketchup), cheese and dairy (e.g. Kraft Macaroni and Cheese), ambient meals, frozen and chilled meals, and for infant and nutrition. It’s headquartered in Chicago, but operates globally (its geographical segments are United States, Canada, EMEA, and Rest of the World). The company was founded on July 2, 2015 when the H.J. Heinz Company acquired Kraft Foods Group in a transaction valued at $54.9 billion.

Why The Market Hates Kraft Heinz

We are using the steady and significant sell off of Kraft Heinz shares over the last 18 months as evidence that the market hates the stock. Specifically, KHC is down 50% , but why? Here are a few reasons:

1. Questions remain as to whether Kraft Heinz has the ability to grow sales organically (i.e. not via acquiring other companies). According to Morningstar, “sales have languished, falling 1% on an organic basis on average since fiscal 2015.” And according to the Wall Street Journal:

“Organic sales fell by 1% in 2017, as a 0.5% increase in prices failed to make up for a 1.5% decline in volume.”

Accrording to The Motley Fool:

“The company said in early November that its rebound plan was starting to take root, and CEO Bernardo Hees pointed to an almost 3% boost in organic sales as support for that claim. Still, gross profit has declined over the last nine months even as expenses rose, leading to far lower profitability in 2018.”

2. Brand value has been eroding. Specifically, the company has been focusing so hard on operations (particularly on the integration of operations) that they’ve basically neglected brand strength, and thereby reduced the value of intangible brand assets. Management continue to suggest the company will put more emphasis on brand value (for example, last quarter’s earnings presentation lists “Continue to expand and deploy capabilities for brand and category advances” as part of the investment outlook and “growth agenda), but we’ll believe it when we see it. The upside of the intense focus on reducing costs is very strong operating margins (more on this later), but it has come at the cost of reduced brand value (i.e. the company is not spending enough to strengthen its brands, in our view). Also worth mentioning, consumer preferences change over time, and demand for frozen, chilled and boxed meals changes over time and depending on the market cycle (more on market cycle later).

3. The Market Fears More Expensive Acquisitions. Kraft Heinz has been spending heavily on acquisitions, and the market doesn’t trust that the spending spree has stopped. For example, here is a look at some of the recent acquisitions that did, and did not, go through:

Acquisitions are expensive, can result in a lot of debt, and are usually less desirable than organic growth. Plus if they’re not a good fit, they can take a company away from its core competencies. For example, the failed Unilever deal in the above table would have taken Kraft Heinz into the “household and personal care products” space. And given KHC’s recent track record, many investors fear there may be more expensive acquisitions ahead.

4. Kraft Heinz does have a significant amount of debt. For example, here is a look at the company’s debt coverage ratios, which have generally been on the rise in recent years.

The company’s debt remains investment grade with a stable outlook, but its near the lower end of investment grade, as shown in the following graphic.

And if interest rates continue to rise in the years ahead, it’ll make it more expensive for Kraft Heinz to refinance its debt when it comes due, per the following maturity schedule.

And worth mentioning, not only will rising interest rates increase the cost of refinancing debt, but the company is also be challenged by inflationary pressures related to higher input costs, such as resins as well as freight and logistics costs.

What’s Good About Kraft Heinz?

Despite the reasons listed above for why the market has hated Kraft Heinz, the company does have a variety of good things going for it. For example…

1. Strong Cash Flow: For starters, Kraft Heinz continues to generate very strong cash flow to support the big dividend payments. The following chart shows free cash flow per share significantly exceeds the dividend payments, and is expected by analysts to continue to do so for years to come.


And for more perspective, here is a look at the company’s historical uses of cash.

2. Improving Margins: Another very impressive quality of the Kraft Heinz company is its very strong, industry leading margins. We mentioned previously that the company had been neglecting spending to increase brand value, but the other side of that is very strong profitability margins, such as gross, operating, and net margins, as shown in the following table. This is a big part of the reason why Kraft Heinz has such strong free cash flow to support its big dividend.

3. Attractive Valuation: KHC is currently very attractive from a valuation standpoint relative to peers. For example, the following table shows its strong Enterprise value relative to EBIT and EBITDA and relative to peers.

4. Transitory Issues Not Expected to Repeat: You may be saying so what if KHC has a low valuation if its business outlook is not good. However, its business outlook is better than the market seems to expect. For example, recent profitability has been held back by several factors not expected to repeat such as recent supply chain inflation, unfavorable bonus accruals and commercial investments.


5. Kraft has room to grow: Not only will the absence of transitory issues favorably impact future profitability, but so too will the company’s ability to grow. For example, as mentioned in the graphics above, the company recently experienced some quarterly sales momentum and they believe it can continue. Further still, there are opportunities for Kraft to distribute its goods across Heinz’s international sales footprint thereby growing top-line numbers. Kraft is also underpenetrated in club and dollar store channels thereby more room for growth relative to peers and thanks to Heinz’s established channels.

6. Analyst Love Kraft Heinz: Even though the market hates the stock (i.e. the share price is way down), Wall Street analyst love it. For example, over the 23 analysts covering Kraft Heinz, the majority have buy recommendations, and their price target ($58.10) suggests the shares have more than 25% upside versus the current market price. However, it may be worth taking these analyst price targets with a grain of salt, considering they been recommending “buy” for many months while the share price has continued to decline.

7. Market Cycle: Of course no one has a crystal ball that predicts with 100% certainty what will happen next in the stock market, however an argument can be made that now is an attractive point in the market cycle to consider investing in contrarian/value consumer staples stocks, such as Kraft Heinz. For example, as the nine year bull market run has shown signs of slowing over the last quarter, so too has the outperformance of growth stocks over value stocks started to slow.

In particular, most value stocks (including the consumer staples sector) did not sell off as much as the rest of the market as they are perceived safer, and generally perform better in an economic slowdown. Kraft Heinz, however, has continued to sell off hard, for a variety of inappropriate short-sighted reasons as mentioned above (e.g. one-time transitory challenges not expected to repeat) and thereby creating an increasingly attractive entry point for value-focused income investors, in our view, especially considering the company is showings signs of momentum in organic top-line growth.


Kraft Heinz has basically been spending the last few years getting its ducks in a row relative to the competition and positioning itself for long-term leadership and value. But because the market is notoriously short-term focused it underappreciates what the company has been doing.

Specifically, Kraft Heinz is hated because of its negative organic sales growth, its eroding brand value, its expensive acquisition propensity, and its increased debt ratios (not to mention the share price is down dramatically over the last 18 months). However, there are reasons to believe now may be a good time for income-focused contrarian investors to consider the shares, including its big dividend, strong cash flows, industry leading margins, attractive valuation, its falling away one-off detractors, its improving growth outlook, the fact that analysts love it, and because of where we are in the market cycle.

In our view, if you are looking to add an attractive dividend yield to your portfolio, from a diversified company that is not a REIT, BDC, MLP or CEF (these are the categories in which income investors are often over concentrated), you might want to hold your nose and consider picking up some shares of Kraft Heinz. The dividend is well-covered, and the shares could have more than 25% upside from here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.


Core Trade Alert: Update And Sell Call On Barings Corporate Investors (MCI)

Core Trade Alert:  Update And Sell Call On Barings Corporate Investors (MCI)


  • We believe that the NAV, when reported in 11 days, will result in a NAV of $13.96, a reduction of -8.7%.

  • The expected Q4 TR on NAV (including distributions) is therefore -4.77%.

  • At the current price, the premium would be over 10% and a "SELL"

  • One caveat:  High yield has come back some in the last two weeks meaning a 'current' NAV would likely have seen some rebound.

  • We reduced the target weight in the Core to zero.

Weekly Commentary | January 13, 2018

The markets continued to repair themselves although by weeks end, appeared a bit tired.  The strong start to 2019 of course only has materialized after a very weak fourth quarter in 2018- including a rare non-recessionary bear market.  

Stocks were up for the third consecutive week with small caps outperforming finally allowing the Russell 2000 Index to emerge from bear market territory.  The S&P was up 64 points or 2.47%.  Volatility also continues to moderate with the VIX hitting the lowest levels in a month and ending the week near 18.  We are now more than half way from the pre-October levels.  


Much of the healing has been due to hopes that China and the U.S. will come to an agreement or at least make significant progress towards one.  Talks began on Monday and were expected to last for 3 days.  

Meanwhile, the partial government shutdown rolls on but hasn't seemed to impact the market.  Now in its third week, there is still only small hope that a resolution is near.  The impact on the economy and the markets remains marginal although that may change. President Trump is likely to use his emergency powers to get the border wall built and re-open the government before any real damage is done.

The Fed speakers this week reiterated the dovish tone signaling that they are on hold until further notice.  Chicago Fed Chief Charles Evans was probably the most influential and important.  He has been an avowed hawk (favoring higher rates).  This week he came out and stated the FOMC would be watching the data for the next six months before deciding again on rates.  This seems to indicate that the March hike is being 'skipped' and that June is the likely next move.  He also stated that it was "noteworthy" how much focus the market has placed on the balance sheet suggesting that some changes to it being on auto-pilot could be in store.  

Interest rates moved up after reaching 2.55% on January 3rd.  This compares to the 3.23% hit two months earlier.  Today, the 10-year sits around 2.70%.

Now we turn to earnings season which continue to get marked down providing pressure on the index.  At the start of November, the S&P EPS estimate for 2019 was $178.  We have already seen that decline to $170-$173.  While it doesn't appear to be much, applying a 15x multiple to the variance equates to 120 points on the S&P or nearly 5%.  

During the final two weeks of Christmas, some figures did fall into the $160s but those have since been revised back up to the $170 area.  Assuming a 15x multiple on means that the S&P target is around 2550 on the low end.  Using a 16x multiple would push us up to 2,720.  That appears to be our near-term range.  Of course, if numbers get revised back up, the 'ceiling' will be much higher.  

Bottom line, the fourth quarter was probably correct on the narrative with a lot of headwinds but was likely incorrect in magnitude.  That is, all the negatives that existed (slowing growth, tightening monetary policy, trade wars, fiscal issues, earnings, and political uncertainty) were apparent and not gone today but the move was too violent, overstating the immediacy of the risks.  I personally blame ETFs and algos for exacerbating the moves.

Closed-End Fund Analysis

Distribution Increase

RiverNorth Doubleline Strategic Opp (OPP):  Monthly distribution increased by 22% to $0.1833 from $0.15.

Eaton Vance Enhanced Equity Income II (EOS):  Monthly distribution increased by 13% to $0.0988 from $0.0875

Clough Global Eq (GLQ):  Monthly distribution decreased by 6.5% to $0.1043 from $0.1115.

Clough Global Opp (GLO):  Monthly distribution decreased by 5.6% to $0.0829 from $0.0878.

Clough Global Div & Income (FLV):  Monthly distribution decreased by 4.3% to $0.1003 from $0.1048.

Eaton Vance Enhanced Equity Income (EOI):  Monthly distribution increased by 4% to $0.0898 from $0.0864

Distribution Decrease

Eaton Vance Tax Managed Global Buy-Write (ETW):  Monthly distribution decreased by 20.1% to $0.0727 from $0.091

Eaton Vance Tax Managed Global Div Eq (EXG):  Monthly distribution decreased by 19% to $0.0616 from $0.076.

Conversion Price For SPE

Special Opportunities Fund (SPE):  The fund announced that because of the 2018 year-end cash dividend of $1.45, the conversion price for each share of preferred stock decreased from $16.86 to $15.41.  Holders of the convertible preferreds and whom elect to convert it to common would receive 1.6223 shares of common.  The fund's board may elect to call them at $25 per share as they recently passed the earliest call date.  

Activist Activity

EV Limited Duration Income (EVV): Saba continues to build a position with 6.28M shares, 5.41% of the fund's outstanding.

First Trust High Income LS (FSD):  Saba is now building a position in FSD with over 2M shares or 6.02% of the total outstanding.  


Stats of just Core Portfolio funds for the week:

Statistics for all closed-end funds:



The snap back in discounts that we have witnessed in the last few weeks has been the most jarring in memory.  Z-scores continue to heal with the average across all categories at -1.13.  Across all bond and stock categories, real estate is now at the widest discount at 13.8%.  The multi-sector bond category is back to a premium thanks to DMO, PTY, PDI, and a few others. 

Dividend equity funds saw a 7% move on average last week, the largest of any sector.  NAVs of that category were up 3.95%.  The weakest sector was taxable municipals which, on average, saw approximately 39 bps of price decline and 28 bps of NAV decline.  Tax-free munis were also down slightly on NAV (-17 bps) but saw significant discount closing with the average price up 1.83%.  This is exactly what we were thinking would happen.

MLPs were the big winner on a NAV basis rising 8.87% on the week with prices up 6.42%.  All energy did well again last week with the equity energy and resources category rising 4.85% on price and 4.89% on NAV.  

We continue to closely watch the senior loan (floating rate) category which had another good week returning 1.08% on NAV and 1.79% no price, closing the average discount by 71 bps.  NAVs did decline on Thursday and Friday as the index saw some mild weakness again.  

Preferreds, the other category we have been fond of lately, especially on the individual side, saw strength again this week despite interest rates moving higher.  The category's average price was up 2.90% and the average NAV was up 2.05%.  

Some z-scores are a bit expensive here.  EV Enhanced Equity II (EOS) recently raised the distribution which isn't really a surprise given the move in the NAV the last few years.  With a big cap tech bent, the fund has benefited from Amazon, Google, Facebook, and others.  While those stocks are down from their peaks, they still have significant gains in them over the prior five years.  Check out Voya Global Equity Div Prem Opps (IGD) for a possible replacement.

The game plan for 2019 will be a steady de-risking of the portfolio as we near the end of the cycle.  For example, on the chat we discussed floating rate securities.  They have moved higher significantly in the last couple of weeks from a severely oversold position.  But once closer to par, we will likely trim that exposure significantly as short-term interest rates are unlikely to head significantly higher.  

On Friday, I did sell out of my DMO position given the sharp move higher (it hit a preset limit order price) along with about 10% of my PCI position (~2.6%).  I'll continue to opportunistically trim that position back to the target weight (18%) over the next week or so.  I do think that given the ex-distribution date being Friday, we could see a bit of a pull back in the PIMCO CEFs in the first half of next week.  

Blackrock Credit Allocation (BTZ) Annual Report

The annual report for BTZ came out a few days ago.  We'll go through some of the changes and any red flags that are evident.

  • Leverage ticked up 1% to 33%

  • The corporate bond allocation increased to 74% from 69%

  • Credit quality improved slightly to 72% IG from 71%

  • Net investment income was virtually unchanged in the last year

The company did utilize the share repurchase program to buy back nearly $31M of shares during the year.  That is up substantially from the prior year's $8.8M in repurchases.  Overall in the year, net assets fell by $158M driven by the change in unrealized values (depreciation of assets) from wider spreads and higher interest rates.  

The decline of total net assets is approximately 9.9%.  That was offset by some of the timing of distributions and other factors.  The fund earned on a net per share basis $0.81 and paid out to shareholders $0.80 covering the distribution.  This is the first year without a return of capital since 2014. 

Total expenses continue to tick up from 1.23% to 1.82% as interest expense (borrowing costs) have increased.  

The fund has increased its derivative positions but it is still relatively small compared to total fund assets.  They have a very small long position in the 2-year and 5-year treasury note space.  But they have some short futures positions in the 10-year.  

Overall, no red flags or big changes in the last year (or last several years).  This fund tends to set it and forget buying an array of credit quality corporate bonds with 4-8 years to maturity.  The effective duration of the portfolio is 5.8 years.

We're not overly wild about the industry breakdown with 21% coming from the banking sector, 14% from communications, and 13% from energy.  Of all the industries we dislike currently, that is three of them (add in utilities).  

Coverage in November was 102% (December numbers out in a couple of weeks).  UNII grew in the last month to 1.1 cents.  

Concluding Thoughts

This is a generic way to gain access to the corporate credit market with plain vanilla corporate bonds to mostly higher quality companies.  The credit quality breakdown remains decidedly investment grade with more than half of the portfolio in the BBB-rated debt.  That is debt that resides at the lowest rung of the investment grade category and could be downgraded in the next crisis. 

I did go through the holdings and there weren't any significant holdings of the larger bad players.  There was no holdings in AT&T (T) and only one smaller position (0.25%) in General Electric. The fund also has a small allocation to the upper tranches of some CLOs.  

PIMCO Comparison Report

We created a spreadsheet to compare the PIMCO taxable CEFs.  There is a lot of confusion about the funds many of which are primarily different flavors of the same multi-sector exposure you would get in the open-end PIMCO Income (PONAX) fund.  

We will likely have this in the tools drop down fairly soon.  

The non-agency MBS totals are down approximately 15-20% over the last several months.  We are trying to find out why they are reducing that allocation and where they are adding.  Right now it appears that high yield and emerging markets are the beneficiaries of that capital.