This is another great guest post by George Spritzer who routinely gives us some solid, timely opportunities.
Here are his 2018 posts:
Many investors in retirement have a good portion of their assets allocated to fixed income, but are looking to earn a higher yield than what is normally available from standard investment grade bonds. In this article, I discuss two closed-end funds that invest a good portion of their assets in equities, but which are strong income producers, have characteristics similar to fixed income funds, but have better inflation protection.
Choice #1: Nuveen Real Asset Income and Growth Fund (JRI)
The Nuveen Real Asset Income and Growth Fund (JRI) has an interesting history. It was originally formed in April, 2012. In May, 2017 the fund was reorganized by merging with the Diversified Real Asset Income Fund (which had the ticker DRA). The combination of the two funds has benefited shareholders by lowering fees and expenses and adding some trading liquidity to the fund.
The Fund seeks to deliver a high level of current income and long term capital appreciation by investing in real asset-related companies across the world and across the capital structure- common stocks, preferred securities and debt. Real asset-related companies include those engaged in owning, operating or developing infrastructure projects, facilities, and services, as well as REITs. In general, these businesses tend to produce steady, consistent cash flows.
Up to 40% of its assets may be debt securities which may be below investment grade, but no more than 10% may be invested in securities rated CCC+/Caa1 or lower. Non-U.S. exposure ranges between 25% to 75% of the Fund's managed assets.
The Fund uses leverage, and to a limited extent may opportunistically write call options to enhance the risk adjusted return.
An important goal of the fund merger was also to lower the discount to net asset value, but that has not happened yet. I believe some institutional investors may avoid JRI because it does not easily fit into a Morningstar "style box". It is also difficult to find a good benchmark for a position in JRI. But for investors with more flexibility in their asset allocation process, JRI can be a good way to purchase discounted securities in either your fixed income or equity "buckets". Real assets can be complimentary to traditional equities and fixed income, and smooth overall returns through fluctuating markets.
The Adviser uses a team of various sector specialists:
Jay L. Rosenberg, Head of Nuveen Public Real Assets: listed real estate, global infrastructure and real asset income strategies.
Tryg T. Sarsland, Portfolio Manager/ Director of Global Infrastructure Research: real asset income strategy, MLP/pipeline industry.
Brenda A. Langenfeld, CFA, Portfolio Manager: preferred securities strategy, real asset income strategy
Jean C. Lin, CFA, Portfolio Manager: High Yield Strategy. Leveraged Finance team.
(Data below is sourced from the Nuveen website unless otherwise stated.)
JRI is currently selling at a discount to NAV of -16.34% compared to the 6 month average discount of –13.87%. Over the last year, the discount has ranged from -7.78% to -19.73%. (Source: cefconnect)
The one and three month Z-scores for JRI is now positive because of the big price swoon before Christmas, but the longer term Z-scores are still negative which means the discount is above average for these time periods.
1 month Z-Score= +2.6
3 month Z-score= +0.9
6 month Z-score= -0.1
1 year Z-score = -0.7
Interest Rate Sensitivity/ Fund Characteristics
JRI is well diversified and has a fairly low sensitivity to interest rates. Here are some of the portfolio statistics as of November 30, 2018:
Number of Holdings: 384Average Leverage-Adjusted Duration: 2.55 yrsAverage Coupon: 6.73%
% Large Cap: 39.80%% Mid Cap: 27.85%% Small Cap: 32.33%% Foreign Holdings: 41.41%
I looked at three month NAV correlation data to see how the underlying fund has been trading recently. Here are sample correlations for the NAV of JRI compared to various benchmark ETFs and closed-end funds along with the other fund discussed in this article- GLU. The correlations are scaled between -100% to +100%:
JRI versus TLT = + 8% 20+ Year Treasury BondJRI versus HYG = + 81% High Yield Corporate BondJRI versus SHY = - 32% 1-3 Year Treasury BondJRI versus GLU = +85% Gabelli Global Utility & IncomeJRI versus RA = +90% Brookfield Real Assets IncomeJRI versus VNQ = +71% Vanguard Real Estate ETF
Note that there is an inverse correlation with short-term Treasury Bonds.
JRI has been paying a steady monthly distribution of $0.106 every month since September, 2017 when they bumped up the distribution amount from $0.105. But the distribution had been somewhat higher in earlier years.
The NAV curve for JRI had been relatively flat in 2018 through the end of September, but it fell in the fourth quarter along with most closed-end funds. Its 2018 NAV total return performance was -9.94%.
Note that the 2018 JRI market share price performance of -17.13% was much worse because of the widening of the discount to NAV.
I generally would recommend holding JRI in a tax deferred retirement account, because the recent distributions have been mainly investment income with little or no capital gains or return of capital.
Portfolio Asset Allocation (as of 11/30/2018)
Credit Quality as of 11/30/2018
Top Sector Allocations as of 11/30/2018
Top 10 Issuers (as of 11/30/2018)
JRI: Five Year Discount History
Institutional investors currently own about 25% of the shares outstanding. The largest holder is Relative Value Partners Group who have $13 million invested. I do not see any agressive closed-end fund activists as owners, although this could certainly occur at some point in the future if the discount remains above 15%.
(JRI) Nuveen Real Asset Income & Growth
Total Net Assets= $725 MM
Total Common Assets= $499 MM
Annual Distribution Rate= 8.60%
Dividend Frequency= Monthly
Current Monthly Distribution= $0.106 ($1.272 annually)
Baseline Expense ratio= 1.58% (omits interest expense)
Discount to NAV= -14.41%
6 month Avg. Discount= -13.89%
Average 3 Mos. Daily Trading Volume= 135,500 shares
Average 3 Mos. Daily $ Volume= $1,920,000
Sources: cefconnect, Yahoo Finance
YYY/CEFL Year-End Rebalance May Have Increased the JRI Discount
There are two short-term tactical reasons why the JRI discount may have widened near the end of 2018- tax loss selling and the YYY/CEFL year-end rebalancing. The YYY and CEFL ETFs both track the ISE High Income Index.
JRI is one of the closed-end funds removed from the index at the end of last year. I just checked the YYY portfolio and as of the close of January 8, JRI is no longer in the portfolio.
Choice #2: Gabelli Global Utility & Income (GLU)
The Gabelli Global Utility & Income Fund (GLU) was formed in April, 2004. The fund recently held an interesting "combo" rights offering where they issued about 1.2 million new common shares along with 1.2 million Series B preferred shares for a total of $85 million. Holders of Rights were entitled to purchase one common share and one newly issued Series B preferred share by submitting three Rights and $67.50 per share.
The Fund seeks to deliver a consistent level of after-tax total return with an emphasis on tax-advantaged dividend income.
Under normal market conditions, the Fund invests at least 80% of its assets in equity securities and income producing securities of domestic and foreign companies involved in the utilities industry and other industries that are expected to pay dividends periodically.
GLU differs from most of the other Gabelli closed-end funds because it has only one portfolio manager- Mario Gabelli. Most likely this is because of the smaller asset size of this fund.
(Data below is sourced from the Gabelli website unless otherwise stated.)
GLU is currently selling at a discount to NAV of -12.63% compared to the 6 month average discount of –8.71%. Over the last year, the discount has ranged from a premium of 0.11% to -18.51%. (Source: cefconnect)
The one month Z-score for GLU is now positive because of the big price swoon in late December, but the longer term Z-scores are negative which means the discount is well above average for these time periods.
1 month Z-Score= +0.93 month Z-score= -0.76 month Z-score= -1.01 year Z-score = -1.3
Comparison of GLU with GUT
Gabelli offers two closed-end funds that invest mainly in utilities- GLU and GUT. I find it pretty amazing that GUT tends to trade at a huge premium over NAV, while GLU trades at a big discount. I've presented some data below comparing the two funds as of the close of January 8.
90 day NAV correlation = 83%
I think it is only a matter of time before the market "wakes up" and reduces the 47% difference in discount/premium between these two utility funds.
One "Headwind" for GLU Over the Next Year
While I think GLU is a fairly attractive investment now because of its discount, it is fair to point out a "headwind" that the fund will face for the next year. As part of the rights offering, GLU issued about 1.2 million share of a $50 par value preferred used to provide additional leverage for the fund.
This preferred has a high 7% coupon rate for the first year. Gabelli often adds a "kicker" first year to help market their preferred stock. Once the first year is up, the coupon rate will re-set to the 10-year Treasury yield plus 200 basis points (with a minimum of 4% and a maximum of 7%). If interest rates stay at current levels, that would reduce the coupon rate next year from the current 7% down to around 4.70%. Since markets generally look ahead, a reduction in the coupon rate should lead to a lower discount in GLU as we approach the end of 2019.
Top Portfolio Sectors (as of 09/30/2018)
Note that there were several time periods from 2010 to 2013 when GLU traded at a premium to net asset value. This may occur again at some point in the future if we see sustained weakness in the US dollar or an outperformance of foreign stocks versus US stocks.
Institutional Ownership: GLU
Institutional investors currently own about 13% of the shares outstanding, but Gabelli & Co. is the second largest shareholder. Because of this, there is very little chance of a closed-end fund activist making a move on this fund. But Gabelli is usually pretty good about doing share buybacks when they are appropriate.
(GLU) Gabelli Global Utility & Income Trust
Total Net Assets= $166 MM (est. after rights offering)
Total Common Assets= $104 MM
Annual Distribution Rate= 7.20%
Dividend Frequency= Monthly
Current Monthly Distribution= $0.10 ($1.20 annually)
Baseline Expense ratio= 1.31% (omits interest expense)
Discount to NAV= -12.63%
6 month Avg. Discount= -8.71%
Leverage= 37% (est.)
Average 3 Mos. Daily Trading Volume= 32,000 shares
Average 3 Mos. Daily $ Volume= $535,000
Sources: cefconnect, Yahoo Finance
GLU and JRI are two good ways to add diversification and can be used as fixed income substitutes for a portion of your portfolio. They are both steady income producers with attractive yields in a tax deferred account. In a taxable account, GLU may be the better choice, because its goal is to generate tax-advantaged income.
Both funds are fairly liquid and easy to purchase. The bid-asked spread usually is one or two cents and you usually get some price improvement on smaller market orders.
Over the last few days I was writing this article, JRI has rallied quite a bit, so for tactical reasons I would wait for a pullback to a discount of 15% or higher before purchasing.
Disclosure: I am currently long GLU, JRI.