Trade Alert Flex Portfolio: Sell HYI, IHTA | Buy LOR, DHY

Sold 4.5% position Western Asset High Yield (NYSE:HYI) at $14.55

Sold 14.5% position Invesco High Income 2024 (IHTA) at $9.66 (blended sales came in at $9.623 over several weeks)

Bought 6% position Lazard Worldwide Dividend & Income (LOR) at $9.90

Bought 3% in Credit Suisse High Yield Bond (DHY) at $2.35

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We made 9% worth of buys and 19% worth of sales.  The excess proceeds will be allocated to cash for the time being.  

Sales

We purchased Western Asset High Yield (HYI) on January 30th on a convergence trade rationale.  The discount at the time was more than 13% which was well below its average.  Today, the discount has tightened dramatically, far faster than we anticipated, and stands in the mid-7% area.  We think this is a solid enough return on the fund and are taking our profits.  Remember, this is a term trust fund which liquidates in 6.5 years.  That should keep the discount tethered but the discount reached our target 2%+ per year discount capture.  

Invesco High Income 2024 (IHTA) is a fund we've held for some time now with most of purchased lots either at $9.00 or $9.10 per share (we did have a few lots in the teens and low-to-mid twenties.  Invesco recently released their January numbers for their funds and IHTA showed further erosion in earnings and UNII burning off.  Coverage has fallen to 89.2% and UNII is down to 9.7 cents, from 10.5 last month.  Given the bounce (we issued a sell recommendation a few weeks ago), we would take the profits.  

Purchases

We have commented on Lazard Worldwide Div & Inc (LOR) several times and even owned a small position in it for our international equity exposure.  The fund has not performed well as European equities have struggled as have all developed equity markets ex-US in the last 16 months.  We think this has two upside catalysts:

  1. The fund is conducting a 20% tender offer, which is mostly already priced in.  However, two largest activists (and the two most efficient in getting things done), Bulldog and Karpus, own more than one-quarter of all the outstanding shares.  While this could lower the tender ratio (how many shares we get lifted, we could see further activism from them down the road.

  2. The more important aspect is that the NAV is finally trending higher- something we have been waiting quite some time to realize.  International equities may have turned a corner as a lot of negativity is currently priced into the markets.  Germany and others are nearing recession and could cause further declines.  But we want to maintain some allocation and this is our fund of choice in that space (also have a small allocation to FDEU).  

Credit Suisse High Yield (DHY) is a new name to many of you and is a very junky high yield fund.  We established a small position in it to capture what we think could be a discount tightening opportunity in the fund.  It trades just over a 7% discount to NAV, compared to the -4.1% one-year average and a -1.9% three-year average.  The wider discount is likely due to the distribution cut made last month lowering the payment from $0.02 to $0.019 for a reduction of 5%.  This fund has plenty of liquidity, is levered 33%, and has a -1.0 z-score.

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