YH CEF Report March 2019 | Distribution Cuts Pick Up, But So Do Increases

In March, we saw 17 funds boost their distribution by 2% or more while 30 funds cut their distribution by 2% or more.  Of the increases, 7 of the funds were munis while another 7 were floating rate.  We have been bullish on both of these spaces (though recently less so for the munis as discounts have tightened significantly).  

Floating rate remains an unloved area but the corner may have been turned.  For one, inflows are returning meaning that money isn't flowing out of the sector any longer.  We've been pushing these since December as we saw a significant opportunity and issued a report titled "Why Floaters Look Attractive Despite Lowered Rate Expectations."  Essentially, there was a "double discount" opportunity whereby the underlying loans were priced at a significant (for the sector) discount to par PLUS the funds themselves were at a discount to NAV- with the average being right around -10%.

Floaters continue to be the larger pieces to our Core Portfolio with large allocations to Ares Dynamic Income (ARDC)KKR Income Opportunity (KIO), and Apollo Tactical Income (AIF).  In addition, our high yield fund looks poised to break out with Ivy High Income (IVH) returning 8.64% on NAV and 13.7% on price YTD.  IVH also has a corporate action kicker with Saba (CEFS) building a large position in it.  They own 1.3M shares or approximately 8% of the outstanding shares.  On the most recent filing, they put up an issuer proposal to declassify the board.  This is an initial step towards some sort of shareholder-friendly event.  

On March 1, we highlighted some of the Eaton Vance floating rate funds in our monthly letter including EV Senior Floating Rate (EFR).  Later the same day, the fund increased the distribution by 5.6%.  That is a fund that has coverage above 110% with UNII of nearly 11 cents.  

Blackrock Floating Rate (FRA) was one of our top three picks for February based on the same sort of dynamic:  It was oversold, we liked the sector, and the fundamentals (coverage, UNII, etc) looked stellar.  The fund also raised the distribution in March by 7.75%.  

Distribution Increase ( > 2%)

Nuveen NC Quality Muni (NNC) - Monthly dividend increased by 8.33% to $0.039 from $0.036 per share.

*Blackrock Floating Rate Strategic Income (FRA) - Monthly dividend increased by 7.75% to $0.0695 from $0.0645 per share.

Nuveen PA Quality Muni (NQP) - Monthly dividend increased by 7.45% to $0.0505 from $0.047 per share.

Nuveen GA Quality Muni Inc (NKG) - Monthly dividend increased by 7.25% to $0.037 from $0.0345 per share.

Nuveen Intermediate Dur Quality Muni Trm (NIQ) - Monthly dividend increased by 6.78% to $0.0315 from $0.0295 per share.

EV Senior Floating Rate Trust (EFR) - Monthly dividend increased by 5.63% to $0.075 from $0.071 per share.

*Nuveen Muni Hi Income Opp (NMZ) - Monthly dividend increased by 5.31% to $0.0595 from $0.0565 per share.

Blackrock NY Muni Bond (BQH): Monthly distribution increased by 4.35% to $0.048 from $0.046.

EV Floating Rate Income Tr (EFT) - Monthly dividend increased by 4.23% to $0.074 from $0.071 per share.

EV Senior Income Trust (EVF) - Monthly dividend increased by 3.13% to $0.033 from $0.032 per share.

MFS Special Value (MFV): Monthly distribution increased by 3.13% to $0.04513 from $0.04376.

MFS CA Muni (NYSEMKT:CCA): Monthly distribution increased by 2.94% to $0.035 from $0.034.

Nuveen Senior Income (NSL): Monthly distribution increased by 2.74% to $0.0375 from $0.0365

MFS High Income (CIF): Monthly distribution increased by 2.52% to $0.01997 from $0.01948

EV Floating Rate Income+ (EFF): Monthly distribution increased by 2.5% to $0.083 from $0.081.

Templeton Global Income (GIM): Monthly distribution increased by 2.24% to $0.041 from $0.0401.

EV Floating Rate 2022 Target Term (NYSE:EFL)- Monthly dividend increased by 2.22% to $0.046 from $0.045 per share.

Distribution Decrease (> 2%)

JH Income Sec Trust (JHS) - Quarterly dividend decreased by 27.0% to $0.1522 from $0.2085 per share.

Blackrock FL Muni 2020 Targeted Term (BFO)- Monthly dividend decreased by 23.08% to $0.02 from $0.026 per share.

JH Investor Trust (NYSE:JHI) - Quarterly dividend decreased by 22.39% to $0.2458 from $0.3167 per share.

Royce Value Trust (RVT) - Quarterly dividend decreased by 21.62% to $0.29 from $0.37 per share.

Blackrock Muni Bond (BBK) - Monthly dividend decreased by 14.17% to $0.0545 from $0.0635 per share.

Blackrock MuniHldg Qlty Fd (MUS) - Monthly dividend decreased by 11.88% to $0.0445 from $0.0505 per share.

Nuveen Tax-Adv Total Return Strat (JTA) - Quarterly dividend decreased by 11.11% to $0.24 from $0.27 per share.

Nuveen Hi Income Nov 2021 Targeted Term (JHB) - Monthly dividend decreased by 10.75% to $0.0415 from $0.0465 per share.

Nuveen Hi Income 2020 Targeted Term (JHY) - Monthly dividend decreased by 10.26% to $0.035 from $0.039 per share.

Nuveen Core Equity Alpha (JCE) - Quarterly dividend decreased by 9.91% to $0.25 from $0.2775 per share.

Invesco Muni Opp Tr (VMO) - Monthly dividend decreased by 9.75% to $0.05 from $0.0554 per share.

Nuveen Diversified Div & Income (NYSE:JDD) - Quarterly dividend decreased by 9.38% to $0.2175 from $0.24 per share.

Invesco Adv Muni Income Tr II (VKI) - Monthly dividend decreased by 8.72% to $0.045 from $0.0493 per share.

Invesco Investment Grade NY Muni (VTN) - Monthly dividend decreased by 8.66% to $0.0506 from $0.0554 per share.

MuniEnhanced (MEN) - Monthly dividend decreased by 8.33% to $0.044 from $0.048 per share.

Blackrock MuniYield CA (MYC) - Monthly dividend decreased by 7.69% to $0.048 from $0.052 per share.

Nuveen Tax-Adv Div Growth (JTD) - Quarterly dividend decreased by 7.46% to $0.31 from $0.335 per share.

Nuveen Rel-Estate Income (JRS) - Quarterly dividend decreased by 7.32% to $0.19 from $0.205 per share.

Nuveen Nasdaq 100 Dynamic (QQQX) - Quarterly dividend decreased by 7.14% to $0.39 from $0.42 per share.

Blackrock MuniHldg Inv Qlty (NYSE:MFL) - Monthly dividend decreased by 7.08% to $0.0525 from $0.0565 per share.

Blackrock MuniVest II (MVT) - Monthly dividend decreased by 6.3% to $0.0595 from $0.0635 per share.

Nuveen NY Select Tax-Free Income Port (NXM) - Monthly dividend decreased by 5.95% to $0.0395 from $0.042 per share.

Invesco CA Val Muni Income (VCV) - Monthly dividend decreased by 5.69% to $0.0481 from $0.051 per share.

Nuveen S&P 500 Dynamic Overwrite (SPXX) - Quarterly dividend decreased by 5.36% to $0.265 from $0.28 per share.

Nuveen S&P 500 Buy-Write Income (BXMX) - Quarterly dividend decreased by 5.1% to $0.2325 from $0.245 per share.

Nuveen Dow 30SM Dynamic Overwrite (DIAX) - Quarterly dividend decreased by 4.84% to $0.295 from $0.31 per share.

Nuveen Global High Income (JGH): Monthly distribution decreased by 4.7% to $0.102 from $0.107.

Nuveem MN Quality Muni (NMS): Monthly distribution decreased by 3.92% to $0.049 from $0.051.

Invesco Quality Muni (NYSE:IQI): Monthly distribution decreased by 2.82% to $0.0516 from $0.0531.

MFS High Income Muni (CXE): Monthly distribution decreased by 2.2% to $0.022 from $0.0225.

Distribution Policy Change

Gabelli Global Small & Mid Cap (GGZ): The fund shifted to a quarterly distribution policy for the fund's shareholders. The initial payment $0.14 on March 22, 2019.

Merger

EV NJ Muni Income (EVJ) and EV Muni Income Tr (EVN). The NJ Muni fund will merge into EVN as of the close on Feb 22, 2019.

  • The exchange ratio at which common shares of EVJ were converted to common shares of EVN is listed below: Acquired Fund (Trading Symbol): Eaton Vance New Jersey Municipal Income Trust (EVJ), Exchange Ratio: 1.033252458

  • Fractional shares of EVN common stock were not issued in the merger and consequently cash will be distributed for any such fractional amounts.

EV Muni Bond II (EIV) and EV Muni Bond (EIM) shareholders approved the merger of EIV into EIM. Its expected to be completed by the end of the day March 22, 2019. Each EIV shareholder will be issued shares of EIM at an exchange ratio based on the funds' NAVs.

N-2/IPO

RiverNorth Opportunities Fund II- The Fund filed a SEC form N-2 for an Initial Public Offering of common shares on February 25, 2019.

Tender Offer Period

Blackrock Debt Strategies (DSU): The fund announced the results of the second measurement period under its discount management program expected to end next year.

  • As previously announced, under the Program, the Fund intends to offer to repurchase its common shares based on three 3-month measurement periods (each a "Measurement Period") if the Fund's common shares trade at an average daily discount to net asset value ("NAV") of greater than 7.5% during a Measurement Period (a "Trigger Event"). The Fund’s second Measurement Period commenced on December 1, 2018 and ended on February 28, 2019 (the "Second Measurement Period").

  • The Fund’s Board of Directors (the “Board”) determined that if a Trigger Event occurred during the Second Measurement Period, the Fund would offer to repurchase its outstanding common shares by conducting a tender offer for 5% of its outstanding common shares at a price equal to 98% of the Fund’s NAV per share as determined as of the close of the regular trading session of the New York Stock Exchange ("NYSE") on the day after the tender offer expires. During the Second Measurement Period, the Fund's average daily discount to NAV was -12.9%.

  • As a result, the Fund expects to commence the tender offer on or about March 15, 2019, with the expiration of the tender offer currently anticipated to be on or about April 15, 2019.

Takeaways

Discounts continue to tighten across the entire CEF space with the average discount on the fixed income side down to 5.16%  Just two weeks ago it was at 6% according to CEFA.  And during the week of Christmas, the average discount on the bond side was a crazy -12%.  So clearly we've come in strongly in the last two months as the dynamics that setup the sharp decline reversed course in early January.  Those being the tax loss selling and the rebound in the market (fall in the VIX).  

Below is general sector information on the CEF space.  General equity did the best on NAV for the month of March and still sports a negative one year z-score.  Our call on the loan space seeing some discount closure is starting to play out.  In the table below the senior loan category saw 1.66% of discount tightening, the second largest of any category.  

After a rough fourth quarter for investors, we have realized a V-shaped recovery as both NAVs have rebounded and discounts tightened.  This is not the volatility that many investors had signed up for when they ventured into CEFs.  But if the investor knows how to use them and combine them in a broader income-based portfolio, the rewards by adding during swoons like December can be significant.  We wrote in our March letter and on the public side a piece directed at our investment strategy "LDI Investing Is No Longer Just For Pension Funds."  CEFs are an integral part of this strategy.  

Right now, CEFs are expensive but NAVs are moving up nicely so I'm not overly concerned.  I did lighten up a bit and get cash back to our traditional long-term levels after using it all up in December (and even going ever so slightly into margin).  So overall I'm about at average levels though I did start to trim a few other positions and move them to open-end mutual funds for the time being.  

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