YH Convergence Trade Report | March 2019

YH Convergence Trade Report - March 2019

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.

In the January Muni Market Update we had five funds that we said to 'buy today for the discount capture'.

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).

Below is MYF, which shows a strong V-shaped recovery in the last 7 weeks. How did we identify it? The yield was attractive enough at the wide discount for it to garner a bunch of interest from shareholders. Additionally, the fund had just cut and was unlikely to cut again. Third, the variance between the current discount and the average discount was substantial. Of the Blackrock funds, it was the only one that sold at a premium in the last twelve months. So there was a lot of pull for the discount to close.


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.

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.