YH Power Rankings Report | March 2019

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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)

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In aggregate, we had only 6 funds meet the screen, down from 15 last month and over 40 the month before. We again relaxed the UNII threshold (eliminating it) and the z-score screen to 'lower is better.'  

That widened the field to some 105 funds.

10 Largest Discounts

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

Looking Deeper Into Pioneer High Income Advantage (MAV)

This is the sister fund of one we recently sold, Pioneer High Income (MHI).  The funds are very similar but with one key distinction:  the fiscal year end's are one month off.  In other words, the fiscal year end for MAV is March 31 while the year end for MHI is April 30.  

With very similar portfolios, what MAV reports the other (MHI) is likely to report one month later.  In January, MAV announced a sizable distribution cut going from $0.0525 to $0.0425, -19%.  Meanwhile, still MHI has not cut.  

Pioneer (Amundi) is a semi-annual reporter and the last data we have is from the end of September/end of October.  For MHI, the coverage rate is 91% with UNII of 12.7 cents.  For MAV, coverage is now 106.6% (based on the new distribution but earnings from Sept) with UNII around 8 cents.  

If we use MAV as a template for MHI, it is clearly time to get out of the latter as the lower coverage ratio continues to drain UNII.  A cut for MHI is likely imminent.  

So is MAV a good place for that income now that they cut and being one of the few values left in the muni CEF space?  Well, we are in the process of researching for our muni update but looking at the characteristics of the fund itself, it trades at a nice discount thanks to the distribution cut.  What we typically find is that the discount widens for about 2-4 months following a large cut before it bottoms out.  

The yield for MAV is much lower following the cut at 4.82%, vs. 5.32% for MHI.  Of course, MHI wasn't earning that distribution back in September and is unlikely to be earning it six months later either.  We will receive new earnings and UNII data in late May for MAV and late June for MHI.

MAV may look cheap but when we run it through our model, the discount is actually warranted based on its "type" and the yield it produces.  The model essentially looks at all national muni funds and compares them based on discount, yield, whether they are a term trust, perpetual true, or target term, and lastly, among other factors.  

The warranted discount for the fund based on the regression is approximately -7.3%.   Right now, it trades around -8.2% so a bit less than 1% until it gets to our target discount.  Note, that this is about a point higher than the 52-week average of 6.25%.  

While there is a chance that the discount tightens a bit just because of the current state of the muni CEF market.  Most muni CEFs trade tighter than their 1-year average.  We think there's a less than 50-50 shot it gets closer to and trade just above the 52 week average.  This would be at the $10.73-$10.75 level.

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MAV is the second best fund YTD on a NAV basis at +2.51% for the high yield muni sector.  The fund that we largely swapped to was Nuveen High Income (NMZ), which was the only fund that bested it at +2.87.

Some data on the fund MAV:

We think there's significant risk given the call schedules of both funds.  Below is MAVs call schedule with 58% becoming call eligible in the next five years, opening them up to the possibility of being replaced by lower yielding issues.  I say 'possibility' because some issues that are call-eligible are not being called for various reasons, including because current yields are not any lower than the current issue.  This is the first time in quite a while that this has been the case.  

Pioneer doesn't break it down by year so all 58% of those calls could be in year 4 or 5 and not effect the portfolio for a number of years- we just don't know.  And uncertainty requires a discount to the average spread the fund would typically trade from NAV.

Concluding Thoughts:

We do not think MAV is a "deep value" muni opportunity but trading near its warranted discount to NAV.  Of course, we could see an influx of buying providing a small bump to the price closing the discount a bit temporarily.  Still, we would avoid both. Our thesis for owning MHI despite that call schedule was based on the fact that they had raised their distributions.  And near-term, the fund that raises the distribution likely has the safest distribution.  Fast-forward a year and things can change.  With MAV cutting, MHI is clearly on the chopping block.  Buyers and holders beware!

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