This article was released to CEF/ETF Income Laboratory members on June 2nd, 2023. Please check latest data before investing.
“Quality” Closed-End Fund Report
Quantitative screens help to rapidly narrow down attractive candidates from the database of 500-plus closed-end funds for further due diligence and investigation.
Author
Based on feedback from members, it seems that a very many number of investors, understandably, place a great emphasis on coverage and return of capital. While I’m not going to rehash the entire ROC argument here (it is suffice to say that the issue is much more complicated than “ROC = bad”), some investors may consider a fund with over 100% coverage to be attractive simply because they know that the distributions are being covered by earnings. Such a fund may be at lower risk of a distribution cut, which can cause devastating impacts to a fund’s market price and may even afford to raise its distribution in the future.
What does the “quality” label indicate? Simply put, it means that the distribution coverage is greater than 100%. However, please note these caveats: Firstly, coverage ratios are calculated using earnings data from CEFConnect. Although there are sometimes discrepancies with CEFConnect’s data, this allows us to automate the calculation process for the entire universe, and we consider it to be sufficient for a preliminary screen anyway. Before buying or selling any fund, it’s recommended to independently verify the coverage ratios from the individual fund annual/semi-annual reports themselves. Secondly, having a coverage ratio >100% does not guarantee that the fund’s distribution is secure. Many funds reduce their distributions periodically in line with market conditions in order to maintain good coverage. Thirdly, a coverage cut off ratio of 100% is, ultimately, an arbitrary number. A fund with 99.9% coverage will be excluded from the rankings, whereas funds with 100.1% coverage will be considered, even though only a sliver of coverage separates the two.
The coverage ratio is calculated by dividing the earnings/share number provided by CEFConnect on the “distributions” tab by the distribution/share. CEFdata also provides earning coverage numbers as well.
I hope that these rankings of quality CEFs will provide fertile ground for further exploration.
Key to table headings:
P/D = premium/discount
Z = 1-year z-score
Lev = leverage
BE = baseline expense
Cov = coverage
Data were taken from the close of May 30th, 2023.
1. Top 10 widest quality discounts
The following data show the 10 CEFs with the highest discounts and coverage >100%. Yields, z-scores and leverage are shown for comparison.
| CEF | Category | P/D | Yield | Z | Lev | BE | Cov |
| (HFRO) | Senior Loans | -36.78% | 10.87% | -2.3 | 13% | 1.28% | 102% |
| (CAF) | Asia Equity | -19.80% | 0.02% | -1.9 | 0% | 1.79% | 977% |
| (NXJ) | Single-state Munis | -16.29% | 3.19% | -1.4 | 41% | 0.95% | 164% |
| (NQP) | Single-state Munis | -16.27% | 3.11% | -1.4 | 40% | 0.97% | 155% |
| (HYB) | High Yield | -15.67% | 7.26% | -1.7 | 31% | 1.34% | 109% |
| (DMF) | National Munis | -15.55% | 2.87% | -1.7 | 36% | 0.83% | 180% |
| (VPV) | Single-state Munis | -15.34% | 4.20% | -1.2 | 40% | 1.11% | 118% |
| (BNY) | New York Munis | -15.25% | 3.61% | -1.6 | 39% | 1.03% | 115% |
| (MIO) | National Munis | -15.24% | 4.83% | -1.5 | 30% | 1.11% | 101% |
| (CXE) | National Munis | -15.22% | 4.45% | -1.3 | 40% | 1.30% | 110% |
Income Lab
2. Top 10 best quality z-scores
CEFs with the best (most negative) z-scores are potential buy candidates. The following data show the 10 CEFs with the lowest z-scores. Premium/discount, yields and leverage are shown for comparison. Only funds with coverage >100% are considered.
| CEF | Category | Z | P/D | Yield | Lev | BE | Cov |
| (HFRO) | Senior Loans | -2.3 | -36.78% | 10.87% | 13% | 1.28% | 102% |
| (JPT) | Preferreds | -2.2 | -12.23% | 6.98% | 34% | 1.31% | 113% |
| (PFO) | Preferreds | -2.2 | -9.56% | 7.56% | 41% | 1.37% | 123% |
| (NRK) | New York Munis | -1.9 | -14.72% | 4.03% | 40% | 1.45% | 131% |
| (HNW) | High Yield | -1.9 | -14.88% | 10.86% | 30% | 1.58% | 109% |
| (CAF) | Asia Equity | -1.9 | -19.80% | 0.02% | 0% | 1.79% | 977% |
| (NZF) | National Munis | -1.8 | -14.54% | 2.76% | 38% | 1.06% | 205% |
| (VTN) | New York Munis | -1.8 | -15.01% | 3.93% | 39% | 1.10% | 122% |
| (FFC) | Preferreds | -1.8 | -7.64% | 8.10% | 41% | 0.90% | 120% |
| (PFD) | Preferreds | -1.8 | -5.94% | 6.99% | 40% | 1.28% | 118% |
Income Lab
3. Top 20 highest quality yields
Some readers are mostly interested in obtaining income from their CEFs, so the following data presents the top 20 highest yielding CEFs. I’ve also included the premium/discount and z-score data for reference. Before going out and buying all 10 funds from the list, some words of caution: [i] higher yields generally indicate higher risk, and [ii] some of these funds trade at a premium, meaning you will be buying them at a price higher than the intrinsic value of the assets (which is why I’ve included the premium/discount and z-score data for consideration). Only funds with coverage >100% are considered. To make the charts more manageable, I’ve split the funds into two groups of 10.
| CEF | Category | Yield | P/D | Z | Lev | BE | Cov |
| (OXLC) | Senior Loans | 17.83% | 3.48% | -0.5 | 38% | 7.90% | 104% |
| (PAXS) | Multisector Income | 12.64% | -7.07% | -0.6 | 46% | 2.22% | 110% |
| (PDO) | Global Income | 12.25% | -2.94% | 0.2 | 49% | 2.15% | 109% |
| (WDI) | Multisector Income | 11.67% | -11.62% | 0.0 | 32% | 1.75% | 105% |
| (DSL) | Global Income | 11.44% | -3.19% | 0.6 | 30% | 1.51% | 107% |
| (BGX) | Senior Loans | 10.87% | -14.66% | -1.4 | 39% | 2.21% | 103% |
| (BGX) | Senior Loans | 10.87% | -14.66% | -1.4 | 39% | 2.21% | 103% |
| (HNW) | High Yield | 10.86% | -14.88% | -1.9 | 30% | 1.58% | 109% |
| (PHT) | High Yield | 10.37% | -12.02% | -0.7 | 33% | 1.14% | 104% |
| (BGB) | Senior Loans | 9.90% | -13.31% | -1.4 | 36% | 2.26% | 103% |
| (BGH) | High Yield | 9.79% | -11.90% | -0.8 | 27% | 1.79% | 111% |
| (AOD) | Global Equity | 8.57% | -13.80% | -1.2 | 1% | 1.14% | 103% |
| (FPF) | Preferreds | 8.41% | -10.76% | -0.9 | 34% | 1.35% | 103% |
| (DHF) | High Yield | 8.23% | -14.12% | -1.4 | 30% | 1.28% | 110% |
| (FFC) | Preferreds | 8.10% | -7.64% | -1.8 | 41% | 0.90% | 120% |
| (WIW) | Investment Grade | 7.82% | -13.33% | -0.4 | 37% | 0.88% | 126% |
| (WIW) | Investment Grade | 7.82% | -13.33% | -0.4 | 37% | 0.88% | 126% |
| (WEA) | Investment Grade | 7.78% | -8.94% | -0.8 | 34% | 1.07% | 101% |
| (WEA) | Investment Grade | 7.78% | -8.94% | -0.8 | 34% | 1.07% | 101% |
| (PFO) | Preferreds | 7.56% | -9.56% | -2.2 | 41% | 1.37% | 123% |
Income Lab Income Lab
4. Top 10 best combination of quality yield and discount
For possible buy candidates, it’s probably a good idea to consider both yield and discount. Buying a CEF with both a high yield and discount not only gives you the opportunity to capitalize from discount contraction, but you also get “free” alpha every time the distribution is paid out. This is because paying out a distribution is effectively the same as liquidating the fund at NAV and returning the capital to the unitholders. I considered several ways to rank CEFs by a composite metric of both yield and discount. The simplest would be yield + discount. However, I disregarded this because yields and discounts may have different ranges of absolute values and a sum would be biased toward the larger set of values. I finally settled on the multiplicative product, yield x discount. This is because I consider a CEF with 7% yield and 7% discount to be more desirable than a fund with 2% yield and 12% discount, or 12% yield and 2% discount, even though each pair of quantities sum to 14%. Multiplying yield and discount together biases toward funds with both high yield and discount. Since discount is negative and yield is positive, the more negative the “DxY” metric, the better. Only funds with >100% coverage are considered. The DxY score is scaled by 100.
| CEF | Category | P/D | Yield | Z | DxY | Lev | BE | Cov |
| (HFRO) | Senior Loans | -36.78% | 10.87% | -2.3 | -4.0 | 13% | 1.28% | 102% |
| (HNW) | High Yield | -14.88% | 10.86% | -1.9 | -1.6 | 30% | 1.58% | 109% |
| (BGX) | Senior Loans | -14.66% | 10.87% | -1.4 | -1.6 | 39% | 2.21% | 103% |
| (WDI) | Multisector Income | -11.62% | 11.67% | 0.0 | -1.4 | 32% | 1.75% | 105% |
| (BGB) | Senior Loans | -13.31% | 9.90% | -1.4 | -1.3 | 36% | 2.26% | 103% |
| (PHT) | High Yield | -12.02% | 10.37% | -0.7 | -1.2 | 33% | 1.14% | 104% |
| (AOD) | Global Equity | -13.80% | 8.57% | -1.2 | -1.2 | 1% | 1.14% | 103% |
| (BGH) | High Yield | -11.90% | 9.79% | -0.8 | -1.2 | 27% | 1.79% | 111% |
| (DHF) | High Yield | -14.12% | 8.23% | -1.4 | -1.2 | 30% | 1.28% | 110% |
| (HYB) | High Yield | -15.67% | 7.26% | -1.7 | -1.1 | 31% | 1.34% | 109% |
Income Lab
5. Top 10 best combination of quality yield, discount and z-score
This is my favorite metric because it takes into account all three factors that I always consider when buying or selling CEFs: Yield, discount and z-score. The composite metric simply multiplies the three quantities together. A screen is applied to only include CEFs with a negative one-year z-score. As both discount and z-score are negative while yield is positive, the more positive the “DxYxZ” metric, the better. Only funds with >100% coverage are considered. The DxYxZ score is scaled by 100.
| CEF | Category | P/D | Yield | Z | DxYxZ | Lev | BE | Cov |
| (HFRO) | Senior Loans | -36.78% | 10.87% | -2.3 | 9.2 | 13% | 1.28% | 102% |
| (HNW) | High Yield | -14.88% | 10.86% | -1.9 | 3.0 | 30% | 1.58% | 109% |
| (BGX) | Senior Loans | -14.66% | 10.87% | -1.4 | 2.3 | 39% | 2.21% | 103% |
| (HYB) | High Yield | -15.67% | 7.26% | -1.7 | 1.9 | 31% | 1.34% | 109% |
| (JPT) | Preferreds | -12.23% | 6.98% | -2.2 | 1.9 | 34% | 1.31% | 113% |
| (BGB) | Senior Loans | -13.31% | 9.90% | -1.4 | 1.9 | 36% | 2.26% | 103% |
| (DHF) | High Yield | -14.12% | 8.23% | -1.4 | 1.6 | 30% | 1.28% | 110% |
| (PFO) | Preferreds | -9.56% | 7.56% | -2.2 | 1.6 | 41% | 1.37% | 123% |
| (AOD) | Global Equity | -13.80% | 8.57% | -1.2 | 1.4 | 1% | 1.14% | 103% |
| (NRK) | New York Munis | -14.72% | 4.03% | -1.9 | 1.1 | 40% | 1.45% | 131% |
Income Lab
Top DxYxZ funds
The top DxYxZ funds from this month’s Quality report are HFRO, HNW and JPT.
The Highland Income Fund (HFRO) is a relatively complex, hedge fund-like CEF that invests in a few, highly-concentrated positions. It has an attractive set of valuation metrics, including a discount of -36.78%, yield of 10.87% and z-score of -2.3, however investors should consider HFRO’s history and management before investing (see HFRO: Thoughts On The Conversion Proposal).
Pioneer Diversified High Income Fund (HNW) is a diversified fixed income CEF with allocations to domestic and international high-yield bonds, emerging market bonds, event-linked bonds, and CMBS. It yields 10.88% with a -14.88% discount and -1.9 z-score.
Blackstone / GSO Long-Short Credit Income Fund (BGX) is a fixed income fund that mainly invests in senior loans, with a smattering of high-yield bonds and CLOs. Although BGX has “long-short” in its title, it doesn’t actually have any short exposure at present. It trades with a -14.66% discount, -1.4 z-score and 10.87% yield.
Strategy Statement
Our goal at the CEF/ETF Income Laboratory is to provide consistent income with enhanced total returns. We achieve this by:
- (1) Identifying the most profitable CEF and ETF opportunities.
- (2) Avoiding mismanaged or overpriced funds that can sink your portfolio.
- (3) Employing our unique CEF rotation strategy to “double compound“ your income.
It’s the combination of these factors that has allowed our Income Generator portfolio to massively outperform our fund-of-CEFs benchmark ETF (YYY) whilst providing growing income, too (approx. 10% CAGR).
Income Lab
Remember, it’s really easy to put together a high-yielding CEF portfolio, but to do so profitably is another matter!
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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