/   imtbo.com   / English  

2019-10-19 15:18:49

For income investors, closed-end funds, or CEFs, are an attractive investment class that offers high income generally in the range of 6%-10%, broad diversification in terms of a variety of asset classes, and market matching total returns in the long term if selected carefully and acquired at reasonable price points.

However, CEFs come with their own set of risks and challenges that investors should be aware of. We list various risk factors at the end of this article.

Even though the S&P 500 sits just a hair below its all-time high, the markets have generally been volatile in 2019. During this volatile ride, one type of investment (closed-end funds) has not only survived but has excelled. CEF funds generally have done very well this year. For instance, our 8% CEF Income portfolio is up 24% year-to-date (as of 10/15/2019). However, this also means that most CEF funds are not cheap today. But at the same time, as income investors, we cannot afford to be cash heavy and need to be always on the lookout for good investment candidates that have a solid track record, offer good yield, and are attractively priced.

For regular stocks, there are several popular metrics that we could use to figure out if the stock was overvalued or undervalued at a given time, though it's not easy. But it's even harder to figure out which CEF funds to invest in and if they are attractive buys at a given point in time. This is what this series of articles does - to attempt to separate the wheat from the chaff by applying a broad-based screening process followed by an eight-criteria weighting system.

This is our monthly series on CEFs, where we highlight five CEFs that are relatively cheap, offer excess discounts to their NAVs, pay high distributions, and have a solid track record. We also write a monthly series to identify 5 Safe and Cheap DGI stocks. You can read our most recent such article here.

We use our multi-step filtering process to select just five CEFs from around 500 available funds. The selected five CEFs this month, as a group, are offering an average distribution rate of 6.60% and provide an average discount/premium of -5.12%. Besides, these five funds have collectively returned 9.25% since inception (over 10 years). Since this is a monthly series, there may be some selections that could overlap from month to month.

Please note that these are not recommendations to buy but should be considered as a starting point for further research.

Author's Note: This article is part of our monthly series that tries to discover five best buys in the CEF arena at that point in time. Certain parts of the introduction, definitions, and the section describing selection criteria/process may have some commonality and repetitiveness with our other articles in the series. This is unavoidable as well as intentional to keep the entire series consistent and easy to follow for the new readers.

Goals for the Selection Process

Our goals are simple and are aligned with most conservative income investors, including retirees who wish to dabble in CEFs. We want to shortlist five closed-end funds that are relatively cheap, offering good discounts to their NAVs, paying relatively high distributions, and have a solid and substantial past track record in maintaining and growing their NAVs. We adopt a systematic approach to filter down the 500-plus funds into a small subset.

Here's a summary of our primary goals:

Reasonably high income/distributions.High long-term performance in terms of total return on NAV: We also try to measure if there has been an excess NAV return over and above the distribution rate.Cheaper valuation at the time of buy, determined by the absolute discount to NAV and the excess discount offered compared to their history.Coverage ratio: We try to measure to what extent the income generated by the fund covers the distribution. Not all CEFs fully cover the distribution, especially the equity, and specialty funds, as they depend on the capital gains to cover their distribution. That’s why this is just one of several criteria that are being used.

We believe that a well-diversified CEF portfolio should at least consist of 10 CEFs or more, preferably from different asset classes. It's also advisable to build the portfolio over a period rather than invest in one lump sum. If you were to invest in one CEF every month, in a year, you would have a well-diversified CEF portfolio. What we provide here every month is a list of five probable candidates for further research. We think a CEF portfolio can be an important component in the overall portfolio strategy. One should preferably have a DGI portfolio as the foundation, and the CEF portfolio could be used to boost the income level to the desired level. How much should one allocate to CEFs? Each investor needs to answer this question himself/herself based on the personal situation and factors like the size of the portfolio, income needs, risk appetite, or risk tolerance.

Selection Process

We have more than 500 CEF funds to choose from, which come from different asset-classes like equity, preferred stocks, mortgage bonds, government and corporate bonds, energy MLPs, utilities, and municipal income. Just like in other life situations, even though the broader choice always is good, it does make it more difficult to make a final selection. The first thing we want to do is to shorten this list of 500 CEFs to a more manageable subset of around 100 funds. We can apply some criteria to shorten our list, but the criteria need to be broad and loose enough at this stage to keep all the potentially good candidates. Also, the criteria that we build should revolve around our original goals. One important change we are making this month from our past practice is that we will demand only a five-year history instead of a 10-year history. With this change, we will be able to include many more CEFs that still have a good history and a chance to be excellent income providers in the coming years.

Criteria to Shortlist:

Criteria

Brings down the number of funds to...

Reason for the Criteria

Baseline expense < 2.0% and Avg. Daily Volume > 100,000

Approx. 435 Funds

We do not want funds that charge excessive fees. Also, we want funds that have fair liquidity.

Market-capitalization > 100 Million

Approx. 400 Funds

We do not want funds that are too small.

Track record/ History longer than ten years (inception date 2014 or earlier)

Approx. 375 Funds

We want funds that have a long track record.

UNII* Balance > -$2.00

Approx. 370 Funds

A large UNII (Undistributed Net Investment Income) negative balance would indicate the fund is having problems paying its distributions.

Discount/Premium < +5%

Approx. 335 Funds

We do not want to pay too high a premium; in fact, we want bigger discounts.

Since Inception Annualized Return on NAV > 0%

And 5-Year Annualized Return on NAV > -5%

Approx. 220-240 Funds

We want funds that have a reasonably good past track record in maintaining their NAVs.

Distribution (dividend) Rate > 5%

Approx. 125 -150 Funds

The current distribution (income) to be reasonably high.

After we applied the above criteria this month, we were left with 139 funds in our list, which is still too long to present here or meaningfully select five funds.

Note: Most of the data in this article is sourced from Cefconnect.com, Cefa.com, and Morningstar.com.

Narrowing Down to 50 Funds

To bring down the number of funds to a more manageable number, we will shortlist ten funds based on each of the following criteria. After that, we will apply certain qualitative criteria on each fund and rank them to select the top five.

Five broad criteria:

Discount to NAV.Excess Discount/Premium (explained below).Distribution rate.Return on NAV since inception (long-term over ten years).Return on NAV last five years (medium-term over five years).Coverage ratio.

Discount to NAV:

We sort our list (of 139 funds) on the discount/premium in descending order since we want to buy when we are offered the largest discount. For this criterion, the lower the value, the better it is. So, we select the top 10 funds (most negative values) from this sorted list.

(All data as of 10/11/2019)

Ticker

Fund Name

Leverage %

Baseline Exp.

Distrib. Rate

Discount/ Premium

Excess Discount

NAV Return (Since Incep)

5YR Ann. RTN ON NAV

Inception Dt.

Distrib. Coverage

IIF

MS India Investment

--

1.35%

16.18%

-13.73%

-1.36%

8.60%

3.32%

2/25/1994

0.00%

FAX

Aberdeen Asia-Pacific Income

31.73%

1.16%

7.82%

-13.52%

0.57%

6.96%

1.89%

4/24/1986

52.00%

FT

Franklin Universal Trust

24.06%

1.08%

5.12%

-13.45%

1.81%

6.49%

6.98%

9/23/1988

99.38%

MXF

Mexico Fund

--

1.61%

7.55%

-13.11%

-0.47%

8.12%

-5.72%

6/3/1981

5.76%

GRX

Gabelli Health & Wellness

23.00%

1.55%

5.38%

-13.02%

0.60%

8.64%

5.98%

6/19/2007

0.00%

EVV

EV Limited Duration Income

35.31%

1.29%

6.67%

-12.80%

0.75%

6.32%

4.70%

5/30/2003

89.86%

BGT

BlackRock Floating Rate Inc Tr

27.63%

1.20%

7.50%

-12.77%

-0.70%

5.14%

4.65%

8/30/2004

98.80%

AFT

Apollo Senior Floating Rate

34.88%

2.26%

8.20%

-12.47%

-0.36%

5.28%

4.42%

2/24/2011

104.20%

IDE

Voya Infrastructure Ind & Mat

--

1.22%

8.33%

-12.43%

-3.07%

5.23%

2.80%

1/27/2010

5.24%

EFR

EV Senior Floating Rate

34.70%

1.30%

7.00%

-12.15%

-0.43%

5.36%

5.34%

11/24/2003

95.97%

Excess Discount/Premium:

We certainly like funds that are offering large discounts (not premiums) to their NAVs. But sometimes. We may consider paying near zero or a small premium if the fund is great otherwise. So, what's important is to see the excess discount/premium and may not be the absolute value. We want to see the discount (or premium) on a relative basis to their record say 52-week average.

By subtracting the 52-week average discount/premium from the current discount/premium will give us the excess discount/premium. For example, if the fund has the current discount of -5%, but the 52-week average was +1.5% (premium), the excess discount/premium would be -6.5%.

Excess Discount/Premium = Current Discount/Premium (Minus) 52-Wk Avg. Discount/ Premium

So, what's the difference between the 12-month Z-score and this measurement of Excess Discount/Premium? The two measurements are quite similar, maybe with a subtle difference. The 12-month Z-score would indicate how expensive (or cheap) the CEF is in comparison to the 12 months. Z-score also takes into account the standard deviation of the discount/premium. Our measurement (excess discount/premium) compares the current valuation with the last 12-month average.

We sort our list (of 139 funds) on the “excess discount/premium” in descending order. For this criterion, the lower the value, the better it is. So, we select the top 10 funds (most negative values) from this sorted list.

Ticker

Fund Name

Leverage %

Baseline Exp.

Distrib. Rate

Discount/ Premium

Excess Discount

NAV Return (Since Incep)

5YR Ann. RTN ON NAV

Inception Dt.

Distrib. Coverage

NCV

AGIC Convertible & Income

33.40%

1.33%

11.23%

0.36%

-5.67%

7.25%

3.16%

3/31/2003

56.19%

NCZ

AGIC Convertible & Income II

29.95%

1.37%

10.87%

-1.00%

-5.04%

6.31%

3.13%

7/31/2003

56.67%

BME

BlackRock Health Sciences

--

1.12%

6.46%

-0.62%

-3.84%

12.21%

11.52%

3/28/2005

4.45%

IDE

Voya Infrastructure Ind & Mat

--

1.22%

8.33%

-12.43%

-3.07%

5.23%

2.80%

1/27/2010

5.24%

HQL

Tekla Life Sciences Investors

--

1.19%

9.94%

-10.03%

-2.62%

8.74%

2.64%

5/8/1992

0.00%

ETW

EV Tax-Managed Glb B-W Opps

--

1.09%

9.15%

-4.99%

-2.29%

5.63%

5.12%

9/28/2005

23.66%

BST

BlackRock Science and Technology

0.20%

1.08%

5.56%

2.11%

-1.64%

17.38%

17.38%

10/29/2014

0.00%

BTO

JH Financial Opportunities

16.79%

1.62%

7.00%

-2.21%

-1.42%

10.93%

11.51%

8/18/1994

7.98%

IGA

Voya Global Adv & Premium Opp

--

0.98%

9.05%

-9.83%

-1.38%

6.27%

6.16%

10/26/2005

5.18%

IIF

MS India Investment

--

1.35%

16.18%

-13.73%

-1.36%

8.60%

3.32%

2/25/1994

0.00%

High Current Distribution Rate:

After all, most investors invest in CEF funds for their juicy distributions. We sort our list (of 139 funds) on the current distribution rate and select the top 10 funds from this sorted list.

Ticker

Fund Name

Leverage %

Baseline Exp.

Distrib. Rate

Discount/ Premium

Excess Discount

NAV Return (Since Incep)

5YR Ann. RTN ON NAV

Inception Dt.

Distrib. Coverage

IIF

MS India Investment

--

1.35%

16.18%

-13.73%

-1.36%

8.60%

3.32%

2/25/1994

0.00%

ACP

Aberdeen Inc Credit Strategies

30.39%

2.33%

11.96%

-3.14%

2.50%

6.09%

2.57%

1/27/2011

80.42%

VGI

Virtus Global Multi-Sector Inc

27.52%

1.83%

11.68%

-2.85%

5.08%

5.35%

3.81%

2/24/2012

41.11%

NCV

AGIC Convertible & Income

33.40%

1.33%

11.23%

0.36%

-5.67%

7.25%

3.16%

3/31/2003

56.19%

HEQ

JH Hedged Equity & Income Fund

--

1.13%

11.04%

-5.22%

0.54%

5.10%

3.99%

5/26/2011

16.65%

FTF

Franklin Limited Duration Inco

25.50%

1.22%

11.02%

-8.03%

0.48%

5.60%

1.55%

8/27/2003

50.94%

IAF

Aberdeen Australia Equity

--

1.45%

10.98%

-8.11%

-1.03%

6.87%

3.29%

12/12/1985

11.93%

NCZ

AGIC Convertible & Income II

29.95%

1.37%

10.87%

-1.00%

-5.04%

6.31%

3.13%

7/31/2003

56.67%

GGM

Guggenheim Credit Alloc Fund

31.25%

1.75%

10.77%

4.45%

1.93%

6.38%

5.87%

6/26/2013

88.20%

USA

Liberty All-Star Equity

0.00%

1.00%

10.76%

-1.86%

3.70%

8.06%

8.35%

10/31/1986

2.47%

Long term Return on NAV (since inception)

We then sort our list (of 139 funds) on the return on NAV (since Inception) and select the top 10 funds.

Ticker

Fund Name

Leverage %

Baseline Exp.

Distrib. Rate

Discount/ Premium

Excess Discount

NAV Return (Since Incep)

5YR Ann. RTN ON NAV

Inception Dt.

Distrib. Coverage

BST

BlackRock Science and Technology

0.20%

1.08%

5.56%

2.11%

-1.64%

17.38%

17.38%

10/29/2014

0.00%

STK

Columbia Seligman Premium Tech

--

1.16%

8.59%

3.31%

1.93%

12.47%

16.28%

11/25/2009

0.24%

BME

BlackRock Health Sciences

--

1.12%

6.46%

-0.62%

-3.84%

12.21%

11.52%

3/28/2005

4.45%

UTG

Reaves Utility Income

20.96%

1.10%

5.99%

-1.98%

-0.97%

11.64%

11.23%

2/24/2004

40.89%

PGZ

Principal Real Estate Inc Fund

31.09%

2.08%

6.45%

-9.95%

2.25%

11.21%

10.40%

6/26/2013

88.91%

BTO

JH Financial Opportunities

16.79%

1.62%

7.00%

-2.21%

-1.42%

10.93%

11.51%

8/18/1994

7.98%

EMF

Templeton Emerging Markets

--

1.33%

5.32%

-10.38%

0.81%

10.87%

2.94%

2/27/1987

0.88%

HQH

Tekla Healthcare Investors

--

1.03%

9.90%

-10.66%

-0.78%

10.55%

1.20%

4/23/1987

0.00%

AWF

AllianceBernstein Glb High Inc

0.77%

0.99%

6.62%

-9.39%

1.90%

10.54%

5.09%

7/28/1993

89.62%

RFI

Cohen & Steers Tot Ret Realty

0.00%

0.88%

6.52%

1.59%

3.03%

10.34%

10.40%

9/27/1993

32.38%

Medium Term Return on NAV (last 5-years)

We then sort our list (of 139 funds) on the Return on NAV (last five years) and select the top 10 funds.

Ticker

Fund Name

Leverage %

Baseline Exp.

Distrib. Rate

Discount/ Premium

Excess Discount

NAV Return (Since Incep)

5YR Ann. RTN ON NAV

Inception Dt.

Distrib. Coverage

BST

BlackRock Science and Technolo

0.20%

1.08%

5.56%

2.11%

-1.64%

17.38%

17.38%

10/29/2014

0.00%

STK

Columbia Seligman Premium Tech

--

1.16%

8.59%

3.31%

1.93%

12.47%

16.28%

11/25/2009

0.24%

BME

BlackRock Health Sciences

--

1.12%

6.46%

-0.62%

-3.84%

12.21%

11.52%

3/28/2005

4.45%

RQI

Cohen & Steers Qty Inc Realty

23.10%

1.32%

6.12%

2.89%

8.16%

9.90%

12.84%

2/28/2002

31.38%

RNP

Cohen & Steers REIT & Pref

24.04%

1.05%

6.09%

-1.77%

7.41%

9.44%

11.72%

6/27/2003

57.58%

BTO

JH Financial Opportunities

16.79%

1.62%

7.00%

-2.21%

-1.42%

10.93%

11.51%

8/18/1994

7.98%

ASG

Liberty All-Star Growth

0.86%

1.28%

8.23%

1.04%

5.65%

6.56%

11.25%

3/14/1986

0.00%

UTG

Reaves Utility Income

20.96%

1.10%

5.99%

-1.98%

-0.97%

11.64%

11.23%

2/24/2004

40.89%

HTD

JH Tax-Advantaged Dividend Inc

31.94%

1.21%

6.17%

1.17%

5.19%

9.95%

11.06%

2/27/2004

73.99%

QQQX

Nuveen NASDAQ 100 Dynamic Over

--

0.92%

7.03%

-1.07%

-0.90%

10.28%

10.44%

1/30/2007

1.28%

Coverage Ratio (Earnings vs. distributions)

We then sort our list (of 139 funds) on the coverage ratio and select the top 10 funds. The coverage ratio is derived by dividing the earnings per share by distribution amount for a specific period.

Ticker

Fund Name

Leverage %

Baseline Exp.

Distrib. Rate

Discount/ Premium

Excess Discount

NAV Return (Since Incep)

5YR Ann. RTN ON NAV

Inception Dt.

Distrib. Coverage

GIM

Templeton Global Income

--

0.77%

6.60%

-8.57%

2.78%

7.31%

0.52%

3/17/1988

126.81%

TEI

Templeton Emerging Mkts Income

--

1.11%

5.53%

-8.45%

0.69%

7.97%

0.34%

9/23/1993

109.33%

DBL

Doubleline Opportunistic Cred

21.13%

1.53%

6.59%

-0.43%

0.33%

7.73%

7.45%

1/27/2012

108.55%

HYI

Western Asset High Yld Def Opp

--

0.88%

7.15%

-6.12%

3.22%

6.13%

4.26%

10/27/2010

108.07%

AIF

Apollo Tactical Income Fund In

34.25%

2.24%

8.12%

-10.89%

1.15%

5.73%

4.99%

2/26/2013

106.40%

NMZ

Nuveen Muni High Inc Opp

39.31%

1.05%

5.00%

0.64%

3.09%

7.34%

7.04%

11/19/2003

105.88%

BSL

Blackstone / GSO Sr Float Term

33.01%

1.76%

7.80%

0.37%

1.64%

5.08%

4.04%

5/26/2010

105.79%

BGH

Barings Global Short Dur High

29.41%

1.65%

10.36%

-3.81%

2.77%

5.39%

3.51%

10/26/2012

105.06%

ARDC

Ares Dynamic Credit Allocation

28.22%

1.93%

8.72%

-12.02%

0.59%

5.63%

5.23%

11/28/2012

104.28%

FPF

First Trust Inter Dur Pref & I

30.89%

1.33%

6.80%

-2.09%

3.53%

8.28%

7.89%

5/24/2013

104.23%

Now, we have 60 funds in total from the above selections. We will see if there are any duplicates. In our current list of 60 funds, there were 14 duplicates, meaning there are funds that appeared more than once. Following names appear twice (or more):

UTG (twice)BTO (thrice)BST (thrice)STK (twice)NCV (twice)NCZ (twice)IIF (thrice)IDE (twice)BME (thrice)

So, once we remove the duplicate rows, we are left with 46 funds.

Final Step: Narrowing Down to Just five Funds

In our list of funds, we already have some of the best probable candidates. However, so far, they have been selected based on one single criterion that each of them may be good at. That’s not nearly enough. So, we will apply a combination of criteria by applying weights to six factors and filter out the best ones.

We will apply weights to each of the EIGHT criteria:

Baseline expense (Max weight 5)Current distribution rate (Max weight 10)Current discount/premium (Max weight 5)Excess discount/premium (Max weight 5)NAV return since inception (Max weight 10)NAV return last five years (Max weight 10)Excess NAV return over distribution rate (Max weight 5)Coverage Ratio (Max weight 10)

Once we have calculated the weights, we combine them to calculate an “Overall Total Weight.” The sorted list of 46 funds on the “combined total weight” is presented below.

Ticker

Leverage %

Baseline Exp.

Distrib. Rate

Discount/ Premium

Excess Discount

NAV Return (Since Incep)

5YR Ann. RTN ON NAV

Inception Dt.

Distrib. Coverage

Combined Weight

Expense

Dsitr. Rate

Dis/Prem

Excess Dis

NAV Ret

RTN

Excess Return Over Distr.

WT. Coverge ratio

(PGZ)

31.09%

2.08%

6.45%

-9.95%

2.25%

11.21%

10.40%

6/26/2013

88.91%

44.96

2.92

4.30

4.98

0.00

10.00

10.00

4.76

8.00

(UTG)

20.96%

1.10%

5.99%

-1.98%

-0.97%

11.64%

11.23%

2/24/2004

40.89%

40.35

3.90

3.99

0.99

0.97

10.00

10.00

5.00

5.50

(AWF)

0.77%

0.99%

6.62%

-9.39%

1.90%

10.54%

5.09%

7/28/1993

89.62%

40.13

4.01

4.41

4.70

0.00

10.00

5.09

3.92

8.00

(BME)

--

1.12%

6.46%

-0.62%

-3.84%

12.21%

11.52%

3/28/2005

4.45%

38.34

3.88

4.31

0.31

3.84

10.00

10.00

5.00

1.00

(HTD)

31.94%

1.21%

6.17%

1.17%

5.19%

9.95%

11.06%

2/27/2004

73.99%

38.05

3.79

4.11

-0.59

0.00

9.95

10.00

3.78

7.00

(RNP)

24.04%

1.05%

6.09%

-1.77%

7.41%

9.44%

11.72%

6/27/2003

57.58%

37.19

3.95

4.06

0.89

0.00

9.44

10.00

3.35

5.50

(FPF)

30.89%

1.33%

6.80%

-2.09%

3.53%

8.28%

7.89%

5/24/2013

104.23%

35.90

3.67

4.53

1.05

0.00

8.28

7.89

1.48

9.00

(BTO)

16.79%

1.62%

7.00%

-2.21%

-1.42%

10.93%

11.51%

8/18/1994

7.98%

35.50

3.38

4.67

1.11

1.42

10.00

10.00

3.93

1.00

(RFI)

0.00%

0.88%

6.52%

1.59%

3.03%

10.34%

10.40%

9/27/1993

32.38%

35.49

4.12

4.35

-0.80

0.00

10.00

10.00

3.82

4.00

(FT)

24.06%

1.08%

5.12%

-13.45%

1.81%

6.49%

6.98%

9/23/1988

99.38%

35.17

3.92

3.41

5.00

0.00

6.49

6.98

1.37

8.00

(QQQX)

--

0.92%

7.03%

-1.07%

-0.90%

10.28%

10.44%

1/30/2007

1.28%

34.45

4.08

4.69

0.54

0.90

10.00

10.00

3.25

1.00

(BST)

0.20%

1.08%

5.56%

2.11%

-1.64%

17.38%

--

10/29/2014

0.00%

34.21

3.92

3.71

-1.06

1.64

10.00

10.00

5.00

1.00

(RQI)

23.10%

1.32%

6.12%

2.89%

8.16%

9.90%

12.84%

2/28/2002

31.38%

34.00

3.68

4.08

-1.45

0.00

9.90

10.00

3.78

4.00

(ARDC)

28.22%

1.93%

8.72%

-12.02%

0.59%

5.63%

5.23%

11/28/2012

104.28%

33.74

3.07

5.81

5.00

0.00

5.63

5.23

0.00

9.00

(DBL)

21.13%

1.53%

6.59%

-0.43%

0.33%

7.73%

7.45%

1/27/2012

108.55%

33.40

3.47

4.39

0.22

0.00

7.73

7.45

1.14

9.00

(AIF)

34.25%

2.24%

8.12%

-10.89%

1.15%

5.73%

4.99%

2/26/2013

106.40%

32.89

2.76

5.41

5.00

0.00

5.73

4.99

0.00

9.00

(STK)

--

1.16%

8.59%

3.31%

1.93%

12.47%

16.28%

11/25/2009

0.24%

32.79

3.84

5.73

-1.66

0.00

10.00

10.00

3.88

1.00

(NMZ)

39.31%

1.05%

5.00%

0.64%

3.09%

7.34%

7.04%

11/19/2003

105.88%

32.68

3.95

3.33

-0.32

0.00

7.34

7.04

2.34

9.00

(EFR)

34.70%

1.30%

7.00%

-12.15%

-0.43%

5.36%

5.34%

11/24/2003

95.97%

32.50

3.70

4.67

5.00

0.43

5.36

5.34

0.00

8.00

(BGT)

27.63%

1.20%

7.50%

-12.77%

-0.70%

5.14%

4.65%

8/30/2004

98.80%

32.29

3.80

5.00

5.00

0.70

5.14

4.65

0.00

8.00

(AFT)

34.88%

2.26%

8.20%

-12.47%

-0.36%

5.28%

4.42%

2/24/2011

104.20%

32.27

2.74

5.47

5.00

0.36

5.28

4.42

0.00

9.00

(EVV)

35.31%

1.29%

6.67%

-12.80%

0.75%

6.32%

4.70%

5/30/2003

89.86%

32.18

3.71

4.45

5.00

0.00

6.32

4.70

0.00

8.00

(NCV)

33.40%

1.33%

11.23%

0.36%

-5.67%

7.25%

3.16%

3/31/2003

56.19%

31.74

3.67

6.67

-0.18

5.67

7.25

3.16

0.00

5.50

(TEI)

--

1.11%

5.53%

-8.45%

0.69%

7.97%

0.34%

9/23/1993

109.33%

31.55

3.89

3.69

4.23

0.00

7.97

0.34

2.44

9.00

(GIM)

--

0.77%

6.60%

-8.57%

2.78%

7.31%

0.52%

3/17/1988

126.81%

31.46

4.23

4.40

4.29

0.00

7.31

0.52

0.71

10.00

(HYI)

--

0.88%

7.15%

-6.12%

3.22%

6.13%

4.26%

10/27/2010

108.07%

31.34

4.12

4.77

3.06

0.00

6.13

4.26

0.00

9.00

(EMF)

--

1.33%

5.32%

-10.38%

0.81%

10.87%

2.94%

2/27/1987

0.88%

31.16

3.67

3.55

5.00

0.00

10.00

2.94

5.00

1.00

(GRX)

23.00%

1.55%

5.38%

-13.02%

0.60%

8.64%

5.98%

6/19/2007

0.00%

30.92

3.45

3.59

5.00

0.00

8.64

5.98

3.26

1.00

(NCZ)

29.95%

1.37%

10.87%

-1.00%

-5.04%

6.31%

3.13%

7/31/2003

56.67%

30.78

3.63

6.67

0.50

5.04

6.31

3.13

0.00

5.50

(HQL)

--

1.19%

9.94%

-10.03%

-2.62%

8.74%

2.64%

5/8/1992

0.00%

30.44

3.81

6.63

5.00

2.62

8.74

2.64

0.00

1.00

(BGH)

29.41%

1.65%

10.36%

-3.81%

2.77%

5.39%

3.51%

10/26/2012

105.06%

29.82

3.35

6.67

1.91

0.00

5.39

3.51

0.00

9.00

(IGA)

--

0.98%

9.05%

-9.83%

-1.38%

6.27%

6.16%

10/26/2005

5.18%

29.78

4.02

6.03

4.92

1.38

6.27

6.16

0.00

1.00

(IIF)

--

1.35%

16.18%

-13.73%

-1.36%

8.60%

3.32%

2/25/1994

0.00%

29.60

3.65

6.67

5.00

1.36

8.60

3.32

0.00

1.00

(ETW)

--

1.09%

9.15%

-4.99%

-2.29%

5.63%

5.12%

9/28/2005

23.66%

29.55

3.91

6.10

2.50

2.29

5.63

5.12

0.00

4.00

(HQH)

--

1.03%

9.90%

-10.66%

-0.78%

10.55%

1.20%

4/23/1987

0.00%

29.20

3.97

6.60

5.00

0.78

10.00

1.20

0.65

1.00

(USA)

0.00%

1.00%

10.76%

-1.86%

3.70%

8.06%

8.35%

10/31/1986

2.47%

29.01

4.00

6.67

0.93

0.00

8.06

8.35

0.00

1.00

(FAX)

31.73%

1.16%

7.82%

-13.52%

0.57%

6.96%

1.89%

4/24/1986

52.00%

28.40

3.84

5.21

5.00

0.00

6.96

1.89

0.00

5.50

(GGM)

31.25%

1.75%

10.77%

4.45%

1.93%

6.38%

5.87%

6/26/2013

88.20%

27.94

3.25

6.67

-2.23

0.00

6.38

5.87

0.00

8.00

(ACP)

30.39%

2.33%

11.96%

-3.14%

2.50%

6.09%

2.57%

1/27/2011

80.42%

27.57

2.67

6.67

1.57

0.00

6.09

2.57

0.00

8.00

(IAF)

--

1.45%

10.98%

-8.11%

-1.03%

6.87%

3.29%

12/12/1985

11.93%

27.46

3.55

6.67

4.06

1.03

6.87

3.29

0.00

2.00

(FTF)

25.50%

1.22%

11.02%

-8.03%

0.48%

5.60%

1.55%

8/27/2003

50.94%

27.11

3.78

6.67

4.02

0.00

5.60

1.55

0.00

5.50

(IDE)

--

1.22%

8.33%

-12.43%

-3.07%

5.23%

2.80%

1/27/2010

5.24%

26.43

3.78

5.55

5.00

3.07

5.23

2.80

0.00

1.00

(BSL)

33.01%

1.76%

7.80%

0.37%

1.64%

5.08%

4.04%

5/26/2010

105.79%

26.38

3.24

5.20

-0.19

0.00

5.08

4.04

0.00

9.00

(ASG)

0.86%

1.28%

8.23%

1.04%

5.65%

6.56%

11.25%

3/14/1986

0.00%

26.25

3.72

5.49

-0.52

0.00

6.56

10.00

0.00

1.00

(VGI)

27.52%

1.83%

11.68%

-2.85%

5.08%

5.35%

3.81%

2/24/2012

41.11%

25.92

3.17

6.67

1.43

0.00

5.35

3.81

0.00

5.50

(HEQ)

--

1.13%

11.04%

-5.22%

0.54%

5.10%

3.99%

5/26/2011

16.65%

24.24

3.87

6.67

2.61

0.00

5.10

3.99

0.00

2.00

The Selection of Final Five:

Now, we will consider the top 20 names for consideration to select our top five. For this, we will keep the first 20 names based on overall quality (Total-Weight) and ignore the rest.

Since each person’s needs and priorities can be different, we will present Top-5 names from various categories among the top-20 names.

Position-1

Position-2

Position-3

Position-4

Position-5

Top 5 CEFs with Highest Quality Score

PGZ

UTG

AWF

BME

HTD

Top 5 CEFs with Highest Distribution Rate

ARDC

STK

AIF

BGT

QQQX

Top 5 CEFs with Highest NAV Return

BST

STK

BME

UTG

PGZ

Top 5 CEFs with Highest Coverage Ratio

DBL

AIF

NMZ

ARDC

FPF

Top 5 CEFs with Most Discount

FT

BGT

EFR

ARDC

AIF

Top 5 CEFs with Most Excess Discount

BME

BST

BTO

UTG

QQQX

Our List of Final Top-5:

Now, if we had only five slots for investment and need to select just five funds, we should select funds from different asset classes.

This step can be subjective and may differ from person to person. Here are the selections for this month, based on our perspective:

Note: If you do not like BGT, you could replace it with AWF. We kept BGT for higher discounts and to boost the overall yield, in-spite of lower quality.

Ticker

Fund Name

Category

Distribution Rate

Discount/ Premium

NAV Return since inception

Coverage Ratio

Inception Date

Overall Quality Score

(PGZ)

Principal Real Estate Inc Fund

Real Estate -Comm. (US)

6.45%

-9.95%

11.21%

88.91%

6/26/2013

40.96

(UTG)

Reaves Utility Income

Utilities

5.99%

-1.98%

11.64%

40.89%

2/24/2004

40.35

(BGT)

BlackRock Floating Rate Inc Tr

Senior Loan Funds

7.50%

-12.77%

5.14%

98.80%

8/30/2004

33.29

(HTD)

JH Tax-Advantaged Dividend Inc

Equity Tax-Advantaged

6.17%

1.17%

9.95%

11.06%

2/27/2004

38.05

(FPF)

First Trust Inter Dur Pref & I

Preferreds

6.80%

-2.09%

8.28%

104.23%

5/24/2013

35.90

AVERAGE

6.58%

-5.12%

9.24%

68.78%

37.71

Risks:

It goes without saying that CEFs, in general, have some additional risks that the investor needs to be aware of.

They generally use some amount of leverage, which adds to the risk. The leverage can be hugely beneficial in good times but can be detrimental during tough times. The leverage also causes higher fees because of the interest expense in addition to the baseline expense. In the tables above, we have used the baseline expense only. If a fund is using significant leverage, we want to make sure that the leverage is used effectively by the management team - the best way to know this is to look at the long-term returns on the NAV. NAV is the “Net Asset Value” of the fund after counting all expenses and after paying the distributions. So, if a fund is paying high distributions and maintaining or growing its NAV over time, it should bode well for its investors.

Due to leverage, the market prices of CEFs can be more volatile as they can go from premium pricing to discount pricing (and vice versa) in a relatively short period. Especially during corrections, the market prices can drop much faster than the NAV (the underlying assets). Investors who do not have an appetite for higher volatility should generally stay away from CEFs or at least avoid the leveraged CEFs.

CEFs have market prices that are different from their NAVs (Net Asset Values). They can trade either at discounts or at premiums to their NAVs. Generally, we should stay away from paying any significant premiums over the NAV prices unless there are some very compelling reasons.

Another risk factor may come from asset concentration risk. Many funds may hold similar underlying assets. However, this is easy to mitigate by diversifying into different types of CEFs ranging from equity, equity covered calls, preferred stocks, mortgage bonds, government and corporate bonds, energy MLPs, utilities, and municipal income.

Conclusion

The underlying purpose of this exercise is to find five likely best funds for investment each month using the screening process. We demand our selections have a solid long-term record, maintain good earnings to distribution coverage, offer high distributions, and are relatively cheaper and offer a reasonable discount. Also, we ensure that the selected five funds form a diverse group. Please note that these selections are dynamic in nature and can change from month-to-month (or even week-to-week). However, some of the funds can repeat from month-to-month if they remain attractive over an extended period.

The selected five CEFs this month, as a group, are offering an average distribution rate of 6.60% and an average discount/premium of -5.12%. Besides, these five funds have collectively returned 9.25% since inception (over 10 years). CEFs, in general, have had a good year thus far, and everything is a bit pricey. Our selections offer an average yield that's slightly lower than we wish for, and the discount is less than we expect, but we believe this is the cost of quality.

We believe that the above group of CEFs makes an excellent watch list for further research.

High Income DIY Portfolios: The primary goal of our High Income DIY Portfolios Marketplace service is high income with low risk and preservation of capital. It provides DIY investors with vital information and portfolio/asset allocation strategies to help create stable, long-term passive income with sustainable yields. We believe it's appropriate for income-seeking investors including retirees or near-retirees. We provide six portfolios: two High-Income portfolios, a DGI portfolio, a conservative strategy for 401K accounts, a Sector-Rotation strategy, and a High-Growth portfolio. For more details or a two-week free trial, please click here.

Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, UNH, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, ARCC, AWF, CHI, DNP, EVT, FFC, GOF, HCP, HQH, HTA, IIF, JPC, JPS, JRI, KYN, MAIN, NBB, NLY, NNN, O, OHI, PCI, PDI, PFF, RFI, RNP, STAG, STK, UTF, VTR, WPC, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. Any stock portfolio or strategy presented here is only for demonstration purposes.


seekingalpha.com @
funds cefs income have five return discountpremium list high since month distribution



User comments