NUW - 3 Closed-End Fund Buys In The Month Of April 2023

2023-05-15 11:31:01 ET

Summary

• April saw the market continuing to push off the lows it touched in March due to bank failures.
• Despite the overall uncertainty and precarious banking situation, the overall market volatility has continued to sink lower and lower.
• The theme for adding CEFs this month for me was to deleverage and de-risk.

Written by Nick Ackerman for members of the CEF/ETF Income Laboratory on May 1st, 2023.

The market continues to run higher despite all the negativity and the expectation of a slowdown in the economy later this year or early 2024. Investors seem to be saying one thing and doing another.

That being said, the largest driver of the market running higher this year was growth investments making a comeback after a disastrous 2022. While value investors held up significantly better last year, that's where more muted returns are coming from, as measured by the Dow Jones Industrial Average.

In fact, this rally we are seeing out of the S&P 500 and the Nasdaq composite is rather shallow. The top ten stocks in the S&P 500 contributed to 86% of the index's gains for the year. Of those, it was mostly the mega-cap tech names doing most of the heavy lifting. Therefore, unless you are holding a fairly concentrated portfolio, your results could probably be looking a lot more muted, like the DJIA.

If you're holding some fixed income, you are also seeing some rebounds from last year too. That was an area that was hit in March, too, when the banking crisis began, but it has continued to trudge higher since. That's across the spectrum of high-yield, investment-grade or municipal bonds.

With that being said, I continue to put capital to work every month. It's confusing markets such as this that help highlight why because, despite all the seeming negativity out there, things continue to head higher.

Western Asset Investment Grade Income Fund ( PAI ) and Nuveen AMT-Free Municipal Value Fund ( NUW )

The theme for me was looking to deleverage and de-risk my portfolio a bit. Along with that, I've also positioned myself to hopefully take advantage of when interest rates stabilize. We could be at that point now that the Fed raised the rate earlier this month. Of course, that's subject to change based on the data going forward.

That's why I'm covering both PAI and NUW under the same subheading because I also bought them for virtually the same reason. These are also new positions to my portfolio and the first time I'm putting capital to work in a municipal. I've touched on both of these names recently.

PAI is a non-leveraged investment grade fund, and NUW is a municipal bond fund that is very lowly leveraged. NUW limits itself to 10% leverage, but is generally even below that. Currently, they list $2 million in borrowings, coming to an effective leverage ratio of 0.73%.

Without being leveraged essentially for both of these names, the moves to the downside are relatively limited. Of course, the moves to the upside can also be limited when times are good.

So in going a non-leveraged route, it's taking more of a tepid way to play the potential end to interest rate hikes. If rates are cut, the upside on these could be limited relative to their leveraged peers. On the other hand, if rates continue to go higher as expected, the downside should also be limited.

These are long-duration fixed-income assets, so they are incredibly sensitive to higher interest rates. The average effective duration for NUW is 8.08 years. The effective duration for PAI comes to 7.29 years.

Being non-leveraged or low leveraged also meant that they didn't experience rising interest rate costs on borrowings that many other funds did. This played out in the muni space by seeing most leveraged funds cut, cut, cut and then cut their distributions again.

In fact, NUW recently raised its distribution. Here's a look at a comparison with the fund's leveraged peers; Nuveen Quality Municipal Income Fund ( NAD ) and Nuveen AMT-Free Municipal Income Fund ( NEA ).

On the other hand, being non-leveraged besides giving up upside if/when it comes in a rebound generally means a lower starting distribution yield too. Right now, NUW is at a 3.46% distribution rate, with NAD at 3.98% and NEA at 3.78%.

The distribution rate for PAI is 4.36%, which is a bit lower than one can get with money markets right now. However, PAI can also offer some upside. As I said, it's more a play on the Fed stopping interest rate hikes soon or cutting them in the next year or so.

A further catalyst to buying these funds were the discounts. I was able to pick up NUW at a discount over 10%, but that discount has narrowed a bit since buying. I wasn't so lucky with PAI, but it was still a generally attractive discount if history is any guide.

Going back to their historical range or even premiums where both of these funds had traded before would mean further upside potential. The key word here is "potential."

To sum up, this de-risked my portfolio by adding investment-grade fixed-income exposure. I actually had no funds focused on higher-quality debt. All the rest of my fixed-income funds are multi-sector bond funds that place a heavy emphasis on below-investment grade or are strictly high-yield bond funds. Adding non-leveraged funds helped de-risk my portfolio, as it also took my overall effective leverage down. In the end, if rates continue to rise and these funds plunge further, then I would look to add to these positions.

abrdn Global Infrastructure Income Fund ( ASGI )

ASGI is another fund I covered fairly recently , and I regularly update coverage as I've owned it for a while. This fund also stuck to the de-risk April theme for me, as it's a non-leveraged fund. It also recently became a much larger fund as it closed on the Macquarie Global Infrastructure Total Return Fund (XMGUX), which helped provide more liquidity.

ASGI was under $200 million in assets and is now closer to $550 million. So they more than doubled their managed assets. The average trading volume in our previous update was 20k. The average has now moved up to over 37k, which could moderate out. However, generally speaking, larger funds often mean more trading volume.

The fund's discount continues to sink lower more recently, which is what sparked my interest to add to my position.

This discount is coming from the fact that the fund's price is dropping compared to its NAV, which is seen as rising. The fund launched in July 2020 at a $20 price and NAV. As of writing, the share price recently closed at $17.92, and the NAV at $21.44.

A new fund going to a discount isn't anything new, despite the CEF 2.0 launch style of the fund's advisor paying launch costs and coming to market with a term structure. The fund is expected to liquidate in 2035, so we still have plenty of time before that becomes a serious consideration.

Since the fund's launch, compared to some similar funds that also carry global positions in infrastructure, we saw ASGI perform in line on a total NAV return basis. It was simply the fund dropping to a larger discount that saw its total share price return lag these peers during this time to such a large degree. This was the case even though ASGI charges what I believe to be an excessive expense ratio due to its high management fee of 1.35%. However, with the recent merger, there was wording to limit the expense ratio from exceeding 1.65% going forward. That's still high.

Using BlackRock Utilities, Infrastructure & Power Opportunities ( BUI ), Cohen & Steers Infrastructure Fund ( UTF ) and Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund ( MFD ) as comparisons here seems fairly appropriate. However, they all have their own little quirks of investment policy and represent managements from different fund sponsors.

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