ECAT - 3 Closed-End Fund Buys In The Month Of June 2023

2023-07-16 06:10:11 ET

Summary

• In June, the broader indexes headed higher, with more participation outside of only the mega-cap growth names.
• As usual, I continue to put capital to work every month, but I've also been letting some cash accumulate, too, as the broader indexes continue to march.
• This month I've added to my position in ASGI and NUW; I've also added ECAT as a new position to my portfolio as a tactical play.

In the last month, the broader indexes have once again seen a continuation of gains. It wasn't quite as large of a gain as we saw in the prior month, but these are still sizeable gains. Additionally, a trend of some broader participation in June was certainly encouraging.

For most of the year prior to this, it was mostly tech leading the way. This can be reflected by the Dow Jones Industrial Average being up a much more modest amount. The Nasdaq has certainly continued to dominate, but some of this was also bouncing back from last year as the index fell much further.

Another way to see how much the mega-cap growth names have been contributing to the overall gains would be looking at the results of Invesco S&P 500 Equal Weight ETF ( RSP ) as well. There, too, we see relatively mild gains for the year relative to the Nasdaq Composite and the S&P 500 Indexes. At the beginning of the year, RSP and the S&P 500 were almost in lockstep. It was starting around March when these two diverged, with tech really ramping up while the more value-oriented sectors lagged with the banking failures.

That said, no matter the market environment, I add to my portfolio every month by adding new capital and reinvesting the distributions. I've also been letting some cash accumulate in the last several months, but still putting fresh capital to work nonetheless. This month I've continued to remain focused on funds that are unleveraged.

abrdn Global Infrastructure Income Fund ( ASGI )

ASGI has been my go-to infrastructure closed-end fund play due to not being a leveraged fund. With interest rates being increased substantially in the last year with a couple more increases to go, avoiding adding more leverage to my portfolio is something I've continued to work on.

I actually had picked up some in the previous month as well, and the fund remains trading at an attractive discount. The fund hasn't been around for too long, but we seem to be getting to a level where the discount has been bottoming out for ASGI.

As an income investor, I tend to gravitate towards investments in infrastructure that naturally are recession-resilient businesses and produce tons of cash flows for investors. With the latest addition of ASGI, it's now become my second largest infrastructure play in the CEF space - only behind John Hancock Tax-Advantaged Dividend Income Fund ( HTD ). Overall, it's my seventh-largest CEF position, and I'd still be comfortable with making it even larger.

While it's an infrastructure fund, it should be noted that the largest sector exposure for the fund has been industrial names. Having industrial exposure in infrastructure funds isn't something unheard of, but it is a larger composition for this fund than we typically see. The fund also is positioned globally, with only around 44% invested in the U.S. When looking at the top ten, we see several global positions represented.

Thanks to the large discount, investors can collect an 8.07% distribution yield while the rate on the NAV is at 6.91%. They raised once in their short history, and a NAV higher than at inception shows that they've been covering the payout through this period.

Nuveen AMT-Free Municipal Value Fund ( NUW )

NUW is another fund I've been adding to more recently, going back to April. The idea is to dollar-cost average for NUW and also for Western Asset Investment Grade Income Fund ( PAI ), which I had also added to last month along with ASGI. The idea for investing in NUW and PAI is the same, to bring up the overall quality of my portfolio and reduce leverage, as both are minimally leveraged or no leveraged funds. NUW carries less than 1% leverage and will only go up to a maximum of 10%.

One of the main benefits of investing in non-leveraged munis is that while most funds have been cutting their distributions due to rising borrowing costs, NUW has been one that hasn't. In fact, they raised their distribution last week as yields rose. It's a muni fund, so they have long maturities, so turnover in the portfolio won't be quick. That said, as long as rates stay higher, net investment income should continue to increase over time.

Conversely, the other idea behind buying higher quality, longer maturity fixed-income investments such as NUW and PAI is for potential rate cuts next year and into 2025. The largest allocation of the portfolio is allocated to AA and A-rated munis.

These funds have taken big hits due to higher durations as interest rates increased. If/when rates are cut, some of these prices should recover across their portfolio, reversing some of the declines experienced in the last year or so. The average effective duration comes to 7.59 years, meaning that for every 100 basis point change in interest rates, the portfolio should move by 7.59%. Currently, the portfolio is listed as having an average bond price of $92.17.

Besides, the potential benefit from an appreciation for rate cuts or higher income generation would be from realizing the fund's discount. The latest discount is well below the average of the last decade.

The main risk here should be if rates rise faster than anticipated. In that case, I'm basically left with a poor-performing fund that produces unrealized losses but throws off an okay tax-free yield that should see distribution growth. The latest May 31st, 2023 UNII report reflects an average NII of $0.041, producing a distribution coverage of 101.3%.

For the quarter that ended February 28th, 2023, this average NII was $0.0405 with coverage of 103.9%. The reason for the reduction in coverage was due to the increased distribution.

BlackRock ESG Capital Allocation Term Trust ( ECAT )

ECAT was a new name to my portfolio this last month. In this case, it is a more tactical position as the discount is quite deep, but there is a catalyst that the discount could be realized in the form of Saba pressure.

ECAT was one of a few BlackRock funds that Saba targeted recently. In this case, they are looking to get four nominees elected to the Board and possibly push for the fund to go open-ended. If Saba is successful and pushes the fund to convert to an open-ended fund or merge with a similar open-ended fund, the discount would evaporate immediately as traditional mutual funds are always available for redemption at NAV. After all, that is what would be the best "governance" for shareholders in this "ESG" fund.

Saba owns around 12.5% of the fund's voting power as of the last 13D filing . With RiverNorth, Karpus and SIT Investments as regular activist accomplices, there is a good chance of such a change occurring.

ECAT is a multi-asset fund that invests in a diversified portfolio of equity and fixed-income positions. The fund is spread across various sectors as well as credit quality on their fixed-income side. At the end of the day, most of the positions in the fund are names you'd see anywhere else, which is why I'm comfortable with holding a position in the fund in the first place. As the fund is still trading at a material discount, I felt it was a good buying opportunity as well - even if Saba doesn't accomplish changes on the fund.

Even better, the fund doesn't incorporate any borrowings into its strategy, so no leverage fits with the trend of reducing leverage in my portfolio. The fund is flexible to invest in various derivatives, however. They also are looking to ramp up private investments in the fund to around 25% of the assets. That said, as of Q1 2023 , only around 4.4% of the fund was invested in private holdings.

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