CSGKF - 3 Closed-End Fund Buys In The Month Of March 2023

2023-04-16 04:16:42 ET

Summary

• March gave us quite the wild ride in the market, volatility ramped up, but by the end of the month, almost all seemed forgotten.
• The market rallied toward the end of the month, sending all three of the major indices positive for the month.
• As usual, I stuck to the same strategy I do every month; I accumulated positions in funds that I thought were attractive to grow my income.

This article was originally published to members of the CEF/ETF Income Laboratory on April 1st, 2023.

It was a fairly quiet month in terms of what I was doing personally, with only three names that I've added to in the last month. However, it wasn't necessarily a quiet month for the market overall. Bank failures spurred a spike in volatility, though that volatility was quite short-lived. We started to see the broader indexes rise into the end of the month despite those pressures.

In fact, all three of the main indices posted positive returns for the month. The biggest beneficiary was the tech-heavy Nasdaq.

The Fed raised interest rates another 25 basis points for the month, but the theme now seems to be that we'll need fewer increases going forward. In fact, it's only expected we'll be seeing one more hike , but that is always subject to change. If the trend in lower inflation reverses, we will very likely see more increases. There has even been some suggestion that rate cuts could be closer than they were previously. That could be what's sparking this general shift towards growth once again becoming quite attractive.

All that being said, as I frequently mention, I'm doing some buying every single month, no matter what the market is doing. This month was no different, even if it was only adding to three positions. These were all names I owned previously, so there are no new names in my portfolio for the month.

BlackRock Enhanced Global Dividend Trust ( BOE )

Adding more BOE to my portfolio was a move to add more global exposure to my portfolio. I've provided an update on BOE quite recently for more details, but the general idea is that global equities continue to appear cheaper than their U.S. counterparts.

During most of the last decade, we've been in an environment where U.S. large-cap stocks have outperformed internationally; historically, that hasn't always been the case. It's just been on a particularly long run with this latest outperformance.

For those that may have only started investing around the GFC, it would have been all they've known is U.S. outperformance. Cheaper valuations elsewhere could be the catalyst to kick off better performance outside the U.S.

The other reason I went with BOE is that it's a covered call fund, which can work out better in a more volatile environment or flat market. With all the uncertainty going on lately, adding more BOE can be a way to help balance out funds with leverage.

John Hancock Financial Opportunities Fund ( BTO )

I think it's probably fairly obvious what I was going for here, a play on a potential rebound in the financial space. BTO carries meaningful exposure to regional banks that were hit the hardest, but at the same time, they also own several of the larger cap banks too. Instead of trying to pick one bank for a potential recovery, I've decided to go through this more diversified approach.

What's a bit more unusual about BTO is that the fund's share price is bouncing back at a much more rapid pace than its NAV per share. That's creating a situation where the fund is actually getting quite expensive. When I initially picked it up, it was mid-month when most of the volatility was. I was able to snag the shares at a low single-digit premium. That premium has run up significantly since then.

While I would normally sell at this elevated premium, as I'm one that focuses quite heavily on valuation, I will continue to hold onto this as an exception to my usual stance. I think the idea is that the banks will eventually rebound, and investors are bidding up BTO in anticipation of that.

That being said, the Invesco KBW Regional Banking ETF ( KBWR ) hasn't responded too positively. At least, it hasn't responded too positively compared to what we are seeing from the rest of the major indexes. As we highlighted above, it's been mostly the tech names that are once again blasting off. The market seems to be anticipating new regulations that could cut down on the profitability of this space.

Flaherty & Crumrine Dynamic Preferred and Income Fund ( DFP )

DFP was another play on the financial space, this time through a preferred play. Preferreds are supposed to be more conservative and less risky, but with leverage and CoCo exposure, it certainly didn't act like it. This is also a fund that has almost half of its portfolio in investment-grade rated securities.

DFP and the rest of the preferred funds were hit particularly hard as they are often highly exposed to financial preferred and bonds. I discussed the whole preferred closed-end fund space more in-depth recently to give a broader overview.

In fact, DFP was carrying some of those Credit Suisse ( CS ) CoCos or AT1 bonds that will be wiped out with the merger of UBS Group ( UBS ). This was the exposure at the end of their last available annual report.

With so much uncertainty, most regional bank preferreds and other European CoCo securities saw their values drop. While DFP carries some exposure to the larger banks, it wasn't enough to offset the rapid losses we saw elsewhere.

Unlike BTO, DFP had dropped to a sizeable discount, which hadn't been that common of an event in the last several years. Though it has become more common in the last year as interest rate hikes have been impacting this fund negatively. They've seen their distribution come down several times, which is another topic I've touched on.

The basic idea is that they weren't hedged with their leverage. Therefore, as leverage costs began to rise, they began to reduce the net investment income available for shareholders; thus, why they have been cutting their distribution regularly over the last year. So while a discount has been a more normal sight in the last year, this latest volatility really shook it up and sent the discount wider.

Similar to tech, stabilizing interest rates and potentially lower interest rates sooner than expected would bode well for this fund too.

DFP had participated along with the rest of the market in the rally to finish off the month and quarter. In this case, the NAV saw a bit of a rebound as well, unlike BTO and KBWR, which are focused on the equity of the capital stack. An additional push higher for DFP came from discount contraction as well. This is a great example of the opportunities that can present themselves in closed-end funds, in general.

For further details see: