BANX - 3 Closed-End Fund Buys In The Month Of May 2023

2023-06-15 10:52:54 ET

Summary

• BANX has bounced back after being sold off during the banking crisis, with its NAV increasing by 2.62% in April.
• ETW offers a more defensive approach with a call-writing strategy and global exposure, including Europe and Asia/Pacific.
• PAI is a non-leveraged fund focusing on investment-grade bonds, offering a less aggressive play with what should be a relatively limited downside.

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

Tech continues to be the overall market winner in 2023, with most of the rest of the market providing much more lackluster results. To get a better sense of what most equities are experiencing, the Invesco S&P 500 Equal Weight ETF ( RSP ) would appear to be a much better barometer. At least, a more realistic barometer for investors that aren't just crowded into the mega-cap growth names that have been leading the upside in this market.

Fixed-income investors have seen some better results, but even there, after last year, it isn't anything to boast about. With higher interest rates, it would appear that Invesco Senior Loan ETF ( BKLN ) has been the beneficiary of investment and below-investment-grade bonds. With another 25 basis point hike now looking very likely in June, that means fixed-income could experience some declines from these already limited gains.

That being said, every month, I look to add to my closed-end fund portfolio. A CEF portfolio tends to generate a substantial amount of monthly cash flow that can be perfect to reinvest. Over time, reinvesting helps offset the distribution cuts that come along the way. By reinvesting, the income snowball can grow faster and faster. This is particularly true when CEFs are looking relatively cheap, historically.

The above tells us that CEF discounts have only been wider than they currently are, 6% of the time going back to the end of 1996. The widening discounts began in 2022 after 2021 had discounts at historically narrow levels. The low participation in the broader market seems to be reflected in what we see in CEFs as well, and that is, unless you're the handful of mega-cap growth names, you aren't generally experiencing meaningful upside.

ArrowMark Financial Corp ( BANX )

Last month I was avoiding adding leveraged funds, and I intended to continue to avoid adding leverage. However, with BANX, there seemed to be an opportunity to snag this fund at an abnormally large discount. I covered this fund fairly recently , but it seems this fund was getting sold off with the banking crisis. Since that last update, the fund has bounced back quite meaningfully, but it has been quite volatile.

At the same time, the fund doesn't hold a lot of banking exposure in terms of actual banking debt. Instead, the fund invests in regulatory capital relief securities. These are generally floating rates, with 83% of BANX's portfolio invested in variable rate exposure. That's driven the higher income generation of the fund that we saw over the last year as the Fed was raising interest rates.

Despite the fund selling off in terms of its share price, the fund's NAV was estimated at the end of April at $21.16. That was up from the estimated NAV at the end of March, which came in at $20.62. That was good for an increase of 2.62%. At the end of 2022, they posted a NAV of $20.79 or an increase of 1.78%. That would indicate that they are experiencing no significant adverse impact from the banking failures we saw earlier in the year.

The fund is seemingly mistaken for what it was previously, which is a fund that did hold a large CLO position and actual exposure directly to various pieces of financial institutions' capital stack. The fund has been transitioning to how it's positioned now over the last few years. Being a smaller fund means it doesn't generally get too much coverage.

Given the fund's last reported NAV of $21.16 and the last closing price of $16.80 as of writing, we are given a discount of around 20.6%. Now, it's entirely possible that the market is anticipating a recession that could start to hit these credit-linked notes. As their name would suggest, there are credit risks if consumers start missing loan payments. After all, these are instruments that help financial institutions meet their regulatory capital requirements by transferring credit risks to these notes.

Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund ( ETW )

ETW is consistent with going for a more defensive positioning since they don't utilize leverage. Instead, they have an options strategy that can help generate capital gains even in a flat market.

A call-writing strategy can also potentially slightly mitigate some downside moves due to these gains that can offset some losses. The fund generally targets nearly 100% of its portfolio as being overwritten. They also write options against indexes and not individual positions. With a total of 300 holdings in the fund, there is plenty of diversification.

The fund's global exposure is also an added benefit, in my opinion, for some international exposure. The majority of the fund is invested in North America, but that isn't that unusual. There is still a significant amount of exposure to Europe and Asia/Pacific as well.

For most investors, international markets have seemingly underperformed forever. However, there have been periods of under and outperformance between international and U.S. stocks through different periods. In fact, the more recent performance suggests that international investments are now starting to outperform U.S. equities, and they continue to trade at better valuations.

Currently, ETW's discount remains quite attractive.

Western Asset Investment Grade Income Fund ( PAI )

PAI is a name I picked up last month. It's a non-leveraged fund that focuses on investment-grade bonds. I added to this position a bit of weakness as yields ticked higher. Originally, most market participants expected the Fed to pause. However, as data keeps coming out stronger than expected, there is now an expectation for another 25 basis point hike in June.

Higher rates will significantly impact PAI as the fund's duration is quite elevated at 7.32 years. Higher interest rates are the main risk of adding this fund, but that's why I'm continuing to be open to adding to this position. I know I won't know when the bottom is in, so using a dollar-cost average approach can be appropriate. I still expect that interest rate hikes are near the end than they are at the beginning, and that's supported by economists that expect rate cuts in 2024.

Being that the fund is non-leveraged, that would mean that it's a less aggressive play, and the downside from higher rates should be relatively limited compared to leveraged counterparts. That also means when rates are cut at some point, the rebound would be more subdued, and that could limit the upside potential. So as always, the pros and cons need to be weighed before making an investment decision.

If rates are cut, it would probably be due to being in a recession. Having a portfolio of investment-grade debt should mean that PAI is relatively safer in that aspect as well. Defaults and bankruptcies of the underlying portfolio positions should be relatively lower compared to high-yield bond funds.

The fund's current discount is still below its longer-term average discount.

That's one of the advantages that can be exploited, the fund's discount that isn't going to be present in something like iShares iBoxx $ Investment Grade Corporate Bond ETF ( LQD ).

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