WDI - Kicking Off The New Year With 7 Closed-End Fund Buys In The Month Of January 2023

Summary

• We have now closed on the first month of the new year, but my strategy of buying every month hasn't changed.
• The new year has started off with a bang, with the broader indexes jumping higher.
• However, there are still significant headwinds to consider through 2023 with a shift mostly focused on recession now.
• I picked up or added to 7 CEFs, and I sold off 2 names.

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

2022 was the year of rapidly rising interest rates, with 2023 being the year of a much-anticipated recession. Albeit, we are still expecting at least a couple more interest rate hikes. The shift from interest rate focus to a recession has done little to dent the markets' enthusiasm through the first month of the new year. The broader indexes were all higher through January.

This could be some seasonability at work. Investors participate in tax loss harvest at the end of a year, then turn around and put capital back to work at the start of the year. There certainly was no lack of tax-loss harvesting candidates for 2022 unless your portfolio was entirely in energy.

However, none of these events change my strategy in the slightest. I put cash to work every month with either new capital or cash flow from distributions and dividends. With income investing, when you're diversified enough, you really can have an endless supply of cash flow month after month. Putting this capital back to work to compound your cash flow can keep it growing month after month, too.

Two Positions Sold

With that being said, there were two positions I had sold in the last month that are worth touching on. We'll discuss those first.

The first was Invesco Senior Income Trust ( VVR ) . This is probably going to be the more unpopular and potentially confusing one that I sold because it's doing incredibly well. They actually just raised their distribution again by 22%!

However, the position largely achieved what I wanted it to accomplish. I bought the initial position in January of last year. I bought it on a couple more occasions throughout the year too. The main goal was simple with VVR, though, to act as a hedge against rising interest rates. Ultimately, rates rose much faster than anticipated, so the benefits here were incredible, reflected in the growing distribution.

In the end, my cost basis was around $4.06, and I sold for around $3.90. This is where distributions matter once again. During this time, I collected an average of $0.37 in distributions. That includes the regular monthly and the special last year. That puts it at around a positive 5.2% return over the last year.

Here is a reminder of what equities and bonds did in the last year:

So largely, my VVR position worked as planned. It helped hold up my portfolio relatively better during the time of quickly increasing interest rates. Additionally, as VVR's discount was narrowing to around 4%, that's quite a narrow discount for this fund historically. Although this is the time for VVR to shine with higher interest rates, so a higher valuation could be warranted.

In the senior loan space, I still have multi-sector bond funds that naturally will carry floating rate exposure. I have also retained my position in BlackRock Floating Rate Income Strategies Fund ( FRA ) for those last remaining interest rate increases. As the fund is still at a large discount, I'm not in a hurry to jettison that position yet.

The other position I sold in the last month was Calamos Convertible Opportunities & Income Fund ( CHI ) . That just came down to valuation, simple as that.

Seven Bought or Added To

BlackRock Utility & Infrastructure Trust ( BUI )

BUI has been experiencing a rare time when trading at a discount. For most of the last five years or so, the fund has traded mostly at a premium. Admittedly though, prior to that, the fund had experienced a consistent discount too. It could be returning to that time when it simply just traded at a discount for years. Despite that, I took the opportunity to pick up more shares in this name.

On the surface, BUI doesn't seem too unique over any other infrastructure/utility fund. It invests in utilities quite heavily but also includes energy plays. They even include Waste Management ( WM ) as one of their top holdings. WM is identified as an industrial sector position, and we frequently see industrial plays show up in infrastructure funds. However, where BUI really sets itself apart is that it isn't leveraged. Instead, they take an options writing approach - much like most of BlackRock's ( BLK ) equity funds.

An options writing strategy can make it attractive during times when the market is relatively flat. In that way, they are still generating gains through the options premium. On the other hand, since they write against individual positions, it can be a drag when we are in rally mode. This is due to positions either being called away or being closed at a loss to retain the ownership of the position.

BUI has been a long-term position for me that I use to complement my many infrastructure CEF holdings. Besides the different strategies of the fund being non-leveraged, it also helps add diversification of management and cash flow stream from a separate fund within the infrastructure space.

Special Opportunities Fund ( SPE )

SPE has been another longer-term holding for me. It's a unique fund where one can get access to Bulldog's activist activities without having direct positions in the CEFs they own.

This fund continually trades at a discount, but it has opened up even wider recently. It would usually be easy to say that it seemed investors weren't aware of the distribution policy to reset annually at 8% of the NAV. However, the discount was widening even before the 'cut' was announced in early January.

Bulldog took this fund over in 2009 and changed its investment objective in 2010. So the longer-term history isn't too relevant before that time period. However, they also didn't seem to really come up with a plan to try to reduce the fund's discount until a few years ago. That's when they implemented their managed distribution in the first place. Before that, it was only paying an annual distribution. Even despite those efforts, it didn't seem to get investors excited enough to reduce the discount materially.

The fund is trading below its decade-long average, which I believe is attractive, but this fund definitely isn't going to be for everyone. At this point, to be honest, their returns haven't been anything too remarkable or boast-worthy. That could be doing a lot to dent investor enthusiasm as well.

Tekla Healthcare Opportunities Fund ( THQ )

THQ is another example of a fund that is more of a long-term holding for me. In this case, it's specifically focused on healthcare investments. The drop back below its longer-term average discount spurred my interest into adding more to my position.

Healthcare is obviously a fairly defensive sector; however, THQ is leveraged. So that means we are going to experience relatively greater volatility, with a boost to returns during good times but also a further drop during the bad.

THQ has the capacity of a hybrid fund within the healthcare sector, investing across the capital stack of equities and fixed-income investments. In practice, though, they've traditionally stuck with investing most heavily in equities. As of their last report, nearly 82% of their portfolio was in common stock positions.

Western Asset Diversified Income Fund ( WDI )

The day I sold VVR, I put capital to work in WDI. So some of that capital went into this more diversified fixed-income fund. Naturally, this fund will carry some of that floating rate exposure that VVR was giving more specifically.

The difference is that WDI is more diversified into other debt categories, and the fund's discount is quite attractive. The discount has narrowed some since initially buying, as I was able to snag up some shares at much closer to a 10% discount.

Similar to VVR, but definitely not to the same extent, WDI has also been increasing its distribution to shareholders too. This fund started with a distribution of $0.117 per month and the latest being $0.128 per month. Certainly not the 20%+ increases VVR has been able to accomplish but heading in the right direction.

Eaton Vance Tax-Advantaged Dividend Income Fund ( EVT )

On that same day of selling VVR and buying WDI, I also put capital to work in EVT. EVT being a mostly equity fund, means it's vastly different from the other two. Although technically, it is a hybrid fund; they carry around 86% in equities and the rest in various fixed-income assets. That means it carries the same common trait as WDI in that it is highly diversified.

One main reason I find EVT compelling is that they don't overweight the tech sector. Instead, the largest sector exposures in this fund are allocated to financials, healthcare and energy. Industrials, another value sector, then follows those.

Then finally, we see the tech slice show up with a 7.6% weighting. While the moves in the broader market will largely dictate the direction of EVT, it's different enough for me as it adds more diversification to my portfolio. It's easy to find funds that are overweight tech.

At the same time, the fund's latest distribution cut - which EV went through and adjusted move of their equity fund distributions a few months ago - meant that investors have sold this off. That divergence in price relative to NAV has pushed the fund's discount back near its decade-long average.

Ellsworth Growth & Income Fund ( ECF )

When selling CHI, I wanted to put capital to work and retain the convertible orientation that CHI brought. I recently covered the Calamos twin for CHI, which is Calamos Convertible & High Income Fund ( CHY ). The same reasons that make CHY less attractive at this time plague CHI. That's simply an overvaluation relative to their history and relative to peers. That doesn't mean I don't want to get back into one or the other fund, but I want to see their premiums come down first.

For some investors, a real concern, in this case, is switching from a fund that has a distribution yield of 9.46% for CHI and ECF with a distribution yield of 5.99%. ECF has a minimum managed distribution plan of 5% of NAV. During good years, they realize enough gains to push this rate to competitive levels. However, in bad years such as 2022, there was no special, and so investors were essentially left with the minimum amount.

For me, I know my income will increase by the end of the year in aggregate. That is, through compounding and adding fresh capital to put to work, my entire portfolio will generate higher income this coming year over last year, barring any sort of catastrophic black swan event where half my portfolio stops paying. Retirees who can't compound or have fresh capital coming in is a different situation, so I clearly understand the dilemma to make such a move and that impact on monthly cash flow.

Clough Global Opportunities Fund ( GLO )

Finally, near the end of the month, I took a flier position on GLO. I largely covered why with a very recent article . Quite simply, I expect that most of the damage is done. Leverage levels for this fund are much healthier after anticipated deleveraging through 2022. The current discount has historically indicated it was a fairly decent time to take a position.

At the very least, it's trading much closer to its long-term average than where it had been in most of the last year. Whether it ultimately works out over the next year is yet to be determined.

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