PAI - My Top 10 Closed-End Fund Holdings: December 2023

2024-01-06 10:13:00 ET

Summary

• I have a total of 41 positions in my closed-end fund portfolio, with the top ten positions making up 36.52% of the portfolio.
• We have four new names making their way to my top ten list since the prior update, but three were already positions that have simply grown to be larger allocations.
• Closed-end funds overall look to be a place of opportunity as discounts remain historically wide across both equity and fixed-income-focused funds.

We often take a look at the top ten holdings of closed-end funds and exchange-traded funds because those are often the largest positions in the fund. It gives us a good sense of what type of holdings the fund is tilted toward due to its largest exposure. With that said, it has been quite some time since I've shared the top ten positions in my closed-end fund portfolio. The last time was earlier in 2023 , and some readers had suggested that they would be interested. As we get ready to close out 2023 and start a new year, it also just feels like a really appropriate time for an update.

Generally speaking, this portfolio doesn't tend to change dramatically in shorter periods of time. I rarely sell a closed-end fund unless a holding is running at an abnormally narrow discount or at a relatively large premium for a fund that often trades at a discount (i.e., looking relatively overvalued.) So, unlike sharing what CEFs I buy every month - which I do post monthly updates on - taking a look at my top positions usually isn't as 'exciting.' It doesn't tend to be particularly noteworthy in relatively shorter periods of time, such as a monthly update.

Top 10

Overall, I hold 41 total positions in my entire closed-end fund portfolio. However, that only includes this main CEF portfolio, those that I feel could be held potentially forever. Although, for the right price, everything is for sale. With that said, I hold some more CEF holdings in a different account that I use for more tactical positions. An example of one of those names would be the BlackRock ESG Capital Allocation Term Trust ( ECAT ), and all the CLO funds are also put in a different account for more active swap trades.

Between the multiple accounts, it often leads to having roughly 50 CEF positions at any one time, and that is why I'm hesitant to really add too many new names to keep track of. The count is up from the 39 in the last update. With 41 total positions, there are quite a few names to keep track of. That said, the top ten comprise 36.52%, making these more of the high-conviction names. Looking at the top 20 positions would bring that total closer to 64%. Earlier this year, the top ten accounted for a larger 40.66% weighting.

Of course, as I mentioned, I really generally only sell when something looks overvalued by a fairly wide margin. I do more buying when valuations are low, and in the CEF space, that's really been the case moving through the last couple of years now. We went from historically narrow discounts in 2021 to some of the historically widest discounts more recently .

That has left a lot of opportunity in these instruments, in my opinion. However, throughout most of 2023, I've been emphasizing de-risking the portfolio by making most additions to non or low-leveraged funds. With a potentially lower interest rate environment going forward, borrowing costs could come down to some more attractive levels.

Still, the expectation isn't for rates to go back to zero unless more catastrophic to the economy happens. Therefore, I believe that deleveraging to de-risk the portfolio can make sense, and I'm still comfortable erring on the side of caution.

With all that said, here are my top ten CEF holdings as of December 22, 2023.

Even after just over 10 months since the last update, there aren't too many huge changes from February of this year.

Cohen & Steers Real Estate Opportunities and Income Fund ( RLTY ) saw a slide from the first spot down to the second spot. However, the allocation percentage went from 4.86% down to 3.86% - ironically, exactly one point during this period. Funds that also remain in top spots now were previously BlackRock Health Sciences ( BME ) , BlackRock Enhanced Equity Dividend Fund ( BDJ ) , Cohen & Steers Quality Income Realty Fund ( RQI ) and Cohen & Steers Tax-Advantaged Preferred Securities and Income Fund ( PTA ) .

Additionally, NXG NextGen Infrastructure Income Fund ( NXG ) was a top ten name, but it was listed as its former name of The Cushing NextGen Infrastructure Income Fund and the ticker "SZC."

That resulted in six funds having held on to top spots.

abrdn Global Infrastructure Income Fund ( ASGI ) has grown to be my largest position, edging RLTY out of that top spot. ASGI had been in my portfolio previously, but it was at the number 15 spot, and it is one of the names that I was adding to relatively more aggressively. This is a non-leveraged fund, so it checks that box of de-risking and reining in leverage.

It's also a utility fund, which is its largest sector weight but has a significant sleeve allocated to industrials. The utility space was slammed most of this year, but I believe it is set up better going forward, which is why I felt even more comfortable adding to this heavily discounted fund in what feels like a discounted sector.

Speaking of the de-risk through deleveraging by adding to more non-leveraged funds is how Western Asset Investment Grade Income Fund ( PAI ) has found its way into my portfolio. More specifically, it has climbed its way to the number seven spot, as I have added to the fund many times this year. This was a new addition since the last update.

This fund is a bit of a split between a tactical position and a long-term holding. The idea here is that it is a conservative investment-grade corporate bond fund; having exposure to that area of the market isn't a bad idea overall. You get a decent yield, nothing too extreme, and it is clearly going to be significantly lower than high-yield leveraged funds. With that, though, comes significantly lower risks, too.

On the tactical side, and as we've already got a glimpse of, the fund is set to perform well if rates can continue to come down. Being investment-grade focused comes with more interest rate sensitivity. Therefore, we saw when interest rates were being increased aggressively and risk-free rates were going higher, the fund was hit hard. With rates expected to come down moving forward and already seeing the risk-free rate enter an almost freefall, the opposite should happen.

In addition to that playing out, being in the CEF structure allows for a discount/premium to exploit. In this case, the fund is running a relatively deep discount. That could further see some additional upside potential in this fund.

Another 'new' fund in my top ten would be the John Hancock Premium Dividend Fund ( PDT ) . This fund is there because we hit that "everything is for sale for the right price" scenario. I wrote about the move in-depth previously , but the short version is that I've held the John Hancock Tax-Advantaged Dividend Income Fund ( HTD ) for years. HTD had consistently been the better value when it came to putting capital to work in the utility/preferred hybrid funds that these two are.

However, along came a distribution cut for PDT and that shook that all up, resulting in PDT becoming much more attractively valued relative to its sister fund. Since making this swap, PDT actually did climb back quickly and even became less attractive on a relative basis. One would have had to have been fairly quick to take advantage of that, as it was a rather brief window. Ultimately, I never made the move because it didn't feel so urgent, and now PDT is still more attractively valued as of writing.

BlackRock Science and Technology Trust ( BST ), PIMCO Dynamic Income Opportunities Fund ( PDO ) and Reaves Utility Income ( UTG ) are all still names in my portfolio, but they slid to positions 12, 15 and 16, respectively. This wasn't through any selling, but they simply slid to lower percentages in my portfolio.

Besides making room for ASGI and PAI to squeeze into the top ten, that also allowed space for the Eaton Vance Tax-Advantaged Global Dividend Income Fund ( ETG ) to make its debut to come in at the number 10 spot. Previously, it was number 11, and its weight was 3.10%. I added to ETG in February after doing the prior update, which would have helped increase the exposure there. I feel the fund is great for getting some global exposure and its relatively mild leverage of ~20%.

In addition to adding to ETG shortly after the last update, another factor was that PDO and UTG had relatively poor performance since that time. Both of those funds are down double-digits in terms of share price since. This doesn't count the distributions the funds paid, as that would have reduced the negative returns to a degree, but regardless, that wouldn't impact the percentage allocation. During this time, BST also performed respectably on a share price basis only, which is where adding just a touch to ETG was enough to edge it out.

Conclusion

ASGI and PAI were new names to my portfolio due to adding fairly aggressively through the year. PAI was a new name, while ASGI had been there but at a lower allocation. ETG has also made its way into one of the top ten spots due to adding to my position just after the previous update, as well as PDO and UTG, being relatively weaker performers. Those two were previously top ten names, along with BST. These are all still held in my portfolio, but they have slid to lower positions. PDT was also a 'new' name but was the result of a swap trade from HTD when that opportunity arose after PDT cut its distribution.

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