NPCT - NPCT: Responsible Investing For Sustainable Long-Term Total Return

Summary

• This newer fund from Nuveen invests in fixed income securities based on ESG principles.
• At a discount to NAV of -14% and an annual yield of 11%, the fund is a strong buy for sustainable long-term total return.
• The future of ESG investing is likely to demonstrate that the principles of ESG, when properly applied, reduce risk and lead to higher quality investments.

Yes, and how many years must a mountain exist, Before it is washed to the sea? And how many years can some people exist, Before they're allowed to be free? Yes, and how many times can a man turn his head, And pretend that he just doesn't see?

-- Bob Dylan

When some investors read or hear the term ESG (Environmental, Social, Governance), it may bring up an emotional response. What do you think when you hear about an ESG investment? The answer my friend, is blowing in the wind. In a February 2022 article from Forbes, the discussion about ESG Investing was explored in some detail for those who wish to understand more about the reasons why someone may wish to invest their hard-earned capital in an ESG-oriented investment. For some, it is about “responsible” investing, but there is another benefit to ESG investing that some may wish to consider that has more to do with the actual returns generated.

“There’s a misconception out there that you need to be willing to give up returns in order to invest responsibly but a growing body of research shows that ESG actually helps mitigate risk,” says Smith of The Haverford Trust Company.

In a recent report from Nuveen titled 2021-2022 Annual Stewardship Report, responsible investing using ESG principles is described in further detail and outlines the state of the company’s ESG offerings and investment conviction. In that report some key highlights include:

• ESG data can be an important, financially material component of the investment process
• Monitoring our portfolios for ESG issues, actively engaging companies and setting expectations for best practice are all in the best interests of our clients
• Strong management of ESG issues can mitigate risks and create long-term, sustainable value

Back in August, 2022, I reviewed a high yield total return fund from Nuveen that invests in companies that meet ESG criteria established by the fund managers. The Nuveen Core Plus Impact Fund ( NPCT ), invests in fixed income securities in businesses that meet established ESG criteria. According to the fund’s latest fact sheet , the fund’s investment objective is high current income and capital appreciation, investing primarily in fixed income investments that are 50% investment grade (core) and the remaining below investment grade but no more than 10% in CCC/Caa or lower. Also, no more than 30% of foreign investments are with issuers in emerging market countries.

The fund’s inception date was April 2021, and as of last August when I last covered it the fund’s total return was negatively impacted by the timing of the fund’s public debut. In fact, I mentioned that when I wrote:

The timing of the fund’s introduction was not particularly propitious, as the bull market turned bearish shortly after the fund went public. It is only just in the past few weeks that the NAV has recovered from its all-time low of $13.44 on July 14, 2022.

And as we now know, the bear market did not turn bullish in the second half of 2022 and the price of the fund has lagged the broader market since then while continuing to pay a steady monthly dividend of $.1030, which it has paid every month since it went public. I rated the stock a Buy in August due to the fact that it was paying a high yield of 9.6% while trading at a discount to NAV of -11%.

In the Nuveen Stewardship report dated November 30, 2022, the company had this to say about the current state of ESG investing:

As the world emerged from pandemic lockdowns, we’ve had to contend with supply chain disruptions, a “great resignation,” record inflation, geopolitical turmoil and intensifying climate risks. The fact that we’ve seen growing regulation and political discord on ESG is, to us, a sign of progress. Markets grow when a necessity for greater consistency and clarity becomes evident, and in 2022 we saw new technology and innovative business approaches surface to address emerging realities, as well as systemic social and environmental issues such as financial inclusion and climate change.

Today, at the closing market price of $11.06 as of 1/13/23, the fund now trades at an even wider discount of -14% and the annual yield is closer to 11%. It appears that the NAV is beginning to trend up again in the past few months and may have reached a bottom in October as can be seen on this chart from CEFConnect.

Fund Characteristics

As of November 30, 2022, according to the fund website the number of holdings is 129 with an average leverage-adjusted effective duration of just under 11 years. The fund was established as a 12-year term fund with the potential to convert to a perpetual fund at the end of the term which ends May 2, 2033 unless converted.

The top 10 issuers include several well-known businesses, utilities, financial institutions, and countries as shown on the website.

In the portfolio commentary from the fund’s September 30, 2022 review literature , the fund managers explain the rationale behind the current investment mix ( emphasis mine ):

By quarter end, around two-thirds of the Fund was invested in impact investments, while one-third was invested in environmental, social and governance ((ESG)) leaders. The Fund remained broadly diversified across impact categories with around 37% in renewable energy and climate change , 19% in natural resources and 10% in community and economic development.

At the sector level, the Fund remained most heavily invested in corporates, including investment grade, below investment grade and emerging market [EM] bonds. The portfolio also included preferred securities and commercial mortgage-backed securities ((CMBS)), with small allocations to senior loans, municipal bonds and asset-backed securities ((ABS)). At quarter end, approximately 44% of the Fund was rated below investment grade.

I like the fact that the fund mentions investments in preferred securities and CMBS, as those are investments that offered a good price in the fourth quarter with relatively low-risk high yield returns, as I discuss in an article in November where I wrote about the Housing market and in which I recommended buying preferred shares of REITs. I also like the emphasis on renewable energy and climate change, as those are hot topic issues that are not going away even if they have been put on the back burner in 2022, as explained by fellow SA contributor, Manuel Paul Dipold in his discussion of WilderHill Clean Energy ETF ( PBW ).

Fund Distributions

The primary reason why I own shares of this fund is for the steady, high-yield monthly income from a diversified fixed income fund. Although the fund does not yet have a long track record, they have made the same monthly distribution since inception 21 months ago. That resulted in a total of $2.06 paid out to shareholders as shown on the fund website as of November, with another $.1030 since then.

For shareholders who got in early, the total return has not been terribly impressive. Keep in mind that the timing of the fund was terrible though, and that short history does not provide a good indication of what is likely to be expected in the future.

The distributions have been steady and have not changed despite the difficult bear market conditions. The distributions have included a mix of ROC and Income, at least according to what is reported by CEFConnect. The most recent 19a notice from December confirms that with about 44% of the 2022 distributions as of November 30 made up of ROC and the remaining 56% NII.

Keep in mind that ROC is not always destructive, and in fact can be a benefit to those holding NPCT in a taxable account. The return of capital may be partly due to the types of investments that are held by the fund.

Future Outlook and Risks

In my opinion, the fund’s mix of investment grade and junk rated fixed income is the best place to be right now in the high yield market. This additional commentary from the September marketing literature adds some color to the fund’s composition and opportunities in high yield:

The Fund experienced no defaults or impairments during the quarter. Despite concerns over slowing economic growth, default rates in the investment grade corporate market remained very low. In high yield, although default rates rose slightly from trough levels, they are unlikely to retrace previous recessionary levels because several factors are helping the segment withstand elevated stress. The high yield market currently exhibits a much stronger ratings composition with a historically high percentage of BB rated bonds. Also, issuers opportunistically locked in low rates in 2020 and 2021, resulting in very low debt maturities over the next few years.

The fund’s mix of credit quality and call exposure is shown in the September 30, 2022 fact sheet. The lower credit quality issues are typically the higher yielding ones. With most of the call exposure still a few years out there is a lower level of risk involved in holding those securities as rates continue to increase this year and therefore fewer issuers are likely to redeem early at higher rates.

I like NPCT for the steady, high yield income stream that is likely to continue into the next 10 years, along with potential capital appreciation as ESG initiatives become more commonly accepted and recognized for the value they provide. As the term gets closer to expiration date, the fund’s discount is likely to narrow, and the price should rise as the NAV rises. Until then, the current discount is wider than average and represents a Strong Buy opportunity for those investors willing to hold and enjoy the monthly income.

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