EVF - Weekly Closed-End Fund Roundup: Tortoise Tender Results (November 19 2023)

2023-12-01 11:22:23 ET

Summary

• 22 out of 22 CEF sectors positive on price and 21 out of 22 sectors positive on NAV.
• Tortoise tender offering results.
• Eaton Vance tender offer results.

The Weekly Closed-End Fund Roundup will be put out at the start of each week to summarize recent price movements in closed-end fund [CEF] sectors in the last week, as well as to highlight recently concluded or upcoming corporate actions on CEFs, such as tender offers. Data is taken from the close of November 17th, 2023 .

JPMorgan releases a nice Weekly Market Recap every week. These are the key index levels this week:

Weekly performance roundup

For CEFs, 22 out of 22 sectors were positive on price (up from 1 last week) and the average price return was +2.66% (up from -2.72% last week). The lead gainer was Real Estate (+4.69%) while Senior Loans lagged (+0.86%).

21 out of 22 sectors were positive on NAV (up from 2 last week), while the average NAV return was +1.81% (up from -1.74% last week). The top sector by NAV was Real Estate (+4.02%) while the weakest sector by NAV was Senior Loans (-0.07%).

The sector with the highest premium was Multisector Income (-2.12%), while the sector with the widest discount is Asia Equity (-15.64%). The average sector discount is -8.77% (up from -10.44% last week).

The sector with the highest premium/discount increase was California Munis (+1.65%), while Commodities (-0.67%) showed the lowest premium/discount decline. The average change in premium/discount was +0.68% (down from -0.73% last week).

The sector with the highest average 1-year z-score is MLPs (+0.82), while the sector with the lowest average 1-year z-score is Covered Call (-1.29). The average z-score is -0.22 (up from -1.06 last week).

The sectors with the highest yields are Senior Loans (+13.74%), Emerging Market Income (+12.94%), and Real Estate (+11.49%). Discounts are included for comparison. The average sector yield is +8.80% (down from +9.19% last week).

Individual CEFs that have undergone a significant decrease in premium/discount value over the past week, coupled optionally with an increasing NAV trend, a negative z-score, and/or are trading at a discount, are potential buy candidates.

Conversely, individual CEFs that have undergone a significant increase in premium/discount value in the past week, coupled optionally with a decreasing NAV trend, a positive z-score, and/or are trading at a premium, are potential sell candidates.

New!

From our screener, here are the CEFs with the highest yields, widest discounts, and lowest 1-year z-scores:

From our screener, here are the CEFs with the best 1-year performance, highest premiums, and highest 1-year z-scores:

Recent corporate actions

These are from the past month. Any new news in the past week has a bolded date:

November 13, 2023 | Templeton Global Income Fund Announces Final Results of Tender Offer.

November 7, 2023 | Tortoise Announces Final Results of Tender Offers for its Closed-End Funds.

November 6, 2023 | Nuveen Preferred & Income Closed-End Funds Announce Completion of Mergers.

October 27, 2023 | Tekla Capital Management LLC Announces Closing of Transaction With abrdn.

October 27, 2023 | Tekla Funds Approve New Investment Advisory Agreements With abrdn Inc.

October 25, 2023 | Eaton Vance Floating-Rate Income Trust and Eaton Vance Senior Income Trust Announce Final Results of Tender Offers.

October 23, 2023 | First Trust Announces Shareholder Approval of First Trust Dynamic Europe Equity Income Fund’s Reorganization into First Trust Active Global Quality Income ETF.

October 23, 2023 | First Trust Advisors Announces Fund Board Approval of Mergers of First Trust Energy Income and Growth Fund, First Trust MLP and Energy Income Fund, First Trust New Opportunities MLP & Energy Fund, and First Trust Energy Infrastructure Fund into First Trust Energy Income Partners Enhanced Income ETF.

October 23, 2023 | NEUBERGER BERMAN CLOSED-END MUNICIPAL FUNDS ANNOUNCE COMPLETION OF REORGANIZATIONS.

Upcoming corporate actions

These are from the past month. Any new news in the past week has a bolded date:

October 24, 2023 | The Herzfeld Caribbean Basin Fund, Inc. Updates Important Dates for Rights Offering.

July 10, 2023 | Virtus Stone Harbor Emerging Markets Total Income Fund Announces Distributions; Provides Update on Pending Merger.

Recent activist or other CEF news

These are from the past month. Any new news in the past week has a bolded date:

October 26, 2023 | XAI Octagon Floating Rate & Alternative Income Term Trust Announces Board Approval of Proposal to Become Perpetual Fund and New Sub-Advisory Agreement with Octagon Credit Investors.

September 22, 2023 | The Fund will be renamed PIMCO Dynamic Income Strategy Fund (new ticker: PDX) and will make investment objective and guideline changes as well as additions to its portfolio management team line-up to reflect its increased focus on multi-sector credit.

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Distribution changes this month

These are sorted in ascending order of distribution change percentage. Funds with distribution changes with ex-dates this month are included. Other statistics such as yield, distribution coverage (post distribution boost/cut), discount and z-score information. The funds are separated into cutters and boosters.

Cutters

Boosters

Commentary

1. Tortoise CEF tender offer results (portfolio holding)

The tender offer for the Tortoise MLP/midstream CEFs have concluded on November 1, 2023 . We discussed these as they were announced in a previous CEF Weekly Roundup . The tender offers are for 5% of outstanding shares at 98% of NAV, and were triggered after certain conditions were met as part of the discount management program instituted by managers. The funds are:

• Tortoise Energy Infrastructure Corp. ( TYG )
• Tortoise Midstream Energy Fund, Inc. ( NTG )
• Tortoise Pipeline & Energy Fund, Inc. ( TTP )
• Tortoise Energy Independence Fund, Inc. ( NDP )
• Tortoise Power and Energy Infrastructure Fund, Inc. ( TPZ )

We own NTG in our Tactical Income-100 portfolio.

Tender offers are beneficial to investors is because they allow cashing out of a CEF close to NAV. The reason that CEF managers usually don't willingly conduct tender offers is because they reduce AUM and hence fee income. Thus, the fact that Tortoise is conducting these offers voluntarily, rather than being strong-armed into doing in reaction to activist pressure, is a sign of management alignment with shareholders, in my opinion. (This is notwithstanding the fact that some of the Tortoise funds are now being targeted by Saba, but the discount management program was established before then).

The pro-ration factors ranged from 8.68% for NDP to 10.71% for TYG, which was in line with what we expected. Taking our own NTG position as an example, we owned 250 shares of NTG when the tender offer expired on November 1, 2023. At the close of expiry day, NTG traded at $33.50. We tendered 23 of these shares back to the CEF at $39.55, making a quick +18.1% profit on the tendered shares.

At first glance, it might seem like you could earn "free money" by buying a CEF in advance of the tender offer, tender all of your shares, and then sell off the remaining untendered shares. However, there is no free lunch. The principal risk is because CEFs are often bid up in premium/discount valuation as the expiry date approaches, due to buyers wishing to take part in the tender offers. Then, when the offer expires, there would be concomitant drop in valuation as investors head for the exits.

Fortunately, the aforementioned scenario did not occur for NTG. This could be due to the fact that NTG was trading at a significant discount of -17.00% on the day of expiration, which was close to its 52-week average. Consequently, we did not observe the usual decline in valuation that often accompanies the conclusion of tender offers. Therefore, we are pleased that the tender offer worked quite well for our portfolio this time around.

2. Eaton Vance tender offer results

The tender offers for two Eaton Vance floating rate CEFs Eaton Vance Floating-Rate Income Trust ( EFT ) and Eaton Vance Senior Income Trust ( EVF ) concluded on October 25, 2023 . We discussed these when they were announced in previous CEF Weekly Roundups here and here .

As a refresher, EFT and EVF along with Eaton Vance Senior Floating-Rate Trust ( EFR ) and Eaton Vance Short Duration Diversified Income Fund ( EVG ) were funds that were held hostage by Saba as shareholder approval was needed for the transfer of the funds' management contract to Morgan Stanley, which acquired Eaton Vance back in 2021. Eventually, the funds reached an agreement to conduct tender offers for a significant chunk of the funds' AUM, providing Saba and other investors with liquidity to exit their positions at near NAV. As part of the agreement with Saba, the funds also agreed for conditional tender offers in 2022, 2023 and 2024 that would take place should the average of the funds exceed -10% over the measurement period from January to August. Only EFT and EVF satisfied this requirement this year, so only these two funds conducted tender offers.

The tender offers were for 10% of shares at 98% of NAV. Normally, we would model a participation rate of 50% giving a pro-ration factor of 20%. However, the actual pro-ration factors were 49.275% and 99.399% for EFT and EVF respectively, which was much better than expected.

Why? It turns out that EVF's discount in particular had narrowed to -4.26% one day before expiration, meaning that the advantage from tendering was relatively slim at only 2%. Possibly due to this reason, fewer shareholders than expected tendered their shares, resulting in a very high pro-ration factor. For EFT, the discount narrowed to -9.14% one day before expiry, so more shareholders tendered and the pro-ration factor was lower.

Even considering all of the above, the pro-ration factors were still unusually high. This would have been a pleasant result for those who owned the funds and tendered their shares, while those who did not clearly left money on the table. This is why it pays to keep abreast of corporate actions such as tender offers! As we had recommended :

However, those who already own EFT or EVF and intend to keep holding these funds should remember to tender 100% of their shares before the tender deadline (unless the discount narrows to under -1%).

3. abrdn takes over Tekla CEFs

The transfer of management contracts from Tekla Capital to abrdn passed without much fanfare. We discussed this when it was first announced in a previous CEF Weekly Roundup. The new funds are thus now named:

• abrdn Healthcare Investors ( HQH )
• abrdn Life Sciences Investors ( HQL )
• abrdn Healthcare Opportunities Fund ( THQ )
• abrdn World Healthcare Fund ( THW ).

We had previously written:

There doesn't seem to be any significant concessions or even a very strong investment case being made by Tekla as to why shareholders should vote to change management. Most of the proxy letter is boilerplate. The only concession is for abrdn to contractually limit expenses at a cap equal to 0.02% less than the funds' respective expense ratios in 2022. This is technically beneficial to shareholders, but the benefit is minute.

I'm guessing Tekla are selling the management contracts to abrdn for a tidy sum. If investors in these funds have been happy with Tekla and are not keen on abrdn, I would vote no.

It will be interesting to see if the funds can even muster even votes to pass the threshold, given the low level of institution ownership. On the flip side, the lack of activist involvement means that there will not be a concerted effort to hold out on the contract transfers unless management sweetens the deal for shareholders.

It turns out that after multiple rounds of adjournment of the shareholder meeting, the transfer of management contracts did get approved without further concessions being offered.

For those investors who owned the Tekla funds, no action is required. Unless notified otherwise, it can be assumed that these funds will continue to adhere to their existing investment mandates going forward into the future.

Strategy Statement

Our goal aims to provide consistent income with enhanced total returns. Our CEF rotation strategy includes trading between CEFs to exploit fluctuations in valuations. This is because CEF prices are inefficient, with investors often overreacting to both the upside or downside, or being unaware of upcoming corporate actions. This could help capture alpha from CEFs for the nimble investor.

Remember, it's really easy to put together a high-yielding CEF portfolio, but to do so profitably is another matter! Our experience has been that it is very possible to earn profitable returns in CEFs. While there are numerous opportunities in the closed-end fund sector, it is essential to remain vigilant of the associated risks. Blindly chasing yield is not a prudent strategy.

For further details see: