Summary
- Ticker NXG was formerly ticker SZC; with this change, "The Cushing" was dropped, and "NXG" was added in front of the fund's name.
- This change had no investment policy, investment objective or change in adviser; it was a slight name and ticker change only.
- The fund continues to trade at a deep discount and recently bumped up its monthly distribution significantly.
Written by Nick Ackerman, co-produced by Stanford Chemist. This article was originally published to members of the CEF/ETF Income Laboratory on February 3rd, 2023.
NXG NextGen Infrastructure Income Fund ( NXG ) might not be a fund that one is familiar with at first. However, this is the former The Cushing NextGen Infrastructure Income Fund (SZC), as they've had a slight name change and a ticker change since our last update. Nothing else changed in terms of the fund's objective, investment policy or management team.
This marks the latest transformation of the fund, as this was a vastly different fund several years ago. This was a pure-play energy fund before the COVID crash; after that, it changed its name and investment objective. It's now been close to three years since that transition to incorporate investments in infrastructure plays more broadly rather than specifically focused on energy. I felt that this added flexibility was a good thing at the time.
I still prefer to invest in hybrid energy funds rather than pure-play energy funds. So for me, I'm still a fan of this allocation. Although bear in mind that they still carry plenty of energy exposure too, which can make the fund more volatile.
Since our last update, we've also seen a large boost in their monthly distribution. With fairly strong results from the fund, the distribution yield on NAV could mean more boost potential in the future. Along with this big boost, we have the latest fiscal year-end annual report available, making it a perfect time to provide an overall update. The large discount on this fund continues to persist, which still presents an opportunity for investors to consider this fund.
Finally, one more change that shouldn't affect the day-to-day, but Jerry Swank, on January 27th, 2023, resigned as a Trustee of the Fund.
On January 27, 2023 Jerry V. Swank resigned as a Trustee of the Fund. The Board of Trustees appointed John H. Alban to serve as an interested trustee of the Fund to fill the vacancy created upon the resignation of Mr. Swank. Mr. Alban will serve the remainder of Mr. Swank's term as a Class II trustee of the Fund. The term of the Class II trustees of the Fund continues until the annual meeting of the shareholders to be held in 2024.
The Basics
- 1-Year Z-score: -0.49
- Discount: -22.50%
- Distribution Yield: 7.73%
- Expense Ratio: 1.87%
- Leverage: 25.91%
- Managed Assets: $190 million
- Structure: Perpetual
NXG will "seek high total return with an emphasis on current income." To achieve that objective, the fund will "invest at least 80% of its net assets, plus any borrowings for investment purposes, in a portfolio of equity and debt securities of infrastructure companies, including: [i] energy infrastructure companies, [ii] industrial infrastructure companies, [iii] sustainable infrastructure companies, and [iv] technology and communication infrastructure companies. The Fund will invest no more than 25% of its Managed Assets in securities of energy master limited partnerships ("MLPs")."
This is a fairly small fund coming in at less than $200 million AUM, that's including their ~26% leverage too. This often means lower daily trading volume, meaning a large investor can have difficulty entering or exiting a position hastily. The average daily trading volume, according to CEFConnect, comes in at 8,114 shares daily.
Speaking of the fund's leverage, they reduced their total borrowings with the latest annual report. Borrowings came down from $56.41 million at the end of November 30th, 2021, to $41.41 million at the end of fiscal 2022. Their leverage is subject to a variable rate based on LIBOR plus 1%. That means as interest rates were rising rapidly, their borrowing costs were also rising at a swift pace.
This isn't any different from most other leveraged CEFs, but it is something to be aware of regardless. The average interest rate for the prior fiscal year came in at 2.55%. With LIBOR pushing around 4.5% more recently, leverage costs would have ballooned to over 5%. The fund's total expense ratio was 2.88% when including the leverage costs.
Performance - Attractive Discount
Before the fund's transition to include a broader portfolio of infrastructure plays, it had been one of the better-performing energy funds. There are several funds one could include, but to get a good mixture, I've included Tortoise Energy Infrastructure Corp ( TYG ), Center Coast Brookfield MLP & Energy Infrastructure Fund ( CEN ) and Kayne Anderson Energy Infrastructure Fund Inc. ( KYN ).
Ycharts
Even after the COVID crash, NXG was the top-performing fund on a total NAV return basis. One of the reasons for this is that they had reduced leverage the year before while most other peers held their leverage firm - being forced to deleverage their portfolio into the lows on margin calls.
Ycharts
TYG had also changed its investment policy to include investments in a more broad sense of infrastructure after the COVID crash. So today, that fund is also a bit different but still carries significant weight to energy investments.
Despite this, the fund's discount is now trading at nearly an all-time depth. Through 2021 it started to reduce quite substantially; however, 2022 saw this widen out significantly again.
NXG Discount/Premium History (CEFConnect)
Distribution - Big Bump
One of the reasons for the fund's immense discount seems to stem from it being one of the lowest-yielding CEFs out there. That was before the latest bump to $0.27 per month. This was the first bump after slashing the distribution in 2020, which was actually the fund's first cut in its history.
Previously it was quarterly, but they held the equivalent monthly payout when adjusting the frequency. That was through a time when the energy sector had been performing poorly on a regular basis from about 2015 to 2020. 2020 was merely the big finale for the energy collapse.
With that raise, we are at a much more appealing 7.73% distribution rate on shares. Due to the massive discount, the fund actually only has to earn 5.99% to have the distribution covered.
It isn't close to achieving that higher level it had previously, but that's where it is a bit interesting. The actual NAV is right near touching the pre-COVID crash level and has been above it on occasion in the last two years. So with the rebound in the broader market and the help of energy investments performing so well, NXG had recovered.
NXG NAV and Share Price (CEFConnect)
Other energy funds that were highly leveraged are still well below ever, coming back to their previous NAV level.
To cover the fund's distribution, we would often first look at net investment income. As an equity fund, we know they'll rely on capital gains too, but we want to see what they can get covered by the dividends and interest of the underlying portfolio first. In this case, one might seem shocked that it is a negative amount.
This goes back to investing heavily in energy investments and including MLPs. They often distribute out return of capital distributions. For this fund, to get to the NII figure, you take total investment income minus the expenses and minus the return of capital.
Instead, we would want to look for net distributable income or distributable cash flow. In that case, we see that DCF coverage comes to 83.4%. That's quite substantial for an equity fund, requiring quite minimal capital gains to cover the gap.
To help cover that gap, the fund also utilizes an options strategy. That contributed $861,015 in the prior fiscal year. That alone nearly put the fund at 100% of distribution coverage.
Now that the fund's distribution has been raised to an annual $3.24, the total distributions should come to around $8.43 million. That would mean that DCF coverage would still come in at a hefty 66%. That's still well above the coverage we see from many other equity funds in the infrastructure space.
When looking at the tax classification of the distributions, the fund had been able to utilize loss carryforwards to offset gains. Besides the ROC distributions the fund receives, this is another way they can keep their distributions as ROC. That can be tax-friendly for investors as it reduces an investor's cost basis rather than be taxable in the current year.
The Fund utilized $11,859,285 of capital loss carryforward during the fiscal year ended November 30, 2022. As of November 30, 2022, for federal income tax purposes, capital loss carryforward is comprised of short-term capital loss of $2,377,584 and long-term capital loss of $4,793,747.
Only a small portion of the fund's distribution in 2021 was classified as ordinary income, and a portion of it was considered qualified dividends. The rest of the distributions were all listed as non-dividends. I have not seen any information on 2022's classifications yet. However, if I were to assume, it should be similar.
NXG's Portfolio
The managers in this fund are quite busy. They reported a portfolio turnover of 124.56% last year. That was after they transitioned through fiscal 2021 and listed a 125.8% turnover. Prior to these two years, the fund was still fairly active but much less so, with turnover in 2020 at 71.35%, 2019 at 59.32% and 2018 at 74%.
Some of this can be due to the fund carrying a relatively small number of holdings. At around 61 holdings, according to CEFConnect, it wouldn't take flipping that many positions to start adding up to a material amount of turnover.
Despite being a fairly narrowly focused portfolio, the breakdown by industry is extensive. This can lead to quite the diversification overall, but the largest weightings carry some fairly meaningful allocations. All three top weightings are related to the fossil fuel energy space, specifically. They comprise 38.4% of the portfolio. As I said, the fund still carries a significant weight to the energy space.
Some of the weightings here will represent only one name - reflecting the narrow number of holdings. Even for some of the larger weightings listed above, it's only represented by one position. The utilities, for example, is the sole position of Clearway Energy ( CWEN.A ). That is listed as 5.4% of managed and 4.6% of net assets.
The largest position for the fund is Atlantica Sustainable Infrastructure ( AY ) at around a 4.4% weighting. This is listed as a solar industry position and helps bump up that category weighting in this fund. This is followed by MPLX ( MPLX ), an MLP investment that they identify as a large-cap MLP. These two positions help show the hybrid approach of NXG quite perfectly, mixing in fossil fuels with renewables to get an overall complementary approach to investing in the infrastructure energy space.
Conclusion
NXG changed its ticker and its name slightly recently; however, there was no fundamental change to the fund with that change. The fund trades at a deep discount and recently significantly bumped up its monthly distribution. While the yield is quite enticing on a share price basis, the actual underlying portfolio doesn't have to yield that much to have it covered. This would be due to the massive discount; the NAV rate is only around 6%. That means we could see further increases in the future. However, I wouldn't necessarily expect it any time soon after this large bump.
For further details see:
NXG: Deep Discount, Big Distribution Boost