2023-05-07 11:35:24 ET
Summary
- Only funds with yields over 8%, coverage higher than 90%, and trading at a discount are considered.
- Top lists of discount, yield, DxY, and DxYxZ are given.
- The top DxY funds are HFRO, HNW, and JPC.
Author's note: This article was released to CEF/ETF Income Laboratory members on April 25th, 2023. Please check latest data before investing.
"High-High-Low" Closed-End Fund Report
Quantitative screens help to rapidly narrow down attractive candidates from the database of 500+ closed-end funds [CEFs] for further due diligence and investigation. The "High-High-Low" report was inspired by a member of CEF/ETF Income Laboratory, who wrote:
Stanford, you should do a follow up article on CEF that distribute 8%+, have 90% or more coverage and trade under NAV. What does that look like in today's world? How many funds are doing that?
What are the Z scores? I think many investors would be interested who are pushing for higher yield to identify best in class of aggressive funds that are coming close to covering dividends. Allows people to reevaluate risk/reward.
The "High-High-Low" report, therefore, screens for the following three attributes that we would like to screen for:
- High distributions (>8%) (i.e., 8% or higher yields).
- High coverage (>90%) (i.e., 90% or better coverage).
- Low premium/discount value (<0%) (i.e., trading at a discount).
Note that the above thresholds are subject to change, based on the number of eligible CEFs there are that satisfy all three of the criteria. I try to aim for a minimum of at least 20 eligible funds so that the "top 10" list actually means something (top 50% of the screen).
As for the Quality CEF report, I should mention some caveats about using coverage as a screen. Firstly, the coverage ratios are calculated using earnings data from CEFConnect. No efforts have been made to independently verify the coverage ratios from the individual fund annual/semi-annual reports themselves. Secondly, having a coverage ratio >90% does not guarantee that the fund's distribution is secure. Many funds reduce their distributions periodically in line with market conditions in order to maintain good coverage. Thirdly, a coverage cut-off ratio of 90% is, ultimately, an arbitrary number. A fund with 89.9% coverage will be excluded from the rankings, whereas funds with 90.1% coverage will be considered, even though only a sliver of difference separates the two.
The coverage ratio is calculated by dividing the earnings/share number provided by CEFConnect on the "distributions" tab by the distribution/share. CEFData also provides earnings coverage numbers as well.
I should also note that having both high yields and less than 100% coverage (though greater than 90%) makes this a more aggressive screen compared to the Quality report (which only selects for >100% coverage). Furthermore, note that because the universe of eligible funds is pretty small, some of the CEFs will appear in multiple top lists, just in a different order...
I hope that these rankings of "high-high-low" CEFs will provide fertile grounds for further exploration.
Key to table headings:
P/D = premium/discount
Z = 1-year z-score
Cov = coverage
1Y NAV = 1-year NAV total return
Lev = leverage
BE = baseline expense
Data were taken from the close of April 21, 2023.
1. Top 10 widest "high-high-low" discounts
The following data show the 10 CEFs with the widest discounts, yield >6.5% and coverage >85%. Z-scores, leverage and baseline expense are shown for comparison.
Fund | Ticker | Category | P/D | Yield | Z | Cov | 1Y NAV | Lev | BE |
Highland Floating Rate Opportunities Fund | ( HFRO ) | Senior Loans | -36.25% | 10.74% | -2.3 | 102% | -2.3% | 13% | 1.28% |
MainStay CBRE Glob Infra Megatrends Fund | ( MEGI ) | Sector Equity | -16.58% | 9.00% | -1.0 | 91% | -12.4% | 28% | 1.47% |
Pioneer Diversified High Income | ( HNW ) | High Yield | -14.15% | 10.79% | -1.6 | 109% | -8.4% | 30% | 1.58% |
BNY Mellon High Yield Strategies Fund | ( DHF ) | High Yield | -14.12% | 8.22% | -1.4 | 110% | -9.3% | 30% | 1.28% |
abrdn Total Dynamic Dividend | ( AOD ) | Global Equity | -13.92% | 8.46% | -1.3 | 103% | -4.1% | 1% | 1.14% |
abrdn Global Dynamic Dividend | ( AGD ) | Global Equity | -13.58% | 8.23% | -1.1 | 99% | -5.9% | 5% | 1.16% |
Apollo Senior Floating Rate Fund | ( AFT ) | Senior Loans | -13.58% | 10.79% | -0.9 | 92% | -1.5% | 36% | 2.38% |
Apollo Tactical Income Fund Inc. | ( AIF ) | High Yield | -13.46% | 11.87% | -0.6 | 93% | -3.3% | 37% | 2.42% |
Blackstone Long-Short Credit Income | ( BGX ) | Senior Loans | -13.45% | 10.85% | -0.6 | 103% | -6.9% | 39% | 2.21% |
Nuveen Senior Income | ( NSL ) | Senior Loans | -12.67% | 11.30% | -0.9 | 90% | -4.0% | 39% | 1.45% |
2. Top 10 lowest "high-high-low" z-scores
The following data show the 10 CEFs with the lowest z-scores, yield >6.5%, coverage >85% and premium/discount <+5%. Leverage and baseline expense are shown for comparison.
Fund | Ticker | Category | Z | P/D | Yield | Cov | 1Y NAV | Lev | BE |
Highland Floating Rate Opportunities Fd | ( HFRO ) | Senior Loans | -2.3 | -36.25% | 10.74% | 102% | -2.3% | 13% | 1.28% |
Nuveen Pref & Income Opps Fund | ( JPC ) | Preferreds | -2.0 | -11.91% | 8.30% | 94% | -15.5% | 40% | 1.34% |
Pioneer Diversified High Income | ( HNW ) | High Yield | -1.6 | -14.15% | 10.79% | 109% | -8.4% | 30% | 1.58% |
BNY Mellon High Yield Strategies Fund | ( DHF ) | High Yield | -1.4 | -14.12% | 8.22% | 110% | -9.3% | 30% | 1.28% |
First Trust Inter Dur Pref & Income Fund | ( FPF ) | Preferreds | -1.4 | -12.18% | 8.48% | 103% | -18.3% | 34% | 1.35% |
Western Asset High Yield Defined Opps | ( HYI ) | High Yield | -1.4 | -6.59% | 9.78% | 93% | -6.0% | 0% | 0.92% |
abrdn Total Dynamic Dividend | ( AOD ) | Global Equity | -1.3 | -13.92% | 8.46% | 103% | -4.1% | 1% | 1.14% |
Blackstone Senior Floating Rt 2027 term | ( BSL ) | Senior Loans | -1.1 | -11.03% | 10.29% | 94% | -4.1% | 31% | 1.83% |
Nuveen Floating Rate Income Opportunity | ( JRO ) | Senior Loans | -1.1 | -11.79% | 11.20% | 91% | -3.2% | 39% | 1.40% |
abrdn Global Dynamic Dividend | ( AGD ) | Global Equity | -1.1 | -13.58% | 8.23% | 99% | -5.9% | 5% | 1.16% |
3. Top 10 highest "high-high-low" yields
The following data show the 10 CEFs with the highest yields, coverage >85% and premium/discount <+5%. z-scores, leverage, and baseline expense are shown for comparison.
Fund | Ticker | Category | Yield | P/D | Z | Cov | 1Y NAV | Lev | BE |
KKR Income Opportunities Fund | ( KIO ) | High Yield | 13.14% | -11.18% | -0.4 | 94% | -14.4% | 34% | 2.18% |
PIMCO Access Income | ( PAXS ) | Multisector Income | 12.51% | -5.72% | -0.1 | 110% | -11.0% | 47% | 2.22% |
PIMCO Dynamic Income Opportunities Fund | ( PDO ) | Global Income | 12.23% | -2.41% | 0.3 | 109% | -15.2% | 49% | 2.15% |
Apollo Tactical Income Fund Inc. | ( AIF ) | High Yield | 11.87% | -13.46% | -0.6 | 93% | -3.3% | 37% | 2.42% |
Western Asset Diversified Inc Fund | ( WDI ) | Multisector Income | 11.75% | -11.11% | 0.3 | 105% | -10.3% | 32% | 1.75% |
DoubleLine Income Solutions Fund | ( DSL ) | Global Income | 11.46% | -3.11% | 0.6 | 107% | -13.6% | 30% | 1.51% |
Franklin Limited Duration Income Trust | ( FTF ) | Limited Duration | 11.40% | -12.52% | -0.9 | 91% | -3.2% | 29% | 1.45% |
Nuveen Senior Income | ( NSL ) | Senior Loans | 11.30% | -12.67% | -0.9 | 90% | -4.0% | 39% | 1.45% |
Ares Dynamic Credit Allocation Fund | ( ARDC ) | Senior Loans | 11.23% | -11.73% | -0.3 | 93% | -6.0% | 35% | 2.46% |
Nuveen Short Duration Credit Opps Fund | ( JSD ) | Senior Loans | 11.20% | -10.87% | 0.3 | 90% | -4.9% | 39% | 1.91% |
4. Top 10 best combinations of "high-high-low" yield and discount
For possible buy candidates, it is probably a good idea to consider both yield and discount. Buying a CEF with both a high yield and discount not only gives you the opportunity to capitalize from discount contraction, but you also get "free" alpha as a result of the distribution being paid out. This is because paying out a distribution is effectively the same as liquidating part of the fund at NAV and returning the capital to the unitholders. I considered several ways to rank CEFs by a composite metric of both yield and discount. The simplest would be yield + discount, however I disregarded this because yields and discounts may have different ranges of absolute values and a sum would be biased towards the larger set of values. I finally settled on the multiplicative product, yield x discount. This is because I consider a CEF with 7% yield and 7% discount to be more desirable than a fund with 2% yield and 12% discount, or 12% yield and 2% discount, even though each pair of quantities sum to 14%. Multiplying yield and discount together biases towards funds with both high yield and discount. Since discount is negative and yield is positive, the more negative the " DxY " metric, the better. Only funds with >6.5% yield, >85% coverage and <+5% premium/discount are considered.
Fund | Ticker | Category | P/D | Yield | Z | DxY | Cov | 1Y NAV | Lev | BE |
Highland Floating Rate Opportunities Fd | ( HFRO ) | Senior Loans | -36.25% | 10.74% | -2.3 | -3.89 | 102% | -2.3% | 13% | 1.28% |
Apollo Tactical Income Fund Inc. | ( AIF ) | High Yield | -13.46% | 11.87% | -0.6 | -1.60 | 93% | -3.3% | 37% | 2.42% |
Pioneer Diversified High Income | ( HNW ) | High Yield | -14.15% | 10.79% | -1.6 | -1.53 | 109% | -8.4% | 30% | 1.58% |
MainStay CBRE Glob Infra Megatrends Fund | ( MEGI ) | Sector Equity | -16.58% | 9.00% | -1.0 | -1.49 | 91% | -12.4% | 28% | 1.47% |
KKR Income Opportunities Fund | ( KIO ) | High Yield | -11.18% | 13.14% | -0.4 | -1.47 | 94% | -14.4% | 34% | 2.18% |
Apollo Senior Floating Rate Fund | ( AFT ) | Senior Loans | -13.58% | 10.79% | -0.9 | -1.47 | 92% | -1.5% | 36% | 2.38% |
Blackstone Long-Short Credit Income | ( BGX ) | Senior Loans | -13.45% | 10.85% | -0.6 | -1.46 | 103% | -6.9% | 39% | 2.21% |
Nuveen Senior Income | ( NSL ) | Senior Loans | -12.67% | 11.30% | -0.9 | -1.43 | 90% | -4.0% | 39% | 1.45% |
Franklin Limited Duration Income Trust | ( FTF ) | Limited Duration | -12.52% | 11.40% | -0.9 | -1.43 | 91% | -3.2% | 29% | 1.45% |
Nuveen Floating Rate Income Opportunity | ( JRO ) | Senior Loans | -11.79% | 11.20% | -1.1 | -1.32 | 91% | -3.2% | 39% | 1.40% |
5 . Top 10 best combinations of "high-high-low" yield, discount and z-score
This is my favorite metric because it takes into account all three factors that I always consider when buying or selling CEFs: yield, discount and z-score. The composite metric simply multiplies the three quantities together. As both discount and z-score are negative while yield is positive, the more positive the " DxYxZ " metric, the better. Only funds with >7% yield, >85% coverage and <+5% premium/discount are considered.
Fund | Ticker | Category | P/D | Yield | Z | DxYxZ | Cov | 1Y NAV | Lev | BE |
Highland Floating Rate Opportunities Fd | ( HFRO ) | Senior Loans | -36.25% | 10.74% | -2.3 | 8.84 | 102% | -2.3% | 13% | 1.28% |
Pioneer Diversified High Income | ( HNW ) | High Yield | -14.15% | 10.79% | -1.6 | 2.46 | 109% | -8.4% | 30% | 1.58% |
Nuveen Pref & Income Opps Fund | ( JPC ) | Preferreds | -11.91% | 8.30% | -2.0 | 2.00 | 94% | -15.5% | 40% | 1.34% |
BNY Mellon High Yield Strategies Fund | ( DHF ) | High Yield | -14.12% | 8.22% | -1.4 | 1.67 | 110% | -9.3% | 30% | 1.28% |
abrdn Total Dynamic Dividend | ( AOD ) | Global Equity | -13.92% | 8.46% | -1.3 | 1.58 | 103% | -4.1% | 1% | 1.14% |
MainStay CBRE Glob Infra Megatrends Fund | ( MEGI ) | Sector Equity | -16.58% | 9.00% | -1.0 | 1.45 | 91% | -12.4% | 28% | 1.47% |
Nuveen Floating Rate Income Opportunity | ( JRO ) | Senior Loans | -11.79% | 11.20% | -1.1 | 1.44 | 91% | -3.2% | 39% | 1.40% |
First Trust Inter Dur Pref & Income Fund | ( FPF ) | Preferreds | -12.18% | 8.48% | -1.4 | 1.43 | 103% | -18.3% | 34% | 1.35% |
Apollo Senior Floating Rate Fund | ( AFT ) | Senior Loans | -13.58% | 10.79% | -0.9 | 1.38 | 92% | -1.5% | 36% | 2.38% |
Blackstone Senior Floating Rt 2027 term | ( BSL ) | Senior Loans | -11.03% | 10.29% | -1.1 | 1.28 | 94% | -4.1% | 31% | 1.83% |
Top DxYxZ funds
The top DxYxZ funds from this month's High-High-Low report are HFRO, HNW and JPC.
The Highland Income Fund ( HFRO ) is a relatively complex, hedge fund-like CEF that invests in a few, highly-concentrated positions. It has an attractive set of valuation metrics, including a discount of -36.25%, yield of 10.74% and z-score of -2.3, however investors should consider HFRO's history and management before investing (see HFRO: Thoughts On The Conversion Proposal ).
Pioneer Diversified High Income Trust ( HNW ) is a diversified fixed income CEF with allocations to domestic and international high-yield bonds, emerging market bonds, event-linked bonds, and CMBS. It yields 10.79% with a -14.15% discount and -1.6 z-score.
Nuveen Preferred & Income Opportunities Fund ( JPC ) is a bond/preferred fixed income fund. Its discount of -11.91% is wider than its historical average and it pays a yield of 8.30% and has a 1-year z-score of -2.0.
For further details see:
The 'High-High-Low' Closed-End Fund Report, April 2023