4 Closed-End Fund Buys In The Month Of July 2022

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This article was originally published to members of the CEF/ETF Income Laboratory on August 1st, 2022.

July felt like one of those months where the market breathed a sigh of relief. We headed higher by a meaningful amount across the board. Earnings were coming in, and they weren’t as bad as feared. Particularly, the mega-cap tech names that make up the majority of the “market” really took the market higher.

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Amazon (AMZN) and Apple (AAPL), more specifically, finished off a great month. Here’s a look at the performance of the major indexes below, sorted by the performance of the last month. The Nasdaq had really rebounded but remained at a depressed 20%+ decline YTD. The more value-oriented Dow Jones Industrial might not have rebounded as hard, but it still is the best-performing major index on a YTD basis. It just simply didn’t have as much to rebound from.

Equity Markets Performance

Equity Markets Performance (August 1st, 2022) (Seeking Alpha)

Sector performance over the last month really showed a similar pattern. Every sector was in the green for the month. Consumer discretionary and tech really led the way. Though industrials and real estate weren’t too far behind.

Sector Performance

Sector Performance (August 1st, 2022) (Seeking Alpha)

At this time, utilities have slipped back into positive territory for the year. Energy remains the leader for the year by a long shot, which was doing a bit of its own rebounding as it joined the rest of the market in the bear territory during the June lows.

Communication services have been the worst performing sector over the last month, though, with positive results for the month nonetheless. That’s helped push the Communication services to come in as the worst performing sector on a YTD basis.

This sector was dragged down by names such as AT&T (T) and Verizon (VZ). Trust me; as a holder of VZ and one that plays the options selling game on T, I’ve been paying attention to their declines. They weren’t the only decline, though; Charter Communications (CHTR), over the last month, also gave up some gains. It is one of the top positions in the sector SPDR.

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As always, I’m not sure what the future holds for the market. This could be a bear market rally, and we will see new lows later this year. The Fed is continuing to raise interest rates but has some time before making its next decision. That amount of time is actually a good thing.

It gives them time to pause and get some more information from reports before making the next rate decision in September. It can give them a chance to reflect on what they’ve already done, for what rate hiking has accomplished, or if they need to stay aggressive.

With that being said, every month, I continue to make purchases. When we are in a bear market, I invest more aggressively. That means putting whatever cash I can to work and keeping only a minimal cash balance. With July’s strong rebound, it could be time to start looking at building a cash position back up.

First Trust Specialty Finance & Financial Opportunities Fund (FGB)

To kick off July, I bought a position in FGB as the market was low, and the discount made this fund even more appealing. This is a fund I’ve regularly covered, and I always like to point out that this is a riskier type of fund. It is essentially invested in a basket of BDCs.

That can make it a more volatile fund on its own as BDCs trade at discounts and premiums (just like traditional CEFs.) That would be in addition to the added volatility of FGB’s own discount and premium as a traditional CEF.

On top of this, FGB is leveraged – only moderately so – but once again, that’s leverage on top of investments in BDCs that often carry high amounts of leverage.

For these reasons, I view FGB as more of a tactical position. Worth trading in and out of as there are opportunities presented. Definitely not a buy-and-hold type of investment.

Buying it in the early part of the month got me a nice discount on the fund that has already contracted a bit. Not to mention that the entire market rose higher through July, as we discussed above.

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This has resulted in my returns for less than a month coming in at 9%. That’s mostly just lucky timing on my part, but the valuation did suggest it was a good time. That being said, I haven’t sold the position just yet. I’m looking for further discount contraction. If August continues as another strong month of recovery for the market, that could make this trade all the better. Of course, we could reverse course, make new lows, and all these unrealized gains could be washed away.

PIMCO Dynamic Income Opportunities Fund (PDO)

This is one that I’ve been buying fairly aggressively, as some readers might have been paying attention to. I made two purchases in May, and I wish I had added even more in June. However, early July was still a rather attractive time to be picking up shares in this name. This helped push it further into solidifying its position as one of my top ten CEF holdings overall.

Below is PDO’s discount/premium chart over the last three months. As we can see, the month of June really provided the best time to be buying. In the second half of June, there was a snap recovery in the discount of the found. That rebound continued through July to narrow the discount to just a bit below parity with its NAV. This is quite an incredible movement for the fund.

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The overall market recovery through July really helped lift a lot of investments. However, the only other thing I can really think of was that investors realized how fantastic the distribution coverage was. The coverage was so strong that PDO had its distribution boosted by around 8%, and there is still a reasonable chance that we will see a special year-end distribution. Specials are required when they don’t pay out the minimum RIC requirements throughout the year.

The recovery here has been meaningful, but fixed-income is still down significantly with a lot of ground to make up. With rates still expected to rise, I wouldn’t see this recovery happening in the short term. PDO is definitely a long-term income play.

Cohen & Steers Tax-Advantaged Preferred Securities & Income (PTA)

PTA is another fixed-income fund that has been totally getting whacked by the market. First, it was a relatively newer fund launched towards the end of 2020. The fund held up well. The declines were mostly from the share price falling away from its NAV as the NAV rose. Towards the end of 2021, the Fed began to announce its intentions to raise rates sooner than expected to help combat inflation. That’s when the fund really began its fairly rapid decline lower.

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Despite these declines, the fund has shown some slight positive total NAV returns when factoring in the distributions it paid. A good reminder of how much a distribution impacts the end result of a CEF.

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Since the fund’s launch, they’ve maintained the same distribution. I believe that the coverage is weaker and is something that needs to be watched. I wouldn’t be overly surprised if they trimmed the distribution at some point. On the other hand, they already trimmed the distributions of their two other preferred funds, leaving PTA’s payout alone for the time being.

I believe the fund is still at an attractive discount at this time. It’s a fund that’s worth a look if you are a little light on some preferred exposure. The upside is that there is some fixed-to-floating exposure in the fund. It doesn’t kick in immediately; it will be over the next few years. If rates stay elevated, some of the preferred holdings in the fund should benefit from increased rates.

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Gabelli Dividend & Income Trust (GDV)

After making some purchases in PDO and PTA, I wanted to balance out the month with more equity exposure. Overall, my portfolio leans more into equity investments. I believe they represent a better chance at stronger results over the long term. Therefore, I was looking through my portfolio to see where I had room to add to an equity position. Additionally, it had to be at an attractive discount.

I have several Eaton Vance funds that I want to add to. However, they remain rather stubborn at slight premiums or higher valuations relative to their historical range.

That’s where GDV comes in. The fund is an equity fund that doesn’t come with many bells and whistles, just a plain equity fund that continues paying out its monthly distribution through market ups and downs.

At the same time, it isn’t heavily tilted towards tech positions. That’s another appealing factor for the fund, in my opinion. There are a lot of diversified funds that lean towards higher-tech allocations. Additionally, I hold several larger positions in tech-focused funds.

So for me, GDV was a perfect fit. With this latest buy, I pushed this name into one of my top ten holdings. I did a more detailed update really recently on GDV. The fund still remains at a wider discount relative to its five-year average, meaning that it is still attractive at this time. Even despite coming off of some of the even deeper discount levels reached rather recently.

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Conclusion

The market was breathing a sigh of relief through July. We were heading higher and continuing to rebound off the lows we saw in June. Earnings were coming in through the month. For the most part, they weren’t as dire as investors had been anticipating. The Fed remains a key focus going forward. However, we have some time before hearing from them again in September. As usual, I took the opportunity to add to positions that I believed presented attractive entries throughout the month. The market is still off from some of its highs, so that is something to consider if you can still raise some cash and put it to work.

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