Note: This article was released to CEF/ETF Income Laboratory members on June 22, 2020, and data are from that date.
This month, I’d like to take a look at Pioneer High Income Trust (PHT), the second-highest ranked “DxYxZ” fund (good combination of discount, yield and z-score). It closed last Friday with a discount of -12.73%, a 1-year z-score of 2.2 and a yield of 10.88% that is fully covered (100%). I haven’t analyzed PHT in quite a while so I thought it was good to take a look at this fund again. (The top-ranked DxYxZ fund, ARDC, is one we already own in our Tactical Income-100 portfolio.)
PHT is a relatively established fund, being incepted in April 2002, and currently holds around $250 million in AUM. It is 30% leveraged and charges a baseline expense ratio of 0.98% which is moderate.
We can see that PHT’s current discount of -12.73% compares quite favorably to its 1-, 3- and 5-year average discounts of -8.15%, -9.44% and -6.26%, respectively. As an aside, recommending investors sell PHT when it reached an unwarranted +45% premium in early 2015 was one of my earliest successful calls which warned investors of not chasing yield in overvalued funds.
In terms of portfolio, PHT isn’t strictly a high-yield fund. As the fund’s latest factsheet shows, PHT has just over 60% in the US high yield bond. Other notable sectors include international high yield (10.5%), US investment grade (6.9%) and emerging market bonds (6.56.5%).
(Source: PHT factsheet 4/30/2020)
The credit profile of PHT isn’t excessively junky. The fund holds 18.50% in CCC credits, and 5.91% bonds are unrated. Nearly 10% of the portfolio is investment-grade rated (BBB or above). The largest allocations are to BB and B credits at 26.85% and 38.96%, respectively.
(Source: PHT factsheet 4/30/2020)
We can see from the graphic below that after keeping its distribution steady at $0.1375/share since inception in 2002 all throughout the Great Financial Crisis (quite a noteworthy achievement), PHT was forced to cut its distribution in 2015 due to deteriorating earnings, hence leading to its premium collapse. There were two more cuts that followed, but the most recent change was a distribution increase in early 2019 which raised the monthly payout from $0.0650 to $0.0675.
Is the 10.88% yield of PHT sustainable? First of all, the NAV yield is actually a lower 9.47% but you get a market yield of 10.88% because of the fund’s current -12.73% discount (this is one of the main advantages of buying a fund at a discount).
We can see from PHT’s latest financial highlights that its net investment income (“NII”) has been relatively steady over the last 3 years. In the year ended 3/31/2018, the fund earned $0.85 in NII and paid $0.78 in distributions. Last year, the fund earned $0.80 in NII and paid $0.79 in distributions. This year, the fund earned $0.81 in NII and paid out $0.81 in distributions. This shows that the managers are trying to closely align earnings with distributions, a more sensible policy than trying to maintain an excessively large yield in the face of deteriorating NAV and earnings.
(Source: PHT annual report)
The coverage for the last financial year period comes to exactly 100%. However, my prediction is that earnings will be lower in the next reporting period because of deleveraging due to the COVID-19 bear market. Total borrowings (in the form of preferred shares) fell from $125K on 3/31/2019 to $99K on 3/31/2020, a -21% decrease. While this isn’t necessarily going to translate to a -21% decrease in earnings (since the fund has to pay interest in those preferreds), there will be a reduction which means that the coverage is likely to be under 100% at present. As such, I would not consider the distribution to be entirely safe.
What has been slightly puzzling me is PHT’s poor recent performance. PHT ranks 29/32 and 28/32 for YTD and 1-year returns out of all high-yield CEFs, respectively, according to CEFdata.
The reason that this was puzzling was because PHT doesn’t have an excessively junky portfolio; moreover, its eclectic mix of investments should have given it some diversification. As the chart below shows, investment grade corporates (LQD) and emerging market bonds (EMB) – two of PHT’s larger sectors – have actually outperformed US high-yield bonds (HYG) on a YTD basis, with only international high-yield bonds (HYXU) lagging.
Let’s compare PHT with three high-yield peers, including BlackRock High Yield Fund (HYT), PGIM High Yield Bond Fund (ISD) and Western Asset High Income Fund II (HIX). The chart below shows that PHT suffered a slightly higher drawdown compared to the other three funds, but where it really struggled was in the recovery where the performance gap widened dramatically.
This leads me to conclude that PHT may have deleveraged at the wrong time, possibly selling assets at rock-bottom to reduce leverage. In contrast, HYT’s borrowings dropped from $607K on 12/31/2019 to $573K today, which is only a -5.6% decrease. HYT’s managers may have also successfully deleveraged in a more orderly fashion compared to PHT.
PHT has an eclectic mix of investments that should give it some benefits of diversification. Its 10.88% yield is also fully covered (100%) as of the latest earnings numbers, although I do expect coverage to go down slightly in the next reporting period due to reduced managed assets as a result of its deleveraging, which was possibly bungled by the managers, but there’s no way of knowing for sure.
The chief attraction of PHT is its -12.75% discount, which compares favorably with its historical discount as well as with e.g. HYT’s narrower -6.90% discount. However, the better-performing HIX and ISD, which we have previously owned in our Tactical Income-100 portfolio, are also trading at fairly attractive discounts of -11.98% and -13.61%, respectively. ISD has a market yield of 9.36% which is 93% covered as of 2/29/20 earnings numbers while HIX’s yield of 9.88% is 99% covered as of /31/20 earnings numbers. Right now, I would prefer HIX and ISD in the high-yield space over PHT.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.