JCE – A CEF That Does What It Is Supposed To (NYSE:JCE)

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Thesis

Nuveen Core Equity Alpha Fund (NYSE:JCE) is an equity-focused closed-end fund (CEF). The vehicle’s investment objective is to provide a high level of total return. JCE focuses on large cap stocks that fall in the Morningstar “Large Blend” category and currently holds 154 names in its portfolio.

What is very specific about this equity CEF is its ability to sell call options with a notional value of up to 50% of the fund’s equity portfolio. The fund currently has a 28% written call option coverage. Furthermore JCE is one of the few equity CEFs that actually achieves its mandate to transform equity returns into high dividends through closely tracking the S&P 500 from a total return perspective. On a 5-year basis JCE is up +98.55% versus 111.69% for the S&P 500. In this space we have seen many equity CEFs which severely underperform the index on a total return basis and really just gather investors’ attention via high dividend yields.

The fund displays good long term analytics, with high Sharpe and Sortino ratios and drawdowns which are capped at -15% in normalized economic environments. However, the vehicle is currently expensive from a CEF structure perspective, having a 6.86% premium to NAV and a very high z-stat of 3.15. We have seen the premium to NAV exhibit a very high volatility in the past year, alternating between a discount and a premium to the underlying net asset value. We believe this is due to the written call option strategy, which tends to offer rich premiums when volatility is high (as measured by the (VIX) for equities) and thus is priced as such by investors.

JCE is a strong, robust fund that historically has achieved what an equity CEF should – transform equity index capital gains into regular dividends for investors. The fund has demonstrated the strength of its management team and its returns on both a 5- and 10-year basis with attractive risk/reward metrics. JCE is nevertheless now expensive, currently trading at a very high premium to NAV of 6.86% versus a historic flat to negative discount to NAV. For retail investors who already have this name in their portfolios, this CEF is a Hold, while new money looking to enter the space would be well served to wait for a normalization of the premium to NAV.

Analytics

AUM: $0.28 bil

Yield: 9.06%

Premium to NAV: 6.86%

Z-Stat: 3.15

Sharpe: 0.79 (5-year)

Standard Deviation: 14.85 (5-year)

Sortino Ratio (Upside Ratio): 1.2 (5-year)

Holdings

JCE is an equities focused closed end fund with 154 holdings:

holding

Characteristics (Fund Fact Sheet)

The fund focuses on the Large Cap / Blended category as highlighted by Morningstar.

focus

Equity Focus (Morningstar)

The fund is overweight the technology sector.

sector

Sectors (Seeking Alpha)

Versus the S&P 500, the fund is overweight technology and underweight financials.

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S&P 500 Sector Breakdown (Seeking Alpha)

The top ten holdings in the fund compose almost 30% of the fund. They represent well known technology, healthcare and financial names.

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Top 10 Holdings (Seeking Alpha)

From this perspective, the fund is fairly concentrated via its top holdings, which represent a third of the fund.

What is interesting about this fund is the fact that the CEF monetizes equity long-term gains via a written call option strategy in addition to outright sells. A regular equity CEF usually distributes its dividend via selling stocks that have experienced capital gains and thus monetizing those figures in order to have the cash to distribute for the dividend yield. If actively managed, the option overlay strategy allows for a similar type of monetization with the addition of volatility monetization as well. That means that when volatility is high, a written call strategy can result in a higher overall price than an outright spot price selling of an equity holding. The option overlay strategy correlates well with the large cap nature of the portfolio, which allows for significant liquidity along the option chain tenors.

Performance

JCE is one of the few equity CEFs that truly earns its worth via a high performance correlation to the underlying index, namely the S&P 500.

performance

5-Year Performance (Seeking Alpha)

We can see that on a 5-year basis the fund exhibits almost an identical total return to the S&P 500. Do note that, by its CEF nature, JCE distributes via yield capital gains while the S&P 500 just has an accreting NAV. However in this space we have seen many equity CEFs which severely underperform the index and really just gather investors’ attention via high dividend yields, when in reality a retail investor would be better served by just purchasing the index outright.

JCE even outperformed the index in 2018 for a long stretch. We can see the same type of performance even on a 10-year basis.

return

10-Year Total Return (Seeking Alpha)

This is a strong fund with a competent management team that has proven throughout time its ability to employ a viable, quantifiable strategy that transforms long term index capital gains into quarterly dividends.

Premium / Discount to NAV

The fund has historically traded at a small discount to NAV.

dnav

Discount to NAV (Morningstar)

We can observe that in the past decade, outside of 2021 and 2018, the fund has always traded at a discount to NAV, which has averaged somewhere from -3% to -7%. The zero rate environment in 2021 brought a premium to NAV. What is surprising is that in today’s environment, where the Fed is on an aggressive tightening path and we have seen the premiums to NAV for many CEFs evaporate, JCE is still trading at a premium of 6.86%. We feel this is not in line with historical occurrences, and the market will revert to a flatter premium to NAV or an outright discount.

We can see a significant volatility associated with the discount / premium to NAV for the fund in the past year, with the market seemingly pricing in the volatility component associated with the written options strategy.

nav

NAV / Price 1-Year Performance (CefConnect)

Conclusion

JCE is a closed end fund focused on large capitalization stocks. The fund has the mandate to write call options as well, and currently 28% of its portfolio is layered with this options strategy.

JCE impresses through its robust historic returns and its ability to closely track the S&P 500 total return on both a 5- and 10-year basis. We have seen many CEFs in this space failing to achieve this basic principle while at the same time charging investors high fees.

JCE has strong analytics and risk reward metrics but currently exhibits a very high premium to NAV. We believe this is going to revert to a flat level or to a discount to NAV. For a retail investor who already has the name in the portfolio this CEF is a Hold, while new money looking to enter the space would be well served to wait for a normalization of the premium to NAV.

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