The Chemist’s ‘High-High-Low’ Closed-End Fund Report: August 2020


Author’s note: This article was released to members on September 3, 2020. Please check latest data before investing.

Chemist’s “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 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:

  1. High distributions (>7.5%) (i.e., 7.5% or higher yields)
  2. High coverage (>90%) (i.e., 90% or better coverage)
  3. 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 = One-year z-score
  • Cov = Coverage
  • 1Y NAV = One-year NAV total return
  • Lev = Leverage
  • BE = Baseline expense

Data were taken from the close of September 1, 2020.

1. Top 10 widest “high-high-low” discounts

The following data show the 10 CEFs with the highest discounts, yield >7.5% and coverage >90%. Z-scores, leverage and baseline expense are shown for comparison.

Fund Ticker Category P/D Yield Z Cov 1Y NAV Lev BE
Principal Real Estate Income Fund (PGZ) Real Estate -19.47% 11.33% -1.3 98% -30.02% 29% 2.02%
Invesco Dynamic Credit Opp (VTA) Senior Loans -16.32% 9.86% -0.9 96% -5.33% 38% 2.18%
RiverNorth Marketplace Lending Corp (RSF) High Yield -14.66% 11.77% -0.8 114% -7.03% 28% 5.18%
Ares Dynamic Credit Allocation Fund (ARDC) Senior Loans -14.06% 9.21% -0.5 122% -4.95% 32% 3.25%
Aberdeen Total Dynamic Dividend (AOD) Global Equity -13.93% 8.40% -0.7 94% 11.53% 0% 1.19%
BlackRock Floating Rate Inc Strategies (FRA) Senior Loans -12.59% 8.06% -0.1 91% -0.74% 31% 1.86%
Aberdeen Global Dynamic Dividend (AGD) Global Equity -12.23% 8.07% 0.2 97% 10.75% 7% 1.16%
Credit Suisse Asset Mgmt Income (CIK) High Yield -12.21% 9.43% -0.8 103% 2.77% 31% 0.77%
PGIM High Yield Bond Fund, Inc. (ISD) High Yield -11.84% 8.90% -0.1 93% 4.59% 25% 1.15%
Blackstone/GSO Strategic Credit Fund (BGB) Senior Loans -11.84% 9.41% -0.6 118% -3.26% 40% 0.00%

2. Top 10 lowest “high-high-low” z-scores

The following data show the 10 CEFs with the lowest z-scores, yield >8%, coverage >90% and premium/discount <0%. Leverage and baseline expense are shown for comparison.

Fund Ticker Category Z P/D Yield Cov 1Y NAV Lev BE
JHancock Preferred Income II (HPF) Preferreds -1.3 -0.95% 8.09% 95% -4.80% 38% 1.27%
Principal Real Estate Income Fund (PGZ) Real Estate -1.3 -19.47% 11.33% 98% -30.02% 29% 2.02%
Invesco High Income 2023 Target Term (IHIT) High Yield -1.2 -4.10% 7.61% 94% -16.80% 29% 1.10%
Blackstone/GSO Senior Floating Rate Trm (BSL) Senior Loans -1.0 -11.26% 8.34% 112% -1.23% 35% 1.83%
JHancock Preferred Income III (HPS) Preferreds -0.9 -0.45% 8.02% 96% -4.12% 37% 1.26%
Invesco Dynamic Credit Opp (VTA) Senior Loans -0.9 -16.32% 9.86% 96% -5.33% 38% 2.18%
Credit Suisse High Yield Bond Fund (DHY) High Yield -0.9 -11.60% 9.32% 95% 1.51% 29% 1.37%
RiverNorth Marketplace Lending Corp (RSF) High Yield -0.8 -14.66% 11.77% 114% -7.03% 28% 5.18%
Blackstone/GSO Long-Short Credit Income (BGX) Senior Loans -0.8 -11.15% 9.47% 122% -0.70% 41% 1.97%
Barings Global Short Duration High Yield (BGH) High Yield -0.8 -10.96% 9.43% 151% -8.19% 33% 0.00%

3. Top 10 highest “high-high-low” yields

The following data show the 10 CEFs with the highest yields, coverage >90% and premium/discount <0%. z-scores, leverage, and baseline expense are shown for comparison.

Fund Ticker Category Yield P/D Z Cov 1Y NAV Lev BE
XAI Octagon FR & Alt Income Term Trust (XFLT) Senior Loans 11.88% -4.90% -0.8 95% -14.81% 31% 3.27%
RiverNorth Marketplace Lending Corp (RSF) High Yield 11.77% -14.66% -0.8 114% -7.03% 28% 5.18%
Principal Real Estate Income Fund (PGZ) Real Estate 11.33% -19.47% -1.3 98% -30.02% 29% 2.02%
DoubleLine Income Solutions Fund (DSL) Global Income 11.12% -1.74% -0.6 96% -3.55% 26% 1.62%
Pioneer High Income (PHT) High Yield 9.93% -8.18% 0.1 100% -2.29% 32% 0.98%
Invesco Dynamic Credit Opp (VTA) Senior Loans 9.86% -16.32% -0.9 96% -5.33% 38% 2.18%
Blackstone/GSO Long-Short Credit Income (BGX) Senior Loans 9.47% -11.15% -0.8 122% -0.70% 41% 1.97%
Barings Global Short Duration High Yield (BGH) High Yield 9.43% -10.96% -0.8 151% -8.19% 33% 0.00%
Credit Suisse Asset Mgmt Income (CIK) High Yield 9.43% -12.21% -0.8 103% 2.77% 31% 0.77%
Blackstone / GSO Strategic Credit Fund (BGB) Senior Loans 9.41% -11.84% -0.6 118% -3.26% 40% 0.00%

4. Top 10 best combination 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 >7.5% yield, >90% coverage and <0% premium/discount are considered.

Fund Ticker Category P/D Yield Z DxY Cov 1Y NAV Lev BE
Principal Real Estate Income Fund (PGZ) Real Estate -19.47% 11.33% -1.3 -2.21 98% -30.02% 29% 2.02%
RiverNorth Marketplace Lending Corp (RSF) High Yield -14.66% 11.77% -0.8 -1.73 114% -7.03% 28% 5.18%
Invesco Dynamic Credit Opp (VTA) Senior Loans -16.32% 9.86% -0.9 -1.61 96% -5.33% 38% 2.18%
Ares Dynamic Credit Allocation Fund (ARDC) Senior Loans -14.06% 9.21% -0.5 -1.29 122% -4.95% 32% 3.25%
Aberdeen Total Dynamic Dividend (AOD) Global Equity -13.93% 8.40% -0.7 -1.17 94% 11.53% 0% 1.19%
Credit Suisse Asset Mgmt Income (CIK) High Yield -12.21% 9.43% -0.8 -1.15 103% 2.77% 31% 0.77%
Blackstone / GSO Strategic Credit Fund (BGB) Senior Loans -11.84% 9.41% -0.6 -1.11 118% -3.26% 40% 1.91%
BNY Mellon High Yield Strategies Fund (DHF) High Yield -11.69% 9.27% -0.5 -1.08 94% 3.12% 27% 1.29%
Credit Suisse High Yield Bond Fund (DHY) High Yield -11.60% 9.32% -0.9 -1.08 95% 1.51% 29% 1.37%
Invesco High Income II (VLT) High Yield -11.67% 9.07% -0.6 -1.06 96% 1.27% 31% 1.22%

5. Top 10 best combination 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. A screen is applied to only include CEFs with a negative 1-year z-score. As both discount and z-score are negative while yield is positive, the more positive the “DxYxZ” metric, the better. Only funds with >7.5% yield, >90% coverage and <0% premium/discount are considered.

Fund Ticker Category P/D Yield Z DxYxZ Cov 1Y NAV Lev BE
Principal Real Estate Income Fund (PGZ) Real Estate -19.47% 11.33% -1.3 2.85 98% -30.02% 29% 2.02%
RiverNorth Marketplace Lending Corp (RSF) High Yield -14.66% 11.77% -0.8 1.47 114% -7.03% 28% 5.18%
Invesco Dynamic Credit Opp (VTA) Senior Loans -16.32% 9.86% -0.9 1.42 96% -5.33% 38% 2.18%
Credit Suisse Asset Mgmt Income (CIK) High Yield -12.21% 9.43% -0.8 0.93 103% 2.77% 31% 0.77%
Credit Suisse High Yield Bond Fund (DHY) High Yield -11.60% 9.32% -0.9 0.93 95% 1.51% 29% 1.37%
Blackstone/GSO Senior Floating Rate Trm (BSL) Senior Loans -11.26% 8.34% -1.0 0.91 112% -1.23% 35% 1.83%
Blackstone/GSO Long-Short Credit Income (BGX) Senior Loans -11.15% 9.47% -0.8 0.88 122% -0.70% 41% 1.97%
Aberdeen Total Dynamic Dividend (AOD) Global Equity -13.93% 8.40% -0.7 0.87 94% 11.53% 0% 1.19%
Barings Global Short Duration High Yield (BGH) High Yield -10.96% 9.43% -0.8 0.85 151% -8.19% 33% 0.00%
Blackstone / GSO Strategic Credit Fund (BGB) Senior Loans -11.84% 9.41% -0.6 0.67 118% -3.26% 40% 0.00%

Labor Day Sale – only 10 spots remaining!

Our Labor Day sale is limited to this week only, or until the first 50 members have signed up, whichever comes first.

At the CEF/ETF Income Laboratory, we manage market-beating closed-end fund (CEF) and exchange-traded fund (ETF) portfolios targeting safe and reliable ~8% yields to make income investing easy for you. Check out what our members have to say about our service.

Disclosure: I am/we are long ARDC, XFLT. 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.

Be the first to comment

Leave a Reply

Your email address will not be published.


*