5 Best CEFs To Buy This Month (April 2020)

The market has recovered quite a bit during the last couple of weeks and full 25% up from its lows on March 23. But by no means, we are out of the woods yet. However, a lot of people feel that there’s some disconnect between the market action and the unprecedented economic upheaval and uncertainties that have been caused by the spread of Coronavirus. But we must keep in mind the huge amount of stimulus dollars that already have been thrown in response by the federal government and the Fed. The stock market is forward looking, and it’s looking beyond the economic shutdown and the positive impact of the damage control measures. However, still, the market may not be accounting for a possible second wave from this virus situation, since the vaccines are not likely to be available at least until early 2021. That said, the picture is never crystal clear, and if it was so, there would be no value left to be found in the market as everything would be priced to perfection. So, it’s always a good time to keep your wish list ready, and it probably may be the time to buy in small lots now rather than later.

For income investors, closed-end funds are an attractive investment class that offers high income (generally in the range of 6%-10%), broad diversification (in terms of variety of asset classes), and market matching total returns in the long term if selected carefully and acquired at reasonable price points. However, CEFs come with their own set of risks and challenges that investors should be aware of. We list various risk factors at the end of this article.

Closed-end funds, in general, had performed very well in the last year, until the recent meltdown. The coronavirus-induced health crisis and the resulting economic shutdown have real and serious impacts on many sectors and industries. It was difficult to find anything cheap or with a good discount just a few months ago. However, CEFs have taken a lot of beating and some more along with the broader market, and many of them are offering very attractive discounts to their NAVs. So, is now the time to buy? No one can predict with any certainty the future direction of the market. So, we continue to be on the lookout for good investment candidates that have a solid track record, offer good yields, and are offering great discounts.

This series of articles attempts to separate the wheat from the chaff by applying a broad-based screening process to the 500 CEF funds, followed by an eight-criteria weighting system. In the end, we are presented with about 30 of the most attractive funds in order to select the best five.

This is our regular series on CEFs where we highlight five CEFs that are relatively cheap, offer “excess” discounts to their NAVs, pay reasonably high distributions, and have a solid track record. We also write a monthly series to identify “5 Safe and Cheap DGI” stocks. You can read our most recent such article here.

We use our multi-step filtering process to select just five CEFs from around 500 available funds.

The selected five CEFs this month, as a group, are offering an average distribution rate of 10.23% (as of 04/21) and an excess discount/premium of -6.57% (compared to 52-week average). Besides, these five funds have collectively returned 5.76% and 7.59% in the last five and 10 years. Since this is a monthly series, there may be some selections that could overlap from month to month.

Please note that these are not recommendations to buy but should be considered as a starting point for further research.

Author’s Note: This article is part of our monthly series that tries to discover five best buys in the CEF arena at that point in time. Certain parts of the introduction, definitions, and the section describing selection criteria/process may have some commonality and repetitiveness with our other articles in the series. This is unavoidable as well as intentional to keep the entire series consistent and easy to follow for the new readers.

Goals for the Selection Process

Our goals are simple and are aligned with most conservative income investors, including retirees who wish to dabble in CEFs. We want to shortlist five closed-end funds that are relatively cheap, offering good discounts to their NAVs, paying relatively high distributions, and have a solid and substantial past track record in maintaining and growing their NAVs. Please note that we are not necessarily going for the cheapest funds (in terms of discounts or highest yields), but we also require our funds to stand out qualitatively. We adopt a systematic approach to filter down the 500-plus funds into a small subset.

Here’s a summary of our primary goals:

  • Reasonably high income/distributions.
  • High long-term performance in terms of total return on NAV: We also try to measure if there has been an excess NAV return over and above the distribution rate.
  • Cheaper valuation at the time of buy, determined by the absolute discount to NAV and the “excess” discount offered compared to their history.
  • Coverage ratio: We try to measure to what extent the income generated by the fund covers the distribution. Not all CEFs fully cover the distribution, especially the equity, and specialty funds, as they depend on the capital gains to cover their distribution. We adjust this weight according to the type and nature of the fund.

We believe that a well-diversified CEF portfolio should at least consist of 10 CEFs or more, preferably from different asset classes. It’s also advisable to build the portfolio over a period rather than invest in one lump sum. If you were to invest in one CEF every month, in a year, you would have a well-diversified CEF portfolio. What we provide here every month is a list of five probable candidates for further research. We think a CEF portfolio can be an important component in the overall portfolio strategy. One should preferably have a DGI portfolio as the foundation, and the CEF portfolio could be used to boost the income level to the desired level. How much should one allocate to CEFs? Each investor needs to answer this question himself/herself based on the personal situation and factors like the size of the portfolio, income needs, risk appetite, or risk tolerance.

Selection Process

We have more than 500 CEF funds to choose from, which come from different asset classes like equity, preferred stocks, mortgage bonds, government and corporate bonds, energy MLPs, utilities, infrastructure, and municipal income. Just like in other life situations, even though the broader choice always is good, it does make it more difficult to make a final selection. The first thing we want to do is to shorten this list of 500 CEFs to a more manageable subset of around 75-100 funds. We can apply some criteria to shorten our list, but the criteria need to be broad and loose enough at this stage to keep all the potentially good candidates. Also, the criteria that we build should revolve around our original goals. One important change we made a few months back from our past practice is that we now demand only a five-year history instead of a 10-year history. However, we do take into account the 10-year history if available. With this change, we are able to include many more CEFs that still have a good history and a chance to be excellent income providers in the coming years.

Criteria to Shortlist:

Criteria

Brings down the number of funds to…

Reason for the Criteria

Baseline expense < 2.5% and Avg. Daily Volume > 10,000

Approx. 435 Funds

We do not want funds that charge excessive fees. Also, we want funds that have fair liquidity.

Market-capitalization > 100 Million

Approx. 400 Funds

We do not want funds that are too small.

Track record/ History longer than five years (inception date 2014 or earlier)

Approx. 375 Funds

We want funds that have a reasonably long track record.

UNII* Balance > -$3.00

Approx. 370 Funds

A large UNII (Undistributed Net Investment Income) negative balance would indicate the fund is having problems paying its distributions.

Discount/Premium < +6%

Approx. 350 Funds

We do not want to pay too high a premium; in fact, we want bigger discounts.

Distribution (dividend) Rate > 5%

Approx. 260-275 Funds

The current distribution (income) to be reasonably high.

5-Year Annualized Return on NAV > 0% AND

3-Year Annualized Return on NAV >0%

Approx. 225 Funds

We want funds that have a reasonably good past track record in maintaining their NAVs.

After we applied the above criteria this month, we were left with 215 funds on our list. But it’s too long a list to present here or meaningfully select five funds.

Note: Most of the data in this article is sourced from Cefconnect.com, Cefa.com, and Morningstar.com.

Narrowing Down to 50-60 Funds

To bring down the number of funds to a more manageable number, we will shortlist 12 funds based on each of the following criteria. After that, we will apply certain qualitative criteria on each fund and rank them to select the top five.

Six broad criteria:

  • Discount to NAV.
  • Excess Discount/Premium (explained below).
  • Distribution rate.
  • Return on NAV, last five years (long-term).
  • Return on NAV, last three years (medium-term).
  • Coverage ratio.

Discount to NAV:

We sort our list (of 215 funds) on the discount/premium in descending order since we want to buy when we are offered the largest discount. For this criterion, the lower the value, the better it is. So, we select the top 12 funds (most negative values) from this sorted list.

(All data as of 04/17/2020)

Ticker

Name

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Excess Disc.

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Inception Date

Distrib. Coverage

NHF

NexPoint Strategic Opportunities Fund

30.73%

1.23%

11.57%

-35.75%

-16.01%

-19.74%

-2.23%

-3.15%

6/29/2006

60.42%

GDL

GDL Fund

44.86%

4.07%

5.03%

-22.74%

-5.19%

-17.55%

-2.10%

0.20%

1/25/2007

0.00%

HFRO

Highland Floating Rate Opportunities Fd

39.76%

1.79%

10.04%

-22.17%

-11.14%

-11.03%

-0.69%

0.54%

1/13/2000

74.35%

RIF

RMR Real Estate Income Fund

42.41%

1.83%

11.39%

-19.60%

0.31%

-19.91%

-12.82%

-6.21%

12/18/2003

0.00%

DNI

Dividend and Income Fund

21.38%

1.34%

10.85%

-18.59%

1.89%

-20.48%

-4.60%

-1.72%

6/29/1998

16.00%

FAX

Aberdeen Asia-Pacific Income Fund Inc

35.67%

1.16%

9.51%

-17.97%

-4.28%

-13.69%

-1.78%

-0.10%

4/24/1986

54.61%

CEE

The Central and Eastern Europe Fund

0.85%

0.70%

8.00%

-17.39%

-4.21%

-13.18%

-0.96%

1.10%

3/6/1990

88.75%

NML

NB MLP and Energy Income Fund Inc.

48.39%

1.37%

6.10%

-16.85%

-4.41%

-12.44%

-35.26%

-27.93%

3/26/2013

0.00%

EDD

Morgan Stanley Emrgng Mkts Domestic Debt

27.39%

1.50%

8.99%

-16.82%

-5.46%

-11.36%

-3.65%

-2.70%

4/24/2007

93.79%

IGR

CBRE Clarion Global Real Estate Income

13.28%

1.16%

10.64%

-16.81%

-4.61%

-12.20%

-3.46%

-2.84%

2/18/2004

15.10%

BCX

BlackRock Resources&Commodities Strategy

0.19%

1.08%

11.26%

-16.38%

-3.63%

-12.75%

-9.10%

-4.80%

3/29/2011

27.81%

FCT

First Trust Senior FR Inc II

31.13%

1.24%

9.67%

-15.93%

-4.01%

-11.92%

-1.51%

0.96%

5/25/2004

72.14%

Excess Discount/Premium:

We certainly like funds that are offering large discounts (not premiums) to their NAVs. But sometimes we may consider paying near zero or a small premium if the fund is great otherwise. So, what’s important is to see the “excess discount/premium” and may not be the absolute value. We want to see the discount (or premium) on a relative basis to their record, say 52-week average.

Subtracting the 52-week average discount/premium from the current discount/premium will give us the excess discount/premium. For example, if the fund has the current discount of -5%, but the 52-week average was +1.5% (premium), the excess discount/premium would be -6.5%.

Excess Discount/Premium = Current Discount/Premium (Minus) 52-Wk Avg. Discount/ Premium

So, what’s the difference between the 12-month Z-score and this measurement of Excess Discount/Premium? The two measurements are quite similar, maybe with a subtle difference. The 12-month Z-score would indicate how expensive (or cheap) the CEF is in comparison to the 12 months. Z-score also takes into account the standard deviation of the discount/premium. Our measurement (excess discount/premium) compares the current valuation with the last 12-month average.

We sort our list (of 215 funds) on the “excess discount/premium” in descending order. For this criterion, the lower the value, the better it is. So, we select the top 12 funds (most negative values) from this sorted list.

Ticker

Name

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Excess Disc.

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Inception Date

Distrib. Coverage

MPV

Barings Participation Invs

6.85%

2.34%

8.17%

-4.21%

-20.15%

15.94%

8.09%

7.59%

10/6/1988

87.09%

HIE

Miller/Howard High Income Equity Fund

44.48%

2.00%

8.56%

-13.29%

-16.96%

3.67%

-13.20%

-10.31%

11/25/2014

91.54%

NHF

NexPoint Strategic Opportunities Fund

30.73%

1.23%

11.57%

-35.75%

-16.01%

-19.74%

-2.23%

-3.15%

6/29/2006

60.42%

MCI

Barings Corporate Investors

6.56%

2.52%

8.01%

-6.50%

-12.07%

5.57%

9.44%

8.28%

9/1/1971

86.03%

HFRO

Highland Floating Rate Opportunities Fd

39.76%

1.79%

10.04%

-22.17%

-11.14%

-11.03%

-0.69%

0.54%

1/13/2000

74.35%

RQI

Cohen & Steers Qual Inc Realty

27.77%

1.32%

9.72%

-13.06%

-10.00%

-3.06%

-1.59%

0.97%

2/28/2002

25.73%

GOF

Guggenheim Strategic Opp Fund

0.27%

1.15%

14.52%

1.35%

-9.14%

10.49%

1.90%

6.14%

7/27/2007

40.46%

BSL

Blackstone/GSO Senior Floating Rate Trm

37.47%

1.76%

9.79%

-10.91%

-9.04%

-1.87%

-3.85%

-0.47%

5/26/2010

106.72%

GGN

GAMCO Global Gold Natural Resources&Inc

13.71%

1.35%

18.58%

-7.71%

-8.96%

1.25%

-7.20%

-3.89%

3/29/2005

0.00%

NCV

AllianzGI Convertible & Income Common

39.73%

1.33%

12.98%

-8.18%

-8.88%

0.70%

-5.18%

-2.41%

3/31/2003

76.31%

PKO

PIMCO Income Opportunity

36.92%

1.56%

11.38%

1.83%

-8.67%

10.50%

2.27%

4.79%

11/30/2007

103.18%

DMO

Western Asset Mortgage Defined Opp

43.20%

1.74%

13.97%

-1.88%

-8.38%

6.50%

-3.01%

0.55%

2/24/2010

85.02%

High Current Distribution Rate:

After all, most investors invest in CEF funds for their juicy distributions. We sort our list (of 215 funds) on the current distribution rate (descending order, highest at the top) and select the top 12 funds from this sorted list.

Ticker

Name

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Excess Disc.

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Inception Date

Distrib. Coverage

FEN

First Trust Energy Income And Growth

38.57%

1.56%

19.81%

-5.34%

-6.73%

1.39%

-17.92%

-13.60%

6/17/2004

0.00%

GGN

GAMCO Global Gold Natural Resources&Inc

13.71%

1.35%

18.58%

-7.71%

-8.96%

1.25%

-7.20%

-3.89%

3/29/2005

0.00%

GPM

Guggenheim Enhanced Equity Income Fund

40.31%

1.35%

18.11%

-2.80%

-3.86%

1.06%

-5.40%

0.27%

8/25/2005

0.77%

JQC

Nuveen Credit Strategies Income Fund

41.65%

1.34%

17.68%

-12.41%

-3.14%

-9.27%

-2.85%

-0.70%

6/25/2003

38.29%

ZTR

Virtus Total Return Fund Inc

32.97%

1.37%

16.42%

0.49%

0.66%

-0.17%

-3.15%

1.42%

2/24/2005

19.88%

IFN

The India Fund Inc

0.28%

1.32%

16.10%

-14.13%

-3.28%

-10.85%

-5.82%

-2.44%

2/23/1994

4.39%

TDF

Templeton Dragon

0.17%

1.31%

15.74%

-15.06%

-3.03%

-12.03%

7.07%

3.48%

9/8/1994

7.63%

VGI

Virtus Global Multi-Sector Income Fund

31.08%

1.83%

15.01%

-9.93%

-4.70%

-5.23%

-4.11%

0.84%

2/24/2012

35.97%

GOF

Guggenheim Strategic Opp Fund

0.27%

1.15%

14.52%

1.35%

-9.14%

10.49%

1.90%

6.14%

7/27/2007

40.46%

EOD

Wells Fargo Global Dividend Opp Fd

19.40%

1.39%

14.42%

-9.13%

-1.62%

-7.51%

-4.35%

-3.48%

3/28/2007

25.02%

NRO

Neuberger Real Estate Securities Income

36.12%

1.40%

14.33%

-10.19%

-5.54%

-4.65%

-9.44%

-4.58%

10/31/2003

39.88%

HEQ

John Hancock Hedged Equity & Income Fund

1.13%

14.07%

-9.33%

-5.27%

-4.06%

-4.05%

-0.16%

5/26/2011

28.58%

Five-Year Annualized Return on NAV

We then sort our list (of 215 funds) on the five-year return on NAV (on descending order, highest at the top) and select the top 12 funds.

Ticker

Name

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Excess Disc.

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Inception Date

Distrib. Coverage

BST

BlackRock Science and Technology Trust

0.15%

1.08%

6.32%

0.42%

-1.11%

1.53%

16.37%

15.41%

10/29/2014

0.00%

MCI

Barings Corporate Investors

6.56%

2.52%

8.01%

-6.50%

-12.07%

5.57%

9.44%

8.28%

9/1/1971

86.03%

MPV

Barings Participation Invs

6.85%

2.34%

8.17%

-4.21%

-20.15%

15.94%

8.09%

7.59%

10/6/1988

87.09%

QQQX

Nuveen NASDAQ 100 Dynamic Overwrite

0.92%

7.42%

-2.10%

-0.84%

-1.26%

6.45%

7.53%

1/30/2007

3.42%

ASG

Liberty All-Star Growth

0.62%

1.28%

8.30%

-5.01%

-4.69%

-0.32%

7.61%

7.07%

3/14/1986

0.00%

EOS

Eaton Vance Enhanced Equity Income II

1.09%

7.65%

-2.08%

-2.77%

0.69%

6.70%

6.59%

1/26/2005

0.00%

BME

BlackRock Health Sciences

0.03%

1.11%

5.87%

2.92%

1.37%

1.55%

9.00%

6.45%

3/28/2005

1.18%

GOF

Guggenheim Strategic Opp Fund

0.27%

1.15%

14.52%

1.35%

-9.14%

10.49%

1.90%

6.14%

7/27/2007

40.46%

BBN

BlackRock Taxable Municipal Bond Trust

38.68%

0.92%

5.81%

-0.99%

1.25%

-2.24%

6.97%

5.67%

8/27/2010

107.26%

MMD

MainStay MacKay DefinedTerm Muni Opp

37.73%

1.02%

5.28%

-1.53%

-3.01%

1.48%

5.16%

5.51%

6/27/2012

99.69%

NIE

AllianzGI Equity & Conv Inc Common

1.06%

7.38%

-9.49%

-1.39%

-8.10%

5.21%

5.33%

2/22/2007

10.33%

ECF

Ellsworth Growth and Income Fund

17.49%

1.20%

5.42%

-11.78%

-3.67%

-8.11%

5.37%

5.29%

6/20/1986

15.15%

Medium Term Return on NAV (last 3-years)

We then sort our list (of 215 funds) on a three-year return on NAV (on descending order, highest at the top) and select the top 12 funds.

Ticker

Name

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Excess Disc.

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Inception Date

Distrib. Coverage

BST

BlackRock Science and Technology Trust

0.15%

1.08%

6.32%

0.42%

-1.11%

1.53%

16.37%

15.41%

10/29/2014

0.00%

MCI

Barings Corporate Investors

6.56%

2.52%

8.01%

-6.50%

-12.07%

5.57%

9.44%

8.28%

9/1/1971

86.03%

BME

BlackRock Health Sciences

0.03%

1.11%

5.87%

2.92%

1.37%

1.55%

9.00%

6.45%

3/28/2005

1.18%

MPV

Barings Participation Invs

6.85%

2.34%

8.17%

-4.21%

-20.15%

15.94%

8.09%

7.59%

10/6/1988

87.09%

ASG

Liberty All-Star Growth

0.62%

1.28%

8.30%

-5.01%

-4.69%

-0.32%

7.61%

7.07%

3/14/1986

0.00%

TDF

Templeton Dragon

0.17%

1.31%

15.74%

-15.06%

-3.03%

-12.03%

7.07%

3.48%

9/8/1994

7.63%

BBN

BlackRock Taxable Municipal Bond Trust

38.68%

0.92%

5.81%

-0.99%

1.25%

-2.24%

6.97%

5.67%

8/27/2010

107.26%

EOS

Eaton Vance Enhanced Equity Income II

1.09%

7.65%

-2.08%

-2.77%

0.69%

6.70%

6.59%

1/26/2005

0.00%

QQQX

Nuveen NASDAQ 100 Dynamic Overwrite

0.92%

7.42%

-2.10%

-0.84%

-1.26%

6.45%

7.53%

1/30/2007

3.42%

BHK

BlackRock Core Bond

24.63%

0.76%

5.59%

-5.97%

0.50%

-6.47%

6.26%

5.02%

11/30/2001

79.39%

NVG

Nuveen AMT-Free Muni Credit Inc

39.21%

1.36%

5.35%

-7.72%

-2.53%

-5.19%

6.15%

4.97%

3/25/2002

101.55%

NZF

Nuveen Municipal Credit Income

39.09%

1.05%

5.29%

-7.32%

-2.96%

-4.36%

5.49%

4.61%

9/25/2001

100.77%

Coverage Ratio (Distributions vs. Earnings)

We then sort our list (of 215 funds) on the coverage ratio and select the top 12 funds. The coverage ratio is derived by dividing the earnings per share by distribution amount for a specific period.

Ticker

Name

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Excess Disc.

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Inception Date

Distrib. Coverage

PPR

Voya Prime Rate Trust

31.22%

1.62%

5.97%

-11.06%

-0.14%

-10.92%

-4.59%

-1.16%

5/12/1988

129.83%

ETG

Eaton Vance Tax Adv Global Dividend Inc

27.98%

1.18%

9.35%

-8.30%

-2.86%

-5.44%

-1.45%

0.43%

1/30/2004

126.78%

ERH

Wells Fargo Util & High In

16.65%

0.94%

8.12%

0.59%

-3.69%

4.28%

2.11%

3.03%

4/30/2004

123.40%

ARDC

Ares Dynamic Credit Allocation Fund

36.06%

1.93%

10.67%

-15.43%

-4.17%

-11.26%

-5.32%

-0.81%

11/28/2012

121.85%

EVF

Eaton Vance Senior Income

39.54%

1.73%

7.16%

-14.46%

-3.11%

-11.35%

-3.42%

0.36%

10/30/1998

118.94%

EFR

Eaton Vance Senior Floating Rate

39.10%

1.30%

7.52%

-13.93%

-2.79%

-11.14%

-3.03%

0.63%

11/24/2003

117.26%

AFT

Apollo Senior Floating Rate Fund

39.42%

2.26%

8.44%

-14.06%

-2.28%

-11.78%

-3.33%

0.17%

2/24/2011

116.87%

EFT

Eaton Vance Floating-Rate Income

38.83%

1.27%

7.39%

-13.92%

-2.85%

-11.07%

-3.38%

0.18%

6/29/2004

116.02%

TEI

Templeton Emerg Mkts Income

1.11%

6.26%

-10.50%

-1.73%

-8.77%

-5.48%

0.31%

9/23/1993

114.73%

FFC

Flah&Crum Preferred Securities

36.38%

0.78%

7.33%

3.73%

0.96%

2.77%

0.62%

3.28%

1/31/2003

113.70%

AIF

Apollo Tactical Income Fund Inc.

39.14%

2.24%

9.29%

-13.57%

-2.40%

-11.17%

-2.14%

0.99%

2/26/2013

112.23%

BGH

Barings Global Short Duration High Yield

36.02%

1.65%

11.04%

-11.90%

-7.38%

-4.52%

-8.58%

-1.99%

10/26/2012

110.48%

Now we have 72 funds in total from the above selections. We will see if there are any duplicates. In our current list of 72 funds, there were 16 duplicates, meaning there are funds that appeared more than once. Following names appear twice (or more):

  • ASG, BBN, BME, BST, EOS, GGN, HFRO, NHF, QQQX, TDF (2 times
  • GOF, MCI, MPV (3 times)

So, once we remove 16 duplicate rows, we are left with 56 funds.

Narrowing Down to Just 10-12 Funds

In our list of funds, we already may have some of the best probable candidates. However, so far, they have been selected based on one single criterion that each of them may be good at. That’s not nearly enough. So, we will apply a combination of criteria by applying weights to eight factors to calculate the total quality score and filter out the best ones.

We will apply weights to each of the NINE criteria:

  • Baseline expense (Max weight 5)
  • Current distribution rate (Max weight 10)
  • Current discount/premium (Max weight 5)
  • Excess discount/premium (Max weight 5)
  • 3-YR NAV return (Max weight 5)
  • 5-YR NAV return (Max weight 5)
  • 10-YR NAV return (Max weight 5, if less than ten years history, an average of 3-yr & 5yr)
  • Excess NAV return over distribution rate (Max weight 5)
  • Coverage Ratio (Max weight 10): This weight is adjusted based on the type of fund to provide fair treatment to certain types like equity and sector funds. We assign some bonus points to certain types of funds, which by their make-up depend on capital gains to fund their distributions, to bring them at par with fixed-income funds. These fund types include Equity/ Sector-equity (four bonus points), Real-estate (three points), Covered-call (two points) and MLP funds (variable). However, please note that this is just one of nine criteria that are being used to calculate the total quality score.

Once we have calculated the weights, we combine them to calculate “Total Combined Weight,” also called the “Quality Score.” The sorted list of 56 funds on the “combined total weight” is presented below.

Ticker Leverage % Base Exp. Distrib. Rate Disc./ Premium Excess Disc. 52 WK AVG Disc/ Premium 3YR Ann. NAV Return 5YR Ann. NAV Return 10YR Ann. NAV Return Inception Date Distrib. Coverage Total Combined Weight WT. Expense WT. Dsitr. Rate WT. Dis/ Prem WT. Excess Dis WT. 3YR NAV Ret WT. 5YR NAV RTN WT. 10YR NAV RTN WT. Excess Return Over Distr. WT. Coverage Ratio (Adjd.)
(MCI) 6.56% 2.52% 8.01% -6.50% -12.07% 5.57% 9.44% 8.28% 11.55% 9/1/1971 86.03% 39.36 2.48 5.34 3.25 5 4.72 4.14 5.00 1.43 8
(RQI) 27.77% 1.32% 9.72% -13.06% -10.00% -3.06% -1.59% 0.97% 9.47% 2/28/2002 25.73% 36.59 3.68 6.48 5.00 10 -0.795 0.49 4.74 0 7
(MPV) 6.85% 2.34% 8.17% -4.21% -20.15% 15.94% 8.09% 7.59% 10.70% 10/6/1988 87.09% 36.05 2.66 5.45 2.11 5 4.045 3.80 5.00 0 8
(PKO) 36.92% 1.56% 11.38% 1.83% -8.67% 10.50% 2.27% 4.79% 9.57% 11/30/2007 103.18% 35.18 3.44 6.67 -0.92 8.67 1.135 2.40 4.79 0 9
(BST) 0.15% 1.08% 6.32% 0.42% -1.11% 1.53% 16.37% 15.41% n/a 10/29/2014 0.00% 34.03 3.92 4.21 -0.21 1.11 5 5.00 5.00 5 5
(ASG) 0.62% 1.28% 8.30% -5.01% -4.69% -0.32% 7.61% 7.07% 10.16% 3/14/1986 0.00% 33.79 3.72 5.53 2.51 4.69 3.805 3.54 5.00 0 5
(GOF) 0.27% 1.15% 14.52% 1.35% -9.14% 10.49% 1.90% 6.14% 9.67% 7/27/2007 40.46% 33.34 3.85 6.67 -0.68 9.14 0.95 3.07 4.84 0 5.5
(NVG) 39.21% 1.36% 5.35% -7.72% -2.53% -5.19% 6.15% 4.97% 6.45% 3/25/2002 101.55% 32.18 3.64 3.57 3.86 2.53 3.075 2.49 3.23 0.8 9
(NZF) 39.09% 1.05% 5.29% -7.32% -2.96% -4.36% 5.49% 4.61% 6.51% 9/25/2001 100.77% 31.60 3.95 3.53 3.66 2.96 2.745 2.31 3.26 0.2 9
(TDF) 0.17% 1.31% 15.74% -15.06% -3.03% -12.03% 7.07% 3.48% 5.54% 9/8/1994 7.63% 31.43 3.69 6.67 5.00 3.03 3.535 1.74 2.77 0 5
(DMO) 43.20% 1.74% 13.97% -1.88% -8.38% 6.50% -3.01% 0.55% 8.74% 2/24/2010 85.02% 30.39 3.26 6.67 0.94 8.38 -1.505 0.28 4.37 0 8
(NIE) 1.06% 7.38% -9.49% -1.39% -8.10% 5.21% 5.33% 7.74% 2/22/2007 10.33% 30.14 3.94 4.92 4.75 1.39 2.605 2.67 3.87 0 6
(ETG) 27.98% 1.18% 9.35% -8.30% -2.86% -5.44% -1.45% 0.43% 6.37% 1/30/2004 126.78% 29.74 3.82 6.23 4.15 2.86 -0.725 0.22 3.19 0 10
(BSL) 37.47% 1.76% 9.79% -10.91% -9.04% -1.87% -3.85% -0.47% n/a 5/26/2010 106.72% 29.57 3.24 6.53 5.00 9.04 -1.925 -0.24 -1.08 0 9
(FAX) 35.67% 1.16% 9.51% -17.97% -4.28% -13.69% -1.78% -0.10% 1,94% 4/24/1986 54.61% 29.02 3.84 6.34 5.00 4.28 -0.89 -0.05 5.00 0 5.5
(EOS) 1.09% 7.65% -2.08% -2.77% 0.69% 6.70% 6.59% 9.07% 1/26/2005 0.00% 29.00 3.91 5.10 1.04 2.77 3.35 3.30 4.54 0 5
(ERH) 16.65% 0.94% 8.12% 0.59% -3.69% 4.28% 2.11% 3.03% 6.80% 4/30/2004 123.40% 28.84 4.06 5.41 -0.30 3.69 1.055 1.52 3.40 0 10
(NHF) 30.73% 1.23% 11.57% -35.75% -16.01% -19.74% -2.23% -3.15% 7.85% 6/29/2006 60.42% 28.67 3.77 6.67 5.00 5 -1.115 -1.58 3.93 0 7
(NCV) 39.73% 1.33% 12.98% -8.18% -8.88% 0.70% -5.18% -2.41% 4.21% 3/31/2003 76.31% 28.62 3.67 6.67 4.09 8.88 -2.59 -1.21 2.11 0 7
(BBN) 38.68% 0.92% 5.81% -0.99% 1.25% -2.24% 6.97% 5.67% n/a 8/27/2010 107.26% 28.09 4.08 3.87 0.50 0 3.485 2.84 3.16 1.16 9
(BHK) 24.63% 0.76% 5.59% -5.97% 0.50% -6.47% 6.26% 5.02% 7.52% 11/30/2001 79.39% 28.02 4.24 3.73 2.99 0 3.13 2.51 3.76 0.67 7
(FCT) 31.13% 1.24% 9.67% -15.93% -4.01% -11.92% -1.51% 0.96% 3.76% 5/25/2004 72.14% 27.82 3.76 6.45 5.00 4.01 -0.755 0.48 1.88 0 7
(CEE) 0.85% 0.70% 8.00% -17.39% -4.21% -13.18% -0.96% 1.10% -2.91% 3/6/1990 88.75% 27.46 4.3 5.33 5.00 4.21 -0.48 0.55 -1.46 0 10
(EFR) 39.10% 1.30% 7.52% -13.93% -2.79% -11.14% -3.03% 0.63% 4.06% 11/24/2003 117.26% 27.33 3.7 5.01 5.00 2.79 -1.515 0.32 2.03 0 10
(MMD) 37.73% 1.02% 5.28% -1.53% -3.01% 1.48% 5.16% 5.51% n/a 6/27/2012 99.69% 27.28 3.98 3.52 0.77 3.01 2.58 2.76 2.67 0 8
(BME) 0.03% 1.11% 5.87% 2.92% 1.37% 1.55% 9.00% 6.45% 12.09% 3/28/2005 1.18% 27.20 3.89 3.91 -1.46 0 4.5 3.23 5.00 3.13 5
(ECF) 17.49% 1.20% 5.42% -11.78% -3.67% -8.11% 5.37% 5.29% 7.39% 6/20/1986 15.15% 27.11 3.8 3.61 5.00 3.67 2.685 2.65 3.70 0 2
(HFRO) 39.76% 1.79% 10.04% -22.17% -11.14% -11.03% -0.69% 0.54% n/a 1/13/2000 74.35% 26.76 3.21 6.67 5.00 5 -0.345 0.27 -0.04 0 7
(EFT) 38.83% 1.27% 7.39% -13.92% -2.85% -11.07% -3.38% 0.18% 3.59% 6/29/2004 116.02% 26.70 3.73 4.93 5.00 2.85 -1.69 0.09 1.80 0 10
(EVF) 39.54% 1.73% 7.16% -14.46% -3.11% -11.35% -3.42% 0.36% 3.56% 10/30/1998 118.94% 26.40 3.27 4.77 5.00 3.11 -1.71 0.18 1.78 0 10
(QQQX) 0.92% 7.42% -2.10% -0.84% -1.26% 6.45% 7.53% 11.29% 1/30/2007 3.42% 25.91 4.08 4.95 1.05 0.84 3.225 3.77 5.00 0 3
(AIF) 39.14% 2.24% 9.29% -13.57% -2.40% -11.17% -2.14% 0.99% n/a 2/26/2013 112.23% 25.49 2.76 6.19 5.00 2.4 -1.07 0.50 -0.29 0 10
(HEQ) 1.13% 14.07% -9.33% -5.27% -4.06% -4.05% -0.16% n/a 5/26/2011 28.58% 25.31 3.87 6.67 4.67 5.27 -2.025 -0.08 -1.05 0 8
(BGH) 36.02% 1.65% 11.04% -11.90% -7.38% -4.52% -8.58% -1.99% n/a 10/26/2012 110.48% 24.47 3.35 6.67 5.00 7.38 -4.29 -1.00 -2.64 0 10
(ARDC) 36.06% 1.93% 10.67% -15.43% -4.17% -11.26% -5.32% -0.81% n/a 11/28/2012 121.85% 24.31 3.07 6.67 5.00 4.17 -2.66 -0.41 -1.53 0 10
(IGR) 13.28% 1.16% 10.64% -16.81% -4.61% -12.20% -3.46% -2.84% 4.46% 2/18/2004 15.10% 24.20 3.84 6.67 5.00 4.61 -1.73 -1.42 2.23 0 5
(AFT) 39.42% 2.26% 8.44% -14.06% -2.28% -11.78% -3.33% 0.17% 0.17% 2/24/2011 116.87% 24.15 2.74 5.63 5.00 2.28 -1.665 0.09 0.09 0 10
(FFC) 36.38% 0.78% 7.33% 3.73% 0.96% 2.77% 0.62% 3.28% 9.49% 1/31/2003 113.70% 23.94 4.22 4.89 -1.87 0 0.31 1.64 4.75 0 10
(EDD) 27.39% 1.50% 8.99% -16.82% -5.46% -11.36% -3.65% -2.70% -2.29% 4/24/2007 93.79% 23.63 3.5 5.99 5.00 5.46 -1.825 -1.35 -1.15 0 8
(NRO) 36.12% 1.40% 14.33% -10.19% -5.54% -4.65% -9.44% -4.58% 5.38% 10/31/2003 39.88% 23.49 3.6 6.67 5.00 5.54 -4.72 -2.29 2.69 0 7
(TEI) 1.11% 6.26% -10.50% -1.73% -8.77% -5.48% 0.31% 2.40% 9/23/1993 114.73% 23.41 3.89 4.17 5.00 1.73 -2.74 0.16 1.20 0 10
(JQC) 41.65% 1.34% 17.68% -12.41% -3.14% -9.27% -2.85% -0.70% 4.01% 6/25/2003 38.29% 22.70 3.66 6.67 5.00 3.14 -1.425 -0.35 2.01 0 4
(VGI) 31.08% 1.83% 15.01% -9.93% -4.70% -5.23% -4.11% 0.84% n/a 2/24/2012 35.97% 21.05 3.17 6.67 4.97 4.7 -2.055 0.42 -0.82 0 4
(PPR) 31.22% 1.62% 5.97% -11.06% -0.14% -10.92% -4.59% -1.16% 2.72% 5/12/1988 129.83% 20.99 3.38 3.98 5.00 0.14 -2.295 -0.58 1.36 0 10
(EOD) 19.40% 1.39% 14.42% -9.13% -1.62% -7.51% -4.35% -3.48% 0.86% 3/28/2007 25.02% 20.98 3.61 6.67 4.57 1.62 -2.175 -1.74 0.43 0 8
(GPM) 40.31% 1.35% 18.11% -2.80% -3.86% 1.06% -5.40% 0.27% 5.17% 8/25/2005 0.77% 20.60 3.65 6.67 1.40 3.86 -2.7 0.14 2.59 0 5
(GGN) 13.71% 1.35% 18.58% -7.71% -8.96% 1.25% -7.20% -3.89% -4.01% 3/29/2005 0.00% 20.58 3.65 6.67 3.86 8.96 -3.6 -1.95 -2.01 0 5
(IFN) 0.28% 1.32% 16.10% -14.13% -3.28% -10.85% -5.82% -2.44% 1.27% 2/23/1994 4.39% 20.13 3.68 6.67 5.00 3.28 -2.91 -1.22 0.64 0 5
(BCX) 0.19% 1.08% 11.26% -16.38% -3.63% -12.75% -9.10% -4.80% n/a 3/29/2011 27.81% 16.79 3.92 6.67 5.00 3.63 -4.55 -2.40 -3.48 0 8
(DNI) 21.38% 1.34% 10.85% -18.59% 1.89% -20.48% -4.60% -1.72% 5.24% 6/29/1998 16.00% 16.79 3.66 6.67 5.00 0 -2.3 -0.86 2.62 0 2
(ZTR) 32.97% 1.37% 16.42% 0.49% 0.66% -0.17% -3.15% 1.42% 7.75% 2/24/2005 19.88% 16.06 3.63 6.67 -0.25 0 -1.575 0.71 3.88 0 3
(GDL) 44.86% 4.07% 5.03% -22.74% -5.19% -17.55% -2.10% 0.20% 1.82% 1/25/2007 0.00% 15.43 0.93 3.35 5.00 5.19 -1.05 0.10 0.91 0 1
(RIF) 42.41% 1.83% 11.39% -19.60% 0.31% -19.91% -12.82% -6.21% 5.28% 12/18/2003 0.00% 11.96 3.17 6.67 5.00 0 -6.41 -3.11 2.64 0 4
(HIE) 44.48% 2.00% 8.56% -13.29% -16.96% 3.67% -13.20% -10.31% n/a 11/25/2014 91.54% 11.07 3 5.71 5.00 5 -6.6 -5.16 -5.88 0 10
(FEN) 38.57% 1.56% 19.81% -5.34% -6.73% 1.39% -17.92% -13.60% 0.61% 6/17/2004 0.00% 5.05 3.44 6.67 2.67 6.73 -8.96 -6.80 0.31 0 1
(NML) 48.39% 1.37% 6.10% -16.85% -4.41% -12.44% -35.26% -27.93% n/a 3/26/2013 0.00% -29.29 3.63 4.07 5.00 4.41 -17.63 -13.97 -15.80 0 1

In order to structure a CEF portfolio, it’s highly recommended to diversify in funds that invest in different types of asset classes. In our list of 56, if we were to look at the top 30 based on the total quality score/weight (quality-score of 25 or above), below is the list of top funds, which is sorted sector wise and quality rating. Please note that some asset classes may not make to the top 30, due to the fact that these ratings are dynamic and time-sensitive.

Sr. no.

Strategy / Asset-class/ Sector

Position-1

Position-2

Position-3

1

Covered Call

(EOS)

(QQQX)

2

Global Equity

(ETG)

(CEE)

3

US Equity

(ASG)

4

High Yield ( Convertibles/ Senior Loans/ High-Yield/ Credit Income/ Mortgage securities)

(MCI)

(DMO)

4A.

Multi-Sector

(PKO)

(GOF)

5

Municipal – Taxable

(BBN)

5A.

Municipal – Tax Exempt

(NVG)

(NZF)

6

Preferreds

7

Real Estate

(RQI)

8

Utilities and Infrastructure

9

CEF Sector Equity (Financial, Tech, Healthcare, etc.)

(BST)

(BME)

10

Emerging Mkt. Equity

(TDF)

(CEE)

If you were to select 10 picks, we would simply pick the top one from each of the above categories.

Final Selection: Our List of Final Top 5

Now, if we had only five slots for investment and need to select just five funds, we will need to make some subjective selections. However, we should be careful to select from different sectors (or asset-classes). Since this step is mostly subjective, so it will differ from person to person. Here are the selections for this month, based on our perspective:

A note about DMO: Even though in the High-Yield category, MCI ranked at the top, but there are some issues with its ranking. That’s why we selected the next best high-yield fund DMO in its place. A few things that we noted about MCI and MPV. First, their daily trading volumes are a bit on the lower side. Secondly, their sponsor Barings does not publish NAV on a regular basis, and the last published NAV on the sponsor’s website is dated 12/31/2019. Since the market is substantially down since December 2019, some of the metrics like NAV returns are not showing the true picture. As far as DMO is concerned, it definitely has risks, but it is quite similar to PIMCO’s (PDI) in many ways. Also, it’s now trading at a small discount compared to the usual 5%-10% premium.

Ticker Name Sector Leverage % Base Exp. Distrib. Rate on 04/21 Disc./ Premium Excess Disc. 52 WK AVG Disc/ Premium 3YR Ann. NAV Return 5YR Ann. NAV Return 10YR Ann. NAV Return Inception Date Distrib. Coverage Total Combined Weight
(DMO) Western Asset Mortgage Defined Opp High Yield 43.20% 1.74% 13.97% -1.88% -8.38% 6.50% -3.01% 0.55% 8.74% 2/24/2010 85.02% 30.39
(RQI) Cohen & Steers Qual Inc Realty Real Estate 27.77% 1.32% 10.31% -13.06% -10.00% -3.06% -1.59% 0.97% 9.47% 2/28/2002 25.73% 36.77
(PKO) PIMCO Income Opportunity Multi-Sector 36.92% 1.56% 11.73% 1.83% -8.67% 10.50% 2.27% 4.79% 9.57% 11/30/2007 103.18% 35.18
(BST) BlackRock Science and Technology Trust Sector Equity 0.15% 1.08% 6.51% 0.42% -1.11% 1.53% 16.37% 15.41% n/a 10/29/2014 0.00% 34.16
(ASG) Liberty All-Star Growth US Equity 0.62% 1.28% 8.64% -5.01% -4.69% -0.32% 7.61% 7.07% 10.16% 3/14/1986 0.00% 34.02
AVERAGE 21.73% 1.40% 10.23% -3.54% -6.57% 3.03% 4.33% 5.76% 7.59% 15 years 42.79% 34.10

Please note that since the prices have fallen in the last couple of days, so as of 04/21 close, the average distribution of these five funds has gone up to 10.23% (slightly up from 04/17, as shown in the above table).

Risks

It goes without saying that CEFs, in general, have some additional risks. This section is specifically relevant for investors who are new to CEF investing, but in general, all CEF investors should be aware of.

They generally use some amount of leverage, which adds to the risk. The leverage can be hugely beneficial in good times but can be detrimental during tough times. The leverage also causes higher fees because of the interest expense in addition to the baseline expense. In the tables above, we have used the baseline expense only. If a fund is using significant leverage, we want to make sure that the leverage is used effectively by the management team – the best way to know this is to look at the long-term returns on the NAV. NAV is the “net asset value” of the fund after counting all expenses and after paying the distributions. So, if a fund is paying high distributions and maintaining or growing its NAV over time, it should bode well for its investors.

Due to leverage, the market prices of CEFs can be more volatile as they can go from premium pricing to discount pricing (and vice versa) in a relatively short period. Especially during corrections, the market prices can drop much faster than the NAV (the underlying assets). Investors who do not have an appetite for higher volatility should generally stay away from CEFs or at least avoid the leveraged CEFs.

CEFs have market prices that are different from their NAVs (net asset values). They can trade either at discounts or at premiums to their NAVs. Generally, we should stay away from paying any significant premiums over the NAV prices unless there are some very compelling reasons.

Another risk factor may come from asset concentration risk. Many funds may hold similar underlying assets. However, this is easy to mitigate by diversifying into different types of CEFs ranging from equity, equity covered calls, preferred stocks, mortgage bonds, government and corporate bonds, energy MLPs, utilities, and municipal income.

Conclusion

The underlying purpose of this exercise is to find five likely best funds for investment each month using our screening process. As always, our filtering process demands that our selections have a solid long-term record, maintain good earnings to distribution coverage (in certain categories), offer reasonably high distributions, and are cheaper on a relative basis and offer a reasonable discount. Also, we ensure that the selected five funds are from a diverse group in terms of the types of assets. Please note that these selections are dynamic in nature and can change from month-to-month (or even week-to-week). At the same time, some of the funds can repeat from month-to-month if they remain attractive over an extended period.

The selected five CEFs this month, as a group, are offering an average distribution rate of 10.23% (as of 04/21) and an excess discount/premium of -6.57% (compared to 52-week average). Besides, these five funds have collectively returned 5.76% and 7.59% in the last five and 10 years. Most CEFs are a lot cheaper than they were just two months ago. They are likely to remain quite volatile for the next few months until the market finally turns around. It’s probably the best opportunity to lock in the high yield if you believe (as we believe) that the market turmoil is temporary, though how long this panic lasts is anyone’s guess. However, to be conservative, we should add in small and multiple lots to take advantage of dollar-cost averaging.

We believe that the above group of CEFs makes an excellent watch list for further research.



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Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, UNH, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, ARCC, AWF, CHI, DNP, EVT, FFC, GOF, HCP, HQH, HTA, IIF, JPC, JPS, JRI, KYN, MAIN, NBB, NLY, NNN, O, OHI, PCI, PDI, PFF, RFI, RNP, STAG, STK, UTF, VTR, WPC, TLT. 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.

Additional disclosure: Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. The author is not a financial advisor. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. The stock portfolios presented here are model portfolios for demonstration purposes.

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