1 week Ago
primeimages Welcome to another installment of our CEF Market Weekly Review, where we discuss closed-end fund ("CEF") market activity from both the bottom-up – highlighting individual fund news and events – as well as the top-down – providing an overview of the broader market. We also try to provide some historical context as well as the relevant themes that look to be driving markets or that investors ought to be mindful of. This update covers the period through the last week of August.
Be sure to check out our other weekly updates covering the business development company ("BDC") as well as the preferreds/baby bond markets for perspectives across the broader income space. Market Action CEFs recovered from their early-August drawdown and then some. All CEF sectors finished August in the green, with the higher-beta MLP and REIT funds leading the way.
Systematic Income August finished on par with the previous three months. There has only been one down month since October of last year. Systematic Income From a total return perspective, CEFs have now recovered their post-2022 drawdown.
Systematic Income Fixed-income CEF sector discounts have continued to tighten, while equity CEF sector discounts have lagged. Fixed-income CEF sectors are now firmly in expensive territory. Systematic Income Once we take into account both credit CEF discounts and underlying credit spreads, we can see that we are getting very close to the late-2021 level of overvaluation.
Overall, this picture does suggest that credit CEFs, in aggregate, do not present an attractive value proposition. That said, there are key differences between today and late 2021 - namely that leverage costs will be falling rather than rising and interest rates are still relatively high. Systematic Income Market Themes AllianceBernstein Muni CEF AFB hiked the distribution by 10%.
Recall that Muni CEFs have been hiking distributions left and right, particularly those managed by Nuveen, Eaton Vance, BlackRock, Invesco, and Western Asset. However, not all managers have participated, with AB and BNY Mellon notably absent. This has resulted in a wide disparity in distribution levels.
Interestingly, the distribution differences do not say anything about discounts, despite managers’ hopes that hikes would tighten discounts. If we look at the relationship between distributions and discounts for unleveraged Muni CEFs, the R^2 is 1% in the “right” direction (i.e.
, higher distributions are associated with tighter discounts) which statistically implies no relationship. Year-to-date, the Muni CEF sector discount compression has outperformed that of the average sector. Perhaps the hikes helped the overall sector, but not the specific funds that hiked.
Systematic Income Market Commentary Recall that Bill Ackman couldn’t convince enough people to buy into his CEF PSUS IPO as most people, correctly, expected the fund to trade at a discount afterwards. This creates a bootstrapping problem for the fund, as no one wants to be the one to sacrifice their capital, buying shares at the NAV so secondary-market investors can buy the fund at a discount. The easiest way to break through the logjam is for Ackman to put in some money for free.
Economically, it could still be a win, as he will recover the money over time through fees. Another option is to put warrants or shares of the management company Pershing Square into the pot. That could be compelling enough for everyone to bring the IPO back to life.
BlackRock discount program tender offers flew by last week. The pro-ration numbers ranged from 6% for MVF to as high as 27% for BME. At the high end, this delivered annualized alpha of 6%.
Also recall that the Eaton Vance Muni fund EIM had a tender offer in July, and that one had an amazing pro-ration factor of 47%. At this point of the two Muni funds, EIM is more attractive than MVF, even if it has a lower number of tender offers per year. These conditional tender offer programs allow investors to generate an attractive amount of alpha in an environment of fairly unattractive beta.
Check out Systematic Income and explore our Income Portfolios , engineered with both yield and risk management considerations. Use our powerful Interactive Investor Tools to navigate the BDC, CEF, OEF, preferred and baby bond markets. Read our Investor Guides: to CEFs, Preferreds and PIMCO CEFs.
Check us out on a no-risk basis - sign up for a 2-week free trial ! ADS Analytics is a team of analysts with experience in research and trading departments at several industry-leading global investment banks. They focus on generating income ideas from a range of security types including: CEFs, ETFs and mutual funds, BDCs as well as individual preferred stocks and baby bonds. ADS Analytics runs the investing group Systematic Income which features 3 different portfolios for a range of yield targets as well interactive tools for investors, daily updates and a vibrant community.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of EIM, MVF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha).
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