Tag Archives: eaton

Summary Equity CEFs have seen a definitive widening of their discounts over the summer despite half the funds I follow outperforming the S&P 500 at the NAV level. Nonetheless, it’s easy to see which funds are working when the markets turn back up and which ones continue to lag behind. The question is – do you stick with what’s worked in the past or should you consider the more heavily discounted CEFs in underperforming sectors that might be turning around? At this point in the market correction, the question that most investors are grappling with, if they want to stay invested in the markets, is whether to stick with the stocks that have worked in the past or do you play a rotation into stocks which have been weak this year and are already in their own bear market? In the world of equity CEFs, the same could be said. There are funds that are seeing great support and seem to bounce back immediately when the markets turn up. And then there are funds that are in a deep freeze and with little to no interest even when the markets turn around. However, based on my research which takes into account market price valuations (discounts and premiums) as well as historic one-year, three-year and five-year NAV performances, not all of the top-performing CEFs present good values now and some of the bottom-performing CEFs offer much better risk/reward despite their poor NAV and market price performances. In my portfolio, it’s best to have exposure to both because despite the urge to go back to what has worked all year, there are signs that a rotation is afoot. Of course, we may be in for a more difficult period all the way around and if that’s the case, then cash is your best alternative. Top-Performing CEFs To Buy And Sell The first step in this analysis is to take a look at the top-performing funds at the NAV level and see which funds may present an opportunity and which funds may be getting ahead of themselves. So here are the top 35 or so equity CEFs out of roughly 100 I follow, sorted by their year-to-date total return NAV performance through September 3, 2015. Funds in green (all of them) have outperformed the S&P 500, as represented by the SPDR S&P 500 Trust (NYSEARCA: SPY ) . YTD, SPY is down -3.9%, including dividends. (click to enlarge) As has been the case most of the year, the healthcare-related equity CEFs are way out in front with the Tekla funds, (NYSE: HQL ) and (NYSE: HQH ), leading the way. However, one top five performing fund that I have been recommending for the past couple years, The Gabelli Healthcare & WellnessRX fund (NYSE: GRX ) , $10.35 market price, 12.06 NAV, -14.2% discount, 5.0% current market yield , has dropped to its widest discount since initiating a regular $0.10/share quarterly distribution back in June of 2012. (click to enlarge) Since initiating the distribution, GRX has raised its distribution twice to $0.12/share in 2014 and then to $0.13/share in 2015 (5.0% annualized) all the while distributing significant capital gains each year as well. And yet none of this seems to help GRX’s market price despite a NAV that has outperformed the Nasdaq-100 since 2012. That’s right, GRX’s NAV has outperformed the NASDAQ-100 index, 93.6% to 91.3% since December 31, 2011. And if investors would only stop and think that this fund also has been yielding over 10% each year going back to 2012, if you included all distributions and capital gains, then maybe they would treat GRX with a little more respect than a -14.2% discount, one of the widest of all CEFs. As it is, you can pick up one of the best-performing CEFs at the NAV level and receive a windfall 5% current market yield (windfall means you get a higher market yield than the fund is paying on its NAV). And, in case you think GRX is only about healthcare and thus may be too sector-specific, the wellness and nutrition part of the fund’s investment strategy means that half its equity portfolio is actually in consumer staple names, mostly foods. This is why I picked GRX as a must-own fund because you can take a relatively large position in it knowing that you have diversification beyond just biotech, healthcare providers, healthcare equipment and other healthcare services. Oh, and a final note on GRX. Five months ago in early April I wrote this article, The Insanity Of CEF Investors , in which I said that it wouldn’t be long before GRX’s NAV would overtake the PIMCO Global Stocks Plus & Income fund’s (NYSE: PGP ) NAV, despite the fact that PGP traded at a market price over twice that of GRX at the time (PGP has since dropped from $22.83 to a current $16.77). Note: See above for PGP’s position in the table. And how has that prediction turned out? Today, GRX’s NAV is $12.06 while PGP’s NAV is $11.74 and I don’t think GRX will ever look back. So I ask you, does nobody get this? Does nobody understand that a fund’s distribution comes from its NAV and, if the NAV is eroding, then an outsized distribution becomes a heavier and heavier ball and chain, further eroding the NAV? It’s just amazing that investors don’t get this and they continue to buy funds (not just PGP) at premium valuations that are seeing continuous NAV erosion over the years. Time To Rebalance The Eaton Vance Option Income Funds By far the best performing option income funds this year at the NAV and market price levels have been from Eaton Vance. This has actually been going on for the last couple years and for those readers who took my advice beginning in 2011 and loaded up on these funds when they were at up to -16% discount, it has been a great ride. Looking back at the table above, five out of the top 20 funds are from Eaton Vance and their market price performances have, for the most part, been even better. However, their popularity has gotten so widespread that one fund, the Eaton Vance Tax-Managed Buy/Write fund (NYSE: ETB ) , $15.98 market price, $15.24 NAV, 4.9% premium, 8.1% current market yield , has moved solidly into an overvaluation position based on its premium market price of 4.9%. A premium market price wouldn’t necessarily trigger a sell recommendation, but compared to most of the other Eaton Vance option income funds, ETB has a lagging NAV as well as one of the lowest yields of all the Eaton Vance funds. In other words, it would make a lot more sense to swap out of ETB at a 4.9% premium and into a couple other Eaton Vance’s option income funds at much lower valuations, higher yields and better NAV performances. The ones I would recommend are the Eaton Vance Tax-Managed Diversified Equity Income fund (NYSE: ETY ) , $10.87 market price, $11.61 NAV, -6.4% discount, 9.3% current market yield, or the Eaton Vance Enhanced Equity Income fund II (NYSE: EOS ) , $13.12 market price, $13.99 NAV, -6.2% discount, 8.0% current market yield . I would also consider (NYSE: ETV ) and (NYSE: ETW ) as swap-into candidates, but they also trade at narrower discounts. The Eaton Vance option income funds get a lot of buy interest when the markets rebound, primarily because they all own many of the same high-flying technology names that institutions like to pile into when the markets turn up. Names like Apple (NASDAQ: AAPL ) , Amazon (NASDAQ: AMZN ) , Facebook (NASDAQ: FB ) , Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) and Priceline (NASDAQ: PCLN ) are among many of the Eaton Vance option fund’s top holdings. However, if these Nasdaq generals fall out of favor, then you can expect that the more richly valued Eaton Vance option income funds will probably see their discounts widen as well, especially when you consider that most other equity CEFs have fallen to double digit discounts in this market environment. Other Equity CEFs With Strong Buy Interest The Eaton Vance option income funds aren’t the only funds I’ve noticed that get a lot of buy interest when the markets turn up. One fund that shows up in the top 20 list above is the BlackRock Enhanced Capital And Income fund (NYSE: CII ) , $13.86 market price, $14.89 NAV, -6.9% discount, 8.7% current market yield . This is quite a change for CII, a fund you couldn’t give away when it was cutting its distribution not that long ago. And finally, one global fund, the Voya Global Advantage And Premium Opportunity fund (NYSE: IGA ) , $11.07 market price, $11.88 NAV, -6.8% discount, 10.1% current market yield , also appears to catch a bid when the markets firm. I would keep my eye on all of these funds when the inevitable bounce occurs after a market sell-off. CEFs Which Could Benefit In a Rotation Though the trend has been to buy the historically strong stocks and funds when the markets turn up, I’ve noticed that there seems to be less conviction each time that occurs now. At the same time, some of the down and out stocks/funds that used to be in free fall seem to be holding up better on each downturn. If that’s the case, then it may be time to include some of the more severe laggards in equity CEFs as the selling pressure abates. Most of these are in the commodity sectors, particularly energy and energy MLPs, but they also represent a number of utility funds as well. The following list of equity CEFs represents the bottom 35 or so funds that have seen their NAVs lag the most this year. All of these funds show red NAV total return performances, that is they lag the SPY’s -3.9% total return. (click to enlarge) The one fund that jumps out at me that has historically been one of the best performing CEFs over the years is the Cohen & Steers Infrastructure fund (NYSE: UTF ) , $19.20 market price, $23.15 NAV, -17.1% discount, 8.3% current market yield . At an unbelievable -17.1% discount, UTF is a great fund that has gotten caught up in the downdraft of the global utility and infrastructure stock sectors despite showing superb NAV total return performance on a longer three-year and five-year term basis. Surprisingly, UTF is one of the more volatile funds despite its large market cap (for a CEF) at almost $2.8 billion, $2 billion of which is in net assets. Just to show you where a -17.1% discount ranks, that would put UTF in the bottom 20 equity CEFs with the widest discounts, joining most of the emerging market and emerging market debt CEFs. That is a ridiculous discount for a fund with a track record as strong as UTF’s. Since 2012, UTF’s NAV is up a very impressive 58.5% even including this year’s -7.1% drop. So don’t confuse a utility and infrastructure CEF like UTF as being boring. Leverage can turbo charge UTF’s portfolio of global utility stocks and the fund can see strong NAV and market price performance as much on the way up as on the way down. In fact, UTF raised its distribution from $0.37/share to $0.40/share earlier this year after a great 2013 and 2014, and combined with that extreme discount you can get a windfall 8.3% current market yield on a fund that only has to support a 6.9% NAV yield. Now that is attractive. When I see the crap CEFs that can trade at premium valuations that have historically destroyed their NAVs, you just wonder what someone is thinking when they sell UTF at a -17%-plus discount. Of course, that’s just it…most don’t know that they’re selling a fund around $19 that has a liquidation value of around $23. A Utility and Energy MLP CEF On Its Knees Another equity CEF that doesn’t make a lot of sense to me despite having a very weak NAV performance so far this year is the Duff & Phelps Global Utility Income fund (NYSE: DPG ) , $16.05 market price, $19.01 NAV, -15.6% discount, 8.7% current market yield . The reason why it doesn’t make a lot of sense is that a similar CEF from Duff & Phelps , the DNP Select Income fund (NYSE: DNP ) , can trade at over a 15% market price premium, despite having a lot of overlap with DPG in its utility holdings. The major difference between the two funds is that DPG has a larger exposure to energy MLPs (33% vs 14% for DNP) while DNP includes about 15% of its portfolio in fixed income corporate bonds of utility companies. DPG also is more global than DNP but why this would account for over a 30% valuation difference between the two funds is a head scratcher. I first wrote about DPG two years ago in September of 2013 in this article, Terrific Opportunity In A Duff & Phelps Utility Fund . At the time, DPG was trading at a -13.3% discount ($18.22 market price, $21.01 NAV) while DNP was trading at a 10.9% premium, so the valuation difference has just widened since then. Certainly, DNP has the longer track record and perhaps has a less volatile NAV than DPG due primarily to its corporate bond exposure, but there is no question that DPG’s portfolio managers use the same research and analysis as DNP’s portfolio managers when they select utility stocks for their fund’s portfolios. So if you owned DNP at a premium valuation and you knew you are not even getting close to the market yield at 8.1% that the fund has to support at a 9.3% NAV yield, wouldn’t it make sense to go into the other fund and get a higher windfall 8.7% market yield when DPG only has to support a 7.4% NAV yield? I would. Obviously, both funds have seen serious NAV depreciation this year but it’s certainly going to be a lot easier for a fund to support a 7.4% NAV yield than a 9.3% NAV yield. And though DPG’s NAV is down -17.5% on a total return basis YTD and a sobering -20.5% on a pure NAV depreciation basis, i.e. not including distributions, the fund’s NAV is still roughly where it came public back in 2011 at $19.07 even after paying $5.60 in total distributions. In other words, there is little danger of DPG cutting its distribution anytime soon unless the global utility sector goes into a deeper bear market than it’s already in. DPG goes ex-dividend on September 11th at a $0.35/share. Both funds use leverage in their high yielding utility, telecommunications, energy MLP and corporate bond portfolios. The one sector I would keep an eye on is the energy MLP sector. After the collapse energy MLP’s have suffered this year, if there is any indication that sector is firming up, which arguably we are seeing already, then I believe that will be your sign that it is safe to go into DPG. At a -15.6% discount, DPG’s market price has priced in far worse than a bear market already. Conclusion Do you stick with what’s worked in the past or do you try and bottom fish? I believe you should be looking at both if you want to up your equity CEF exposure (and income) in the markets right now. So to summarize, here are the funds that have been working this year and should bounce when the markets rebound: GRX – Gabelli Healthcare & WellnessRX fund ETY – Eaton Vance Tax-Managed Diversified Equity Income fund EOS – Eaton Vance Enhanced Equity Income fund II CII – BlackRock Enhanced Capital And Income fund IGA – Voya Global Advantage And Premium Opportunity fund Note: I would be swapping ou t of ETB. And here are the funds I believe present the best risk/reward based on a rotation to underperforming sectors: UTF – Cohen & Steers Infrastructure fund DPG – Duff & Phelps Global Utility Income fund Disclosure: I am/we are long GRX, ETY, EOS, CII, IGA, UTF, DPG. (More…) 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.