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Pioneer Municipal High Income Looks Attractive Here

Summary High tax exempt yield of nearly 7%. Very low leverage cost using auction rate preferreds. 7% discount to NAV for a fund that often trades at a premium. It looks like the Federal Reserve is getting ready to raise the short-term Fed Funds rates before the end of this year. Currently the Fed keeps the target rate in a range from zero to 25 basis points, or an average of 0.125%. Most likely the initial rate increase will be quite modest. There are several ways the Fed can increase the rate. Some possible options are: – Eliminate the range concept and set the new target interest rate at 0.25%. (average increase of 0.125%) -Bump up the range slightly to 0.125%-0.375%. (average increase of 0.125%) -Bump up in the range by 25 basis points to 0.25%-0.50%. I don’t think any of these rate increase options would surprise the market, and it is quite likely that the more important longer-term rates (like the 10-year Treasury rate) have already discounted any Fed rate increase. It wouldn’t surprise me to see a drop in longer-term rates once the uncertainty about the first Fed rate hike has passed. The 10-year yield in the US is now about 40 basis points higher than the 10-year yields in Spain and Italy, so there is plenty of room for a drop here. In years since 2008, there have been major changes in the financing of muni bond CEFs. The CEF auction rate preferred (e.g., ARP) market basically froze up in early 2008. There has been no new ARP financing since then. There was about $60 in billion in ARP financing outstanding in 2008, but most of this has been redeemed since then. A number of new leveraging options to replace ARP financing have been developed for muni bond CEFs, but these newer financing tools are currently more expensive than ARP financing by 50 basis points or more. The muni CEFs that have replaced ARP financing with these newer forms of leverage have lower earnings than before, which leads to lower sustainable dividends. Funds that have kept their ARP financing deserve to sell at a premium, or at least a lower discount to NAV. The Pioneer Municipal High Income Fund (NYSE: MHI ) is a leveraged national municipal bond fund. It seeks high current income exempt from regular Federal income tax with capital appreciation through investment in investment grade US tax exempt municipal securities. I have discussed various factors below, which I use to evaluate municipal bond closed-end funds. Note: Data below is sourced from the Pioneer Investments web site unless otherwise stated. Factor #1: What is the distribution rate? MHI currently has a high distribution yield of 6.91%. It pays a regular monthly dividend of $0.07 per share or an annual distribution of $0.84. Factor #2: What is the likelihood the fund can raise its monthly dividend? To determine this, I look at the Average Earnings/Current Dividend Ratio. This ratio tells you whether or not a fund is earning its current dividend. If the value is well above 100%, it means the fund can easily afford to raise its distribution rate. For MHI, the average earnings for April, 2015 was $0.0712, so the latest Average Earnings/Current Dividend ratio = 101.7%. This factor is a slight positive, since MHI over-earned its last distribution. There is a large positive value for “Undistributed Net Investment Income” or UNII Balance of +0.1622, which means that MHI has over two months of interest in reserve, which can cover future monthly shortfalls that may develop for quite some time. Factor #3: What is the Expense Ratio? I look at the Baseline expense ratio, which does not include leverage costs. MHI has a baseline expense ratio of 1.03%, which is reasonable for a fund with attractive low cost leverage. Factor #4: What is the discount to NAV? MHI is currently selling at a -7.46% discount to NAV. The 6-month average premium is 1.75%. The one year Z statistic is -1.94. So on a one-year basis, the discount is nearly two standard deviations below average. Overall, this factor is a big positive for MHI. Source: cefanalyzer Factor #5: How much leverage is used, and what is the borrowing cost? In the last annual report, the fund reported that 25% of the total managed assets were financed by leverage obtained through ARP financing. The maximum rate for each series is 125% of the 7 day commercial paper rate or adjusted Kenny rate. Dividend rates on APS ranged from 0.088% to 0.261% during the year ended April 30, 2015. This leverage is highly favorable and is a major positive factor for MHI. Factor #6: What is the AMT exposure? The fund did not provide recent AMT data, but up to 25% of the fund may be invested in securities subject to AMT. For this reason, this fund may not be ideal for investors with heavy AMT exposure. Factor #7: What is the credit quality? This is the S&P ratings quality breakdown for MHI as of 6/30/2015: AAA 6.82% AA 21.22% A 5.85% BBB 18.88% BB 8.51% B 8.32% CCC 2.35% Not Rated 26.52% MHI has medium to high credit risk with an average credit rating around BB+. Factor #8: What is the interest rate exposure? MHI has a weighted average life of 7.85 years and a duration of 9.17 years (leverage adjusted = 12.28). This is a little above average. I prefer funds with an average adjusted duration of 10.0 or less. Factor #9: What is the call exposure? Here is a table with the call exposure as of June 30, 2015: Under 5 years 48.8% 5-9.99 years 30.7% Over 10 years 1.0% Other 4.2%% Non-Callable 15.3% MHI has moderate call risk over the next few years if interest rates fall. For most investors, this is not a major concern, since they are worried more about higher interest rates than lower interest rates. Morningstar computes the average coupon rate of its bonds at 6% with an average price of 106. Given the high level of the UNII balance, there is only limited short-term risk to the monthly dividend even if interest rates fall more than expected. Factor #10: For a national fund, what is the breakdown by state? Top 5 States Texas 11.59% Illinois 11.40% New York 8.08% California 6.61% Washington 6.01% There is currently no exposure to Puerto Rico. Source: Morningstar Factor #11: How good is the trading liquidity? MHI has an average daily volume of 102,000 shares, and an average dollar volume of $1.25 million. Factor #12: What percent of the portfolio is in Housing-Multifamily bonds? I like to avoid funds where the Housing Multi-Family sector is above 10%. MHI has no exposure to housing bonds. Factor #13: Fund Management MHI is managed by David J. Eurkus and Jonathan Chirunga. Mr. Eurkus has more than 40 years of investment experience and has been the portfolio manager of the fund since inception. Mr. Chirunga joined Pioneer in 2011 and has been an investment professional since 1996. Based on the above 13 factors, I am currently quite positive on MHI. It is an attractive fund because of its high relative discount to NAV, very low leverage costs and reasonable expense ratio. Disclosure: I am/we are long MHI. (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.

July Asset Flow Roundup: U.S. Tops, EM Lags

In July, the international market looked knackered by spiraling woes. Among these, mayhem in the Euro zone thanks to the nagging Greek debt deal drama and two massive crashes in the Chinese equities’ market hit headlines all over the globe. Meanwhile, a decent GDP report, improving labor and housing markets and a torrent of positive-looking earnings releases, especially in the all-important financial sector, made the U.S. market the sole shining star last month amid broad-based volatility. All these events set the stage for investors’ behavior toward investments across the broad. The ETF industry also witnessed meaningful asset growth last month (per etf.com ). Top Winners S&P 500 – The SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) While steady U.S. growth has already impressed investors, the Fed’s reiteration of near zero interest rates at the end of the month resulted in strong inflows into the U.S. equity funds. The ultra-popular SPY led the way last month, gathering over $4.36 billion in capital. Not only SPY, other two popular S&P 500 ETFs namely the Vanguard S&P 500 ETF (NYSEARCA: VOO ) and the iShares Core S&P 500 ETF (NYSEARCA: IVV ) also piled up assets in the month. While VOO accumulated $1.17 billion, IVV’s asset base grew $1.08 billion. Nasdaq – The PowerShares QQQ Trust ETF (NASDAQ: QQQ ) Another U.S. index that stayed high in the month was Nasdaq. With the economy gaining ground, cyclical sectors like technology are getting a nice boost. In fact, QQQ hit a new 52-week high on July 20, 2015. A few better-than-expected tech earnings at the start of the earnings season turned investors toward this product. QQQ garnered about $861 million in assets in July. Currency Hedged – The WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ) The policy divergence stemmed from the looming Fed tightening and the easy money policies in the Euro zone made hedged European investments a compelling opportunity for U.S. investors. By this technique, strong dollar could not eat away the gains repatriated back home. This phenomenon, along with the easing Greek tension, instigated investors to pour about $1.21 billion (net) into HEDJ. U.S. Financial – The Financial Select Sector SPDR ETF (NYSEARCA: XLF ) The financial sector has set an upbeat tone this earnings season. Several factors including fewer litigation charges, effective cost control measures and modest improvement in core businesses has given Q2 earnings a boost and sent shares to the positive territory. QQQ gathered about $892.4 million in assets in July. Top Losers Emerging Market – The iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) A stronger dollar on speculations of a sooner-than-expected prospect of a Fed rate hike took a toll on the emerging market. Also, sharp sell-off in Chinese equities and downbeat economic readings soured investors’ sentiments over this popular emerging market ETF. The fund saw outflows of about $2.49 billion in July. Apart from emerging markets, the iShares MSCI EAFE ETF (NYSEARCA: EFA ) and the iShares MSCI All Country Asia ex-Japan Index ETF (NASDAQ: AAXJ ) also suffered from the same woes. EFA and AAXJ lost about $733 million and $314 million, respectively in the month. U.S. Small-Cap – The iShares Russell 2000 ETF (NYSEARCA: IWM ) This small-cap U.S. equities ETF lost about $1.17 billion last month. Though this spectrum of the stock market gave a stellar return in June, July proved unlucky. Gold – The SPDR Gold Trust ETF (NYSEARCA: GLD ) Gold has slipped to the level it saw five years back on stronger dollar, a still-muted inflationary backdrop worldwide and the slowdown in China, which is one of the largest consumers of gold. With Fed tightening looming large, gold is likely to prolong its decline in the coming months. So, investors dumped this product in July, resulting in about $1.11 billion in net outflows. China – The i Shares China Large-Cap ETF (NYSEARCA: FXI ) July was a month of massacre in China with its stock market rout wrecking havoc early and later on in the month. Heightened volatility, the still-high valuation and deepening economic crisis led Chinese equities to frequent crashes in July despite government intervention. Quite expectedly, the segment was mostly out of favor in the month, with FXI taking the sixth spot in the top 10 losers’ list. The fund shed about $513 million in assets. Link to the original article on Zacks.com

TIAA-CREF Lifestyle Conservative Fund, August 2015

Objective and strategy The TIAA-CREF Lifestyle Conservative Fund (MUTF: TSCLX ) seeks long-term total return, consisting of both current income and capital appreciation. It is a “fund of funds” that invests in the low-cost Institutional Class shares of other TIAA-CREF funds. It is designed for investors targeting a conservative risk-return profile. In general, 40% of the fund’s assets are invested in stocks and 60% in bonds. The managers can change those allocations by as much as 10% up or down depending upon current market conditions and outlook. Adviser TIAA-CREF. It stands for “Teachers Insurance and Annuity Association – College Retirement Equities Fund,” which tells you a lot about them. They were founded in 1918 to help secure the retirements of college teachers; their original backers were Andrew Carnegie and his Carnegie Foundation. Their mission eventually broadened to serving people who work in the academic, research, medical and cultural fields. More recently, their funds became available to the general public. TIAA-CREF manages almost $900 billion dollars for its five million investors. Because so much of their business is with highly-educated professionals concerned about their retirement, TIAA-CREF focuses on fundamentally sound strategies with little trendiness or flash and on keeping expenses as lower as possible. 70% of their investment products have earned four- or five-star ratings from Morningstar and the company is consistently rated as one of America’s best employers. Manager John Cunniff and Hans Erickson, who have managed the fund since its inception. Management’s stake in the fund We generally look for funds where the managers have placed a lot of their own money to work beside yours. Mssrs. Cunniff and Erickson each have $500,001 – $1,000,000 invested in the fund, which qualifies as “a lot.” Opening date December 9, 2011. Many of the funds in which the managers invest are much older than that. Minimum investment $2,500. That is reduced to $100 if you sign up for an automatic investing plan. Expense ratio 0.87% on $115 million in assets, as of July 2015. That’s about average for funds of this type. Comments Lifestyle Conservative offers many of the same attractions as the Vanguard Star Fund (MUTF: VGSTX ) but does so with a more conservative asset allocation. Here are three arguments on its behalf. First, the fund invests in a way that is broadly diversified and pretty conservative . 40% of its money is invested in stocks, 40% in high-quality bonds and the last 20% in short-term bonds. That’s admirably cautious. They then take measured risks within their various investments (for example, their stock portfolio is more tilted toward international stocks and emerging markets stocks than are their peers) to help boost returns. Second, TIAA-CREF is very good. There are two sorts of funds, those which simply buy all of the stocks or bonds in a particular index without trying to judge whether they’re good or bad (these are called “passive” funds) and those whose managers try to invest in only the best stocks or bonds (called “active” funds). TSCLX invests in a mix of the two with active funds receiving about 90% of the cash. CREF’s management teams tend to be pretty stable (the average tenure is close to nine years); most managers handle just one or two funds and most invest heavily (north of $100,000 per manager per fund) in their funds. CREF and its funds operate with far lower expenses than its peers, on average, 0.43% per year for funds investing primarily in U.S. stocks. Even their most expensive fund charges 40% less than their industry peers. Every dollar not spent on running the fund is a dollar that remains in your account. Third, Lifestyle Conservative is a very easy way to build a very well-diversified portfolio. Lifestyle Conservative builds its portfolio around 15 actively-managed and three passively-managed TIAA-CREF funds. They are: Which invests in Large-Cap Growth Large companies in new and emerging areas of the economy that appear poised for growth. Large-Cap Value Large companies, mostly in the U.S., whose stock is undervalued based on an evaluation of their potential worth. Enhanced Large-Cap Growth Index Quantitative models try to help it put extra money into the most attractive stocks in the U.S. Large Cap Growth index; it tries to sort of “tilt” a traditional index. Enhanced Large-Cap Value Index Quantitative models try to help it put extra money into the most attractive stocks in the U.S. Large Cap Value index. Mid-Cap Growth Medium-sized U.S. companies with strong earnings growth. Mid-Cap Value Temporarily undervalued mid-sized companies. Growth & Income Large U.S. companies which are paying healthy dividends or buying back their stock. Small-Cap Equity smaller domestic companies across a wide range of sectors, growth rates and valuations. International Equity Stocks of stable and growing non-U.S. companies. International Opportunities Stocks of foreign firms that might have great potential but a limited track record. Emerging Markets Equity Stocks of firms located in emerging markets such as India and China. Enhanced International Equity Index Quantitative models try to help it put extra money into the most attractive stocks in the International Equity index. Global Natural Resources Firms around the world involved in energy, metals, agriculture and other commodities. Bond High quality U.S. bonds. Bond Plus 70% investment grade bonds and 30% spicier fare, such as emerging markets bonds or high-yield debt. High-Yield Mostly somewhat riskier, higher-yielding bonds for U.S. and foreign corporations. Short-Term Bond Short-term, investment grade U.S. government and corporate bonds. Money Market Ultra-safe, lower-returning CDs and such. Bottom Line Lifestyle Conservative has been a fine performer since launch. It has returned 7.5% annually over the past three years. That’s about 2% per year better than average, which places it in the top 20% of all conservative hybrid funds. While it trails more venturesome funds such as Vanguard STAR in good markets, it holds up substantially better than they do in falling markets. That combination led Morningstar to award it four stars, their second-highest rating.