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‘High-High-Low’ Closed-End Fund Report, November 2022

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Author’s note: This article was released to CEF/ETF Income Laboratory members on December 5, 2022. Please check latest data before investing.

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 a 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 (>8%) (i.e., 8% 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 80%) 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 = 1-year z-score

Cov = coverage

1Y NAV = 1-year NAV total return

Lev = leverage

BE = baseline expense

Data were taken from the close of December 2, 2022.

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

The following data show the 10 CEFs with the widest discounts, yield >6.5% and coverage >85%. Z-scores, leverage and baseline expense are shown for comparison.

Fund Ticker Category P/D Yield Z Cov 1Y NAV Lev BE
Highland Income Fund (HFRO) Senior Loans -23.54% 8.13% 0.1 166% 14.0% 12% 1.61%
Principal Real Estate Income Fund (PGZ) Real Estate -15.08% 11.24% -1.3 100% -18.3% 36% 2.15%
Blackstone Long-Short Credit Income (BGX) Senior Loans -12.42% 9.16% -0.7 95% -10.8% 42% 2.06%
Pioneer Diversified High Income (HNW) High Yield -12.07% 10.36% -1.1 118% -14.7% 36% 1.58%
BrandywineGLOBAL – Global Inc Opp Fund (BWG) Global Income -11.80% 13.01% -0.4 104% -24.8% 43% 2.46%
Western Asset Emerging Markets Debt (EMD) Emerging Market Income -11.30% 10.54% -0.1 113% -17.7% 31% 1.30%
Ares Dynamic Credit Allocation Fund (ARDC) Senior Loans -10.91% 10.20% -0.5 110% -10.6% 23% 2.08%
Blackstone Strategic Credit (BGB) Senior Loans -10.79% 8.47% -0.5 97% -10.1% 40% 2.17%
KKR Income Opportunities Fund (KIO) High Yield -9.51% 10.94% -0.3 106% -16.6% 43% 2.12%
Barings Global Short Duration High Yield (BGH) High Yield -9.36% 9.48% 0.2 120% -10.4% 25% 1.32%

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Income Lab

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

The following data show the 10 CEFs with the lowest z-scores, yield >6.5%, coverage >85% and premium/discount <+5%. Leverage and baseline expense are shown for comparison.

Fund Ticker Category Z P/D Yield Cov 1Y NAV Lev BE
Principal Real Estate Income Fund (PGZ) Real Estate -1.3 -15.08% 11.24% 100% -18.3% 36% 2.15%
Pioneer Diversified High Income (HNW) High Yield -1.1 -12.07% 10.36% 118% -14.7% 36% 1.58%
Blackstone Long-Short Credit Income (BGX) Senior Loans -0.7 -12.42% 9.16% 95% -10.8% 42% 2.06%
Ares Dynamic Credit Allocation Fund (ARDC) Senior Loans -0.5 -10.91% 10.20% 110% -10.6% 23% 2.08%
Blackstone Strategic Credit (BGB) Senior Loans -0.5 -10.79% 8.47% 97% -10.1% 40% 2.17%
BrandywineGLOBAL – Global Inc Opp Fund (BWG) Global Income -0.4 -11.80% 13.01% 104% -24.8% 43% 2.46%
KKR Income Opportunities Fund (KIO) High Yield -0.3 -9.51% 10.94% 106% -16.6% 43% 2.12%
Pioneer High Income (PHT) High Yield -0.2 -9.27% 9.93% 117% -11.6% 34% 1.14%
BNY Mellon Alcentra Gl Crd Inc 2024 Tgt (DCF) Multisector Income -0.2 -4.54% 8.15% 94% -10.8% 32% 1.76%
Templeton Emerg Mkts Income (TEI) Emerging Market Income -0.1 -8.93% 9.88% 90% -19.1% 12% 1.22%

Chart

Income Lab

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

The following data show the 10 CEFs with the highest yields, coverage >85% and premium/discount <+5%. z-scores, leverage, and baseline expense are shown for comparison.

Fund Ticker Category Yield P/D Z Cov 1Y NAV Lev BE
BrandywineGLOBAL – Global Inc Opp Fund (BWG) Global Income 13.01% -11.80% -0.4 104% -24.8% 43% 2.46%
Principal Real Estate Income Fund (PGZ) Real Estate 11.24% -15.08% -1.3 100% -18.3% 36% 2.15%
DoubleLine Income Solutions Fund (DSL) Global Income 11.01% -1.56% 2.1 116% -24.5% 34% 1.50%
KKR Income Opportunities Fund (KIO) High Yield 10.94% -9.51% -0.3 106% -16.6% 43% 2.12%
Western Asset Diversified Inc Fund (WDI) Multisector Income 10.86% -8.60% 0.9 106% -16.4% 33% 1.64%
Western Asset Global High Income (EHI) High Yield 10.76% -2.86% 2.3 121% -15.8% 36% 1.50%
Western Asset Emerging Markets Debt (EMD) Emerging Market Income 10.54% -11.30% -0.1 113% -17.7% 31% 1.30%
Pioneer Diversified High Income (HNW) High Yield 10.36% -12.07% -1.1 118% -14.7% 36% 1.58%
Ares Dynamic Credit Allocation Fund (ARDC) Senior Loans 10.20% -10.91% -0.5 110% -10.6% 23% 2.08%
Pioneer High Income (PHT) High Yield 9.93% -9.27% -0.2 117% -11.6% 34% 1.14%

Chart

Income Lab

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 >6.5% yield, >85% coverage and <+5% premium/discount are considered.

Fund Ticker Category P/D Yield Z DxY Cov 1Y NAV Lev BE
Highland Income Fund (HFRO) Senior Loans -23.54% 8.13% 0.1 -1.91 166% 14.0% 12% 1.61%
Principal Real Estate Income Fund (PGZ) Real Estate -15.08% 11.24% -1.3 -1.69 100% -18.3% 36% 2.15%
BrandywineGLOBAL – Global Inc Opp Fund (BWG) Global Income -11.80% 13.01% -0.4 -1.54 104% -24.8% 43% 2.46%
Pioneer Diversified High Income (HNW) High Yield -12.07% 10.36% -1.1 -1.25 118% -14.7% 36% 1.58%
Western Asset Emerging Markets Debt (EMD) Emerging Market Income -11.30% 10.54% -0.1 -1.19 113% -17.7% 31% 1.30%
Blackstone Long-Short Credit Income (BGX) Senior Loans -12.42% 9.16% -0.7 -1.14 95% -10.8% 42% 2.06%
Ares Dynamic Credit Allocation Fund (ARDC) Senior Loans -10.91% 10.20% -0.5 -1.11 110% -10.6% 23% 2.08%
KKR Income Opportunities Fund (KIO) High Yield -9.51% 10.94% -0.3 -1.04 106% -16.6% 43% 2.12%
Western Asset Diversified Inc Fund (WDI) Multisector Income -8.60% 10.86% 0.9 -0.93 106% -16.4% 33% 1.64%
Pioneer High Income (PHT) High Yield -9.27% 9.93% -0.2 -0.92 117% -11.6% 34% 1.14%

Chart

Income Lab

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. As both discount and z-score are negative while yield is positive, the more positive the “DxYxZ” metric, the better. Only funds with >7% yield, >85% coverage and <+5% 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 -15.08% 11.24% -1.3 2.14 100% -18.3% 36% 2.15%
Pioneer Diversified High Income (HNW) High Yield -12.07% 10.36% -1.1 1.40 118% -14.7% 36% 1.58%
Blackstone Long-Short Credit Income (BGX) Senior Loans -12.42% 9.16% -0.7 0.81 95% -10.8% 42% 2.06%
BrandywineGLOBAL – Global Inc Opp Fund (BWG) Global Income -11.80% 13.01% -0.4 0.63 104% -24.8% 43% 2.46%
Ares Dynamic Credit Allocation Fund (ARDC) Senior Loans -10.91% 10.20% -0.5 0.60 110% -10.6% 23% 2.08%
Blackstone Strategic Credit (BGB) Senior Loans -10.79% 8.47% -0.5 0.44 97% -10.1% 40% 2.17%
KKR Income Opportunities Fund (KIO) High Yield -9.51% 10.94% -0.3 0.32 106% -16.6% 43% 2.12%
Pioneer High Income (PHT) High Yield -9.27% 9.93% -0.2 0.23 117% -11.6% 34% 1.14%
Western Asset Emerging Markets Debt (EMD) Emerging Market Income -11.30% 10.54% -0.1 0.17 113% -17.7% 31% 1.30%
Templeton Emerg Mkts Income (TEI) Emerging Market Income -8.93% 9.88% -0.1 0.13 90% -19.1% 12% 1.22%

Chart

Income Lab



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