Three closed end funds.

music selection:  “Push It” — Salt-N-Pepa

Each Friday, I review three closed end funds invested in debt and debt like instruments.  I feel that fixed income is a crucial part of any portfolio allocation.  These closed end funds have been selected based on being attractively priced (trading below NAV) and yield rich.  I use this strategy on about 40% of my portfolio and usually have my entire annual budget covered by passive distributions.

Advent Claymore Convertible Securities & Income (AGC) is a closed end fund that seeks total return through investments in global convertible and non convertible securities and utilizing and option writing strategy.  It pays an income only distribution on a monthly basis.

  • Discount to NAV – 11.50%
  • Yield – 10.18%
  • Effective leverage – 40.91%
  • Expense ratio – 3.48%
  • Learn more

NexPoint Strategic Opportunities Fund (NHF) is a closed end fund that seeks current income with capital appreciation through investment in floating and fixed rate loans, bonds, debt obligations, mortgage backed and asset backed securities, collateralized debt obligations and equities.  It pays an income only distribution on a monthly basis.

  • Discount to NAV – 9.47%
  • Yield – 10.91%
  • Effective leverage – 14.77%
  • Expense ratio – 2.54%
  • Learn more

Eaton Vance Tax Advantaged Bond & Option (EXD) is a closed end fund that seeks to provide tax-advantaged current income and gains through the use of a tax-advantaged short-term, high quality bond strategy and a rules-based option overlay strategys.  It pays a managed distribution on a quarterly basis.

  • Discount to NAV – 14.35%
  • Yield – 12.87%
  • Effective leverage – N/A
  • Expense ratio – 1.44%
  • Learn more

Devour your prey raptors!

Friday Fixed Income

Never miss another opportunity to devour prey!

11 thoughts on “Friday Fixed Income

  • June 29, 2018 at 9:21 pm

    For the first and third funds in your post the dividends they are paying are mostly return of capital (I couldn’t find this data for the second fund on their site), meaning the most of the dividend is not earnings from their operations but a return of your investment.

    For example in the case of EXD only $.10 of $1.16 in dividends for 2017 was from earnings (see the Performance tap on their site the section called “Tax Character of Dividend Distributions” at the bottom of the page) . The last five years from this fund had a similar history – the vast majority of the distributions were from capital not income. So the high dividend, at least over the last 5 years, has been mostly just a return of capital which reduces the funds assets and does not represent the income the fund earned.

    The 12.9% dividend yield is probably better thought of 1.1% income the fund earned and 11.8% return of your purchase price of the shares in the fund (based on the 2017 tax information of $.1 earnings and $1.06 return of capital).

    I’m not saying there are not other reasons for buying the fund (although its return rate since inception is only 2.37% and it has a 1.45% fee).

    The discounts to NAV are nice but they will be eaten over 4 to 8 years for the three funds by the fees (for example the first one has a discount of 11.5% divided by a 3.48% fee = ~ 4 years) unless the funds can really earn returns on their assets higher than the average returns market to compensate for these fees.

    Looking at the returns since inception based on NAV they are AGC -1.23%, NHF 5.42% and EXD 2.37 – with returns based on market price being worse than these returns (hence the large price discounts to NAV). Thus it could be that the market has decided that due to the fees these funds are charging and their past returns that this discount to their net assets was necessary, as one is buying not only the net assets buy the net assets with an obligation to pay a fee each year of 1.45% to 3.48%. If fund management doesn’t produce above average returns on assets this fee obligation attached to the assets means they are worth less than the assets without the fee and hence the discount to NAV is not a “bargain” but reflects the high fee and no track record of above average market returns to earn back/cover this fee – which effectively creates a liability/detracts from the value of the assets. I haven’t compared the returns on these funds against their peer group so don’t know if its true but its worth doing/considering.

    So in short I don’t think the high distributions or discounts to NAV are reasons to buy these funds, the main reason to buy the way I see it would be that one believes that the underlying strategy of the fund will start to produce results better than their next best investment alternative and that fund management will competently be able to execute that strategy.

    If one invests in a higher fee fund primarily based on a high dividend which is mostly return of capital, one ends up paying a fee for someone to return their money to them on a regular basis – rather than actually earning income. And if one invests primarily on discount to NAV to acquire a group of assets selling at a bargain price – it may turn out this discount to fair is not a bargain but reflects the fair value of the liability of the fees that are attached to the assets created by the fund’s past performance/the expectation by market participants that the fund will not earn enough on their assets above the average market return to at least cover the fees (although as said above I don’t if this is the case for these three funds).

    • June 30, 2018 at 12:25 am


      That is great research. I only offer suggestions for places to start looking, not tickers to buy. You list good reasons to look elsewhere.

    • July 2, 2018 at 6:30 pm

      Thanks for the great comment, J.

      I’m a bit wary of CEFs for all the reasons you point out. If I was FV and needed reliable cash flow to cover a 5-6% WR, I might consider adding preferred stocks (e.g. PFF -5.5% yield, PGF – 5.9% yield) for the “live on it” portion of the portfolio and small-scale options trading for the “grow it” portion.

      Preferred stocks can gyrate in a financial crisis just like stocks, but their payments are rarely interrupted (Bear Sterns and AIG aside) and you often get returns better than bonds in exchange for anxiously watching the volatility.

      Bonus: an options market (albeit thin) exists for both PFF and PGF. By selling distant calls, or getting in with a long duration put, you can effectively pull out the dividends 6 mos. in advance and reinvest them. Collars are also possible, and would allow you to pivot into equities if the SHTF 2008 style.

      The other direction might be REITs (non-retail, non-office! healthcare if you’re brave!). Several on my screen yield over 5%. Some also have preferreds, such as AIV-A with its 6.7% yield.

      The coming era of yield curve inversion / trade wars is no time to be swinging for the fences or going leveraged long, IMO. Still there are many fixed income options that could allow you to sit back with your popcorn and watch the carnage no matter what.

      • July 4, 2018 at 4:33 pm

        You can also invest in the SDYL etn which is a 2x leveraged of the high yield aristocrats, the fund yields more than 5% and seems pretty safe

  • July 5, 2018 at 8:37 pm

    1) Buy NLY for $10.50
    2) Synthetic short NLY at the $10 strike until Jan ’19 for a $0.20 credit. This creates a position with only $0.30 remaining risk.
    3) Receive $0.60 in dividends between now and Jan ’19.
    4) Exit or roll after the Dec. dividend.

    These are all mid price quotes during trading today.

    Yield to worst (NLY falls below $10): 0.20 credit + 0.60 dividend – 0.50 cap loss = 0.30 credit = 2.9% on 10.30 initial outlay (that’s the 6 mos ROI, figure just under 5.8% annualized)

    Yield to best: 0.20 credit + 0.60 dividend = 0.80 credit = 7.8% on 10.30 initial outlay (again, that’s in 6 mos, figure 15.6% annualized).

    Best of all, the return is guaranteed to fall between 5.8% and 15.6% (before commissions) which is a far better risk-adjusted reward than a risky dividend stock or options position. The bills are paid no matter what and you can snooze through even the worst crash.

    • July 6, 2018 at 3:06 pm

      Nice analysis! The only risk here is that NLY decreases its div % and by what %, like in 2013 where lots of REITS cut their divs

      • July 6, 2018 at 5:37 pm

        That risk is real, considering the history of NLY. However, early exit at no loss is also a possibility if an announcement is made that the dividend is being cut (the long put would put a floor on capital losses while your much larger short call liability evaporates).

        Also, it’s a lot easier to bet on 2 quarters of steady dividends than, say, 2 years.

        I originally looked at this as a long put opportunity. Those of us who survived 2008 know what happens to leveraged mortgage portfolios in a recession.

        • July 8, 2018 at 6:46 pm

          I know, 2008 was awful , REITS like AGNC however did pretty well jejeje

  • July 11, 2018 at 1:14 pm

    EXD put out a note on “Return of Capital Distribuitions Demystified”. You can see this in their literature section from Dec 2017. You cannot equate “return of capital” which is a tax concept with unearned distributions.

    Here is the example they use to explain this concept:
    Fund XYZ begins a year with an NAV of $10.00 per
    share. It realizes a total return on its investments of
    9% ($0.90 per share) and distributes 7% ($0.70)
    during the year. Its NAV rises by 2% ($0.20) to
    an ending value of $10.20. If Fund XYZ has no
    net investment income (because deductible fund
    expenses equal or exceed income and net realized
    short-term gains) and no net realized long-term
    gain (because realized long-term gains are fully
    offset by net realized losses), then its distributions
    are all characterized as return of capital. Fund
    XYZ can achieve this outcome (desirable from
    a shareholder tax perspective) by, for example,
    owning growth equity securities that appreciate
    by an aggregate 9%, and matching net realized
    gains on appreciated securities sold with net losses
    realized by selling portfolio positions that have
    declined in value.

    So how do you determine if a fund has “earned” their ditribution? The NAV tells all. If NAV goes up or remains the same, then it is earning its distribution even if there is “return of capital”. If NAV goes down, then the fund is at least not fully meeting its distribution with earnings.

    So on their overview, which includes distributions and fees, you can see that the market is very pessimistic about. The market value has dropped far below the NAV losses and over the life of the fund has returned ~2.5%.

    So while a fund like EXD is not a solid win. The current discount has a decent chance of having some capital appreciation since the market has really overreacted over the last few months.


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