Closed-End Funds: A Look At Valuations Heading Through Q1 2024

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Dragon Claws Written by Nick Ackerman, co-produced by Stanford Chemist. With the latest CPI report coming in hotter than expected, it looks like the market is coming more in line with the previous Fed...

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With the latest CPI report coming in hotter than expected, it looks like the market is coming more in line with the previous Fed...</p>\n\n<a href=\"https://seekingalpha.com/article/4674989-closed-end-funds-a-look-at-valuations-heading-through-q1-2024\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Closed-End Funds: A Look At Valuations Heading Through Q1 2024</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nClosed-End Funds: A Look At Valuations Heading Through Q1 2024\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-03-01 04:20 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4674989-closed-end-funds-a-look-at-valuations-heading-through-q1-2024><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Dragon Claws Written by Nick Ackerman, co-produced by Stanford Chemist. With the latest CPI report coming in hotter than expected, it looks like the market is coming more in line with the previous Fed...</p>\n\n<a href=\"https://seekingalpha.com/article/4674989-closed-end-funds-a-look-at-valuations-heading-through-q1-2024\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"CUBA","symbol_name":"CUBA基金","start_time":0,"source_url":"https://seekingalpha.com/article/4674989-closed-end-funds-a-look-at-valuations-heading-through-q1-2024","article_id":"2416502717","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1653423353/image_1653423353.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2416502717","pubTimestamp":1709238059,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Dragon Claws Written by Nick Ackerman, co-produced by Stanford Chemist. 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With the latest CPI report coming in hotter than expected, it looks like the market is coming more in line with the previous Fed expectations. That is, for fewer cuts, and if the cuts do happen, they'll probably be in the latter half of 2024. The next Fed meeting isn't until March, and there will be plenty more data between now and then that can change the outlook. That being said, according to the FedWatch Tool, there is still around a 40% probability that rates will be cut in May. By June, the probability is a solid 82%+. However, even that is down from the week ago, suggesting that it was probably over 96%. That was prior to the latest CPI report. Rate Cut Probability (CME FedTool) With that being said, rates are having a material impact on a number of closed-end funds. Closed-end funds (\"CEFs\") can invest in various underlying securities, as they are merely a wrapper for other investments. Therefore, they aren't an asset class in and of themselves. However, with the majority of funds employing leverage through borrowings, they are still impacted meaningfully by interest rates and the costs associated with those borrowings. According to Nuveen, 74% of CEFs are leveraged. Further, the overall impact of rates on equities and fixed income across the board also naturally plays a huge role. Those higher rates also make safer income investments like risk-free Treasuries more attractive. Of course, this is what is primarily impacted by fixed-income investments and other income-oriented investments, like CEFs often are. However, even equities are impacted because a lot of companies operate with their own borrowings that are or will be impacted by higher rates. All of this has also impacted CEFs in terms of their valuations. We've come off some of the widest discount levels, but overall, CEFs are still trading at sizeable historical discounts. As of February 13, 2024, RiverNorth listed that across all CEFs, the discount came to -7.83%. It also notes that discounts have only been wider 16% of the time since the end of 1996. All CEF Discount/Premium (RiverNorth) That average discount had narrowed from our previous update when the average discount of all CEFs came to -8.48%. That was as of the end of September 29, 2023. In that previous update, we also specifically noted that municipal bond-focused CEFs were the hardest hit. That still remains the case today, as they are listed at an average discount of -10.80%, but that's narrowed meaningfully from the -12.89% discount. Still, the current average discount has only been wider 4% of the time since 1996. CEF Muni Discount/Premium (RiverNorth) The least discounted area of the market is in the taxable fixed-income category. The average discount there comes to only -3.99%. Now, a good portion of that can be from PIMCO alone, taking up the category due to the regular premiums that the suite often trades at. Discounts have been wider 45% of the time since 1996. Then, equities are also trading at some hefty discounts, with an average discount of -8.59%. In that case, discounts have been wider 32% of the time. I think, overall, it suggests that there are some opportunities in this space. Investors who are more confident in rate cuts coming more aggressively or sooner than expected could be more aggressive here. More cautious investors, believing that rates will be higher for longer, even suspecting no cuts in 2024, could probably continue to avoid adding leveraged funds. Alternatively, those investors may consider sitting on their cash piles as money markets would continue to be a decent place to keep capital as it earns something these days. With that being said, here are a couple of areas that could be worth exploring for specific CEFs. Screening For Opportunities Deepest Discounted Funds This is where opportunities can come from in the CEF space-taking advantage of discounts and premiums in funds. Funds with the deepest discounts can be a normal starting place, but sometimes, these funds deserve to trade at deep discounts. With that, here are the funds with the deepest discounts. All data is from CEFConnect.   Name Ticker Premium/Discount Distribution Rate Effective Leverage          Highland Opportunities and Income Fund (HFRO) -48.58% 7.09% 15.52%   Foxby Corp (OTCPK:FXBY) -39.58% 1.88% 3.97%   Bexil Investment Trust (OTCPK:BXSY) -36.52% 8.28% 8.21%   Destra Multi-Alternative Fund (DMA) -32.91% 0.71% 15.37%   Highland Global Allocation Fund (HGLB) -28.96% 12.30% 3.14%   Mexico Equity & Income Fund (MXE) -25.27% 2.71%     Gabelli Global Deal Fund (GDL) -22.63% 6.13% 33.50%   Ecofin Sustainable and Social Impact Term Fund (TEAF) -21.78% 9.61% 11.02%   SRH Total Return Fund, Inc (STEW) -20.92% 3.86% 11.34%   Herzfeld Caribbean Basin Fund (CUBA) -19.88% 20.75%     Click to enlarge Funds With The Deepest 1-Year Z-Score Across the board, we know that CEF discounts have been widening, but one better way to actually see if a CEF is trading at an attractive discount is to see its z-score. The 1-year z-score represents funds that are trading at wider-than-normal discounts compared to where they were trading in the last year. Here are those funds in order from the highest negative z-score to the lowest. Just the same as deeply discounted funds, sometimes there is a reason they are trading the way they are.   Name Ticker Premium/Discount Distribution Rate Effective Leverage 1-Year           Highland Opportunities and Income Fund (HFRO) -48.58% 7.09% 15.52% -2.4   Western Asset High Income Fund II (HIX) -5.85% 13.15% 28.37% -2.09   Sprott Physical Silver Trust (PSLV) -4.15% %   -1.85   Cornerstone Strategic Value Fund (CLM) 4.56% 18.10%   -1.79   Central Securities Corporation (CET) -19.84% 8.65% 0.32% -1.71   SRH Total Return Fund, Inc (STEW) -20.92% 3.86% 11.34% -1.63   Cornerstone Total Return Fund Inc (CRF) 8.63% 17.31% 9.50% -1.51   Gabelli Equity Trust (GAB) -0.75% 11.47% 21.02% -1.49   BlackRock Enhanced International Dividend Trust (BGY) -14.36% 7.73% 0.36% -1.32   Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX) -8.17% 7.15%   -1.3   Click to enlarge Funds With The Highest Premium While we often look at discounts for opportunities, opportunities can also come in the form of selling funds when they are at rich premiums. Despite the deep discounts we see through most funds, some outliers still command strong premiums. These could represent funds worth consideration for selling.   Name Ticker Premium/Discount Distribution Rate Effective Leverage          Gabelli Utility Trust (GUT) 97.12% 10.97% 25.84%   PIMCO Strategic Income Fund (RCS) 41.90% 9.98% 33.44%   The Gabelli Multimedia Trust Inc. (GGT) 40.93% 16.70% 43.96%   abrdn Global Income Fund Inc. (FCO) 33.35% 16.23% 28.14%   PCM Fund (PCM) 26.58% 11.72% 46.46%   PIMCO Corporate and Income Opportunity Fund (PTY) 25.18% 10.24% 23.09%   PIMCO Corporate & Income Strategy Fund (PCN) 16.27% 10.16% 17.40%   DNP Select Income Fund (DNP) 15.80% 9.02% 28.96%   Guggenheim Strategic Opportunities Fund (GOF) 14.77% 15.62% 22.43%   Eagle Point Income Co Inc (EIC) 14.29% 15.50% 22.13%   Click to enlarge Funds With The Highest 1-Year Z-Score Conversely, similar to the absolute discount, we need to look at the z-score. Some of the funds that are trading at high premiums regularly do - whether they deserve to or not. Therefore, funds with the highest 1-year z-score could potentially be considered even better candidates to sell.   Name Ticker Premium/Discount Distribution Rate Effective Leverage 1-Year           Royce Global Value Trust (RGT) -9.83% 1.45% 5.23% 3.43   Morgan Stanley China A Share Fund (CAF) -9.59% 0.94%   3.35   Eaton Vance California Municipal Income Trust (CEV) -9.82% 4.89% 27.99% 3.15   The India Fund Inc (IFN) 11.32% 8.70% 0.28% 3.08   Federated Hermes Premier Municipal Inc (FMN) -10.91% 3.75% 38.02% 2.98   Virtus Diversified Income & Convertible Fund (ACV) 7.52% 9.57% 32.10% 2.79   Cohen & Steers Real Estate Opportunities and Income Fund (EVM) -10.17% 4.91% 28.86% 2.78   Cohen & Steers Real Estate Opp & Inc Fd (RLTY) -7.53% 9.44% 36.70% 2.73   Eaton Vance Floating-Rate Income Trust (EFT) -0.07% 10.63% 36.38% 2.72   Nuveen Credit Strategies Income Fund (JQC) -8.46% 11.98% 38.11% 2.71   Click to enlarge No/Low Leverage Listed Funds With The Deepest 1-Year Z-scores Finally, I also wanted to provide a screen for the low or no leveraged funds that could be presenting more attractive opportunities with a negative z-score. As we touched on above, some funds are hedged in different ways from the negatives of higher interest rates, but that doesn't mean they aren't susceptible to more volatility. With leverage, that poses more risks for portfolio losses. Thus, in an uncertain market such as we are in, it can be best to avoid leverage.   Name Ticker Premium/Discount Distribution Rate Effective Leverage 1-Year           Sprott Physical Silver Trust Unit (PSLV) -4.15% %   -1.85   Cornerstone Strategic Value Fund (CLM) 4.56% 18.10%   -1.79   Central Securities Corporation (CET) -19.84% 8.65% 0.32% -1.71   BlackRock Enhanced International Dividend Trust (BGY) -14.36% 7.73% 0.36% -1.32   Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX) -8.17% 7.15%   -1.3   Sprott Physical Gold and Silver Trust (CEF) -5.24% %   -1.29   Liberty All-Star Growth (ASG) -7.47% 8.26% 0.31% -1.26   BlackRock Enhanced Global Dividend Trust (BOE) -14.97% 7.48% 0.02% -1.22   Eaton Vance Tax-Managed Diversified Equity Income Fund (ETY) -5.64% 7.58%   -1.19   Nuveen S&P 500 Buy-Write Income Fund (BXMX) -9.06% 7.25% 0.43% -1.18   Click to enlarge Closing Remarks And Observations Interestingly, on the low/no leverage screen, we have PSLV and CEF, and focused CEFs show up. These offer no distributions at all, but they do provide indirect physical exposure to the metals. Here is what CEF lists on their website as their objective and goal:  The Sprott Physical Gold and Silver Trust (CEF) is a closed-end trust that invests in unencumbered and fully-allocated physical gold and silver bullion in London Good Delivery bar \"form.\" Provide a secure, convenient, and exchange-traded investment alternative for investors who want to hold physical gold and silver without the inconvenience that is typical of a direct investment in physical bullion.  The no/low leveraged funds also aren't trading at sizeable discounts, and in fact, none of the negative 1-year z-scores in this category suggest there are any really great deals here. At the same time, the average discount of these low/no leveraged funds (those with effective leverage ratios of below 5%) comes to -9.18%. That can be compared with the other 422 CEFs that actually have an average discount narrower at -7.36%. I noted this phenomenon previously that despite the higher rate environment causing headwinds for leveraged funds, no/low leveraged funds still weren't seeing any meaningful difference between their leveraged peers. In fact, they are trading at even wider discounts. One of the reasons for this could be that a good portion of no/low leveraged funds are called writing-focused funds. Those that can tend to limit upside potential in exchange for higher and more regular distributions from collecting option premiums. Aside from the no/low leveraged category, there aren't a lot of deep negative 1-year z-scores in all the CEF lands either. This reflects the fact that discounts have narrowed on a relative basis over the last few months. The only wider 1-year z-scores above PSLV are HFRO and HIX. HFRO recently cut its distribution in half. There are also other issues with that fund to make it relatively less appealing. HIX could be a decent opportunity. The reason for their discount widening was due to a rights offering. We often see rights offerings met with an immediate selloff because they are generally dilutive to the NAV as they often sink to discounts, which leads to shares being sold at discounts to the NAV. There are some exceptions where rights offerings are done at premiums and, therefore, are accretive to the NAV. That has historically been the case with funds like CLM and CRF. CLM and CRF are still trading at premiums, but these premiums have come down substantially more recently. Looking specifically at the PIMCO funds, the average comes to a premium there at 1.61%. There are a couple of notable outliers within this group; the muni funds and, more specifically, the PIMCO Dynamic Income Strategy Fund (PDX) are carrying discounts. PDX changed its name and investment policy last November. However, the fund hasn't really transitioned yet and remains heavily invested in energy equities. I suspect PDX will become less of an outlier and eventually get to a premium similar to its sister funds. I believe to speed the process along would require a monthly distribution that's much higher than it currently is. Overall, in my opinion, there are opportunities in the CEF space. Z-scores have narrowed because the overall relative discounts have been closing. That said, looking back at further historical levels, discounts are still near some of the widest levels - this is particularly true in the muni space. Less so in the taxable fixed income space and the equities, but still opportunities within those categories as well.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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