cancel
Showing results for 
Search instead for 
Did you mean: 
     
Highlighted
Lakeside7
Explorer ○○○

Equity CEFs – Current Picks

Doug Albo, who posts on CEFs at Seeking Alpha, is out with his picks for 2020.  Given the current equity valuations (and CEF P/D valuations are generally historically very high now as well) and the year-ahead prospects for earnings, he is in a defensive mode and has picked all option income funds to the exclusion of those using leverage or no augmentation strategy at all, and none has an appreciable allocation to debt.  Top CEF pick is EOI, an Eaton Vance S&P 500-focused fund; other multi-sector picks are JCE (US) and IGD (global).  Sector picks are BST, an IT sector fund with a large-cap focus and with a relatively-low 30% or so overwrite, and BCX, with an eclectic portfolio in the materials and midstream spaces.   

The world of equity CEFs is a complex one and the divergent opinions on this board over the years have reflected that.  Many, and probably the great majority, of equity CEFs use either leverage or options (and occasionally both) to augment income, and these strategies may not work as well (or, conversely, may work better) in certain market and interest rate cycles.  Also, most such funds have high distribution rates, as they are geared to income distribution, and as such distribute annually most of their capital gains rather than leaving them in the fund to compound; this aspect is of course a relative performance drag.  But it’s also important to assess equity CEFs fairly.  For example, option income, or covered call, funds, which are in a way hedged and defensive, should be benchmarked to other such funds, like similar ETFs, and not to a pure long index like the S&P 500.  Another example: some CEFs regarded as “equity” funds are only mostly equity and contain a material allocation to debt securities; assessing their performance fairly requires a custom benchmark that reflects the fund’s specifics (eg, a 20% allocation to preferreds or to bank loans or to corporate debt).

There are also some other aspects of equity CEF analysis that have bedeviled some over the years, notably in assessing return of capital and the role, if any, that UNII should play.  Getting these factors wrong can cause an investor to overlook or reject a CEF that actually is performing quite well.  

One weak area of CEF discussions either here or at Seeking Alpha is tax considerations of competing investment choices.  Selling single-stock call options, as EOI and the BlackRock CEFs do, seems to have some advantages over selling index options, but a particular disadvantage seems to be that index options make it easier for a fund to manage itself to delivering high amounts of RoC in distributions.  RoC is particularly important to me in maximizing current after-tax income, given that it is tax-deferred (usually) and does not appear in AGI (which, for instance, otherwise limits the deductibility of certain schedule A deductions and serves as the starting point for Medicare MAGI surcharges and my state income tax).  As such, I have a large allocation to certain option index funds with a track record of usually delivering high percentages of RoC: ETY, ETV, ETB, and EXD from EV and QQQX from Nuveen; these vary in their benchmark indexes.  I regard these funds also as having a bond-proxy element; certainly they will fall in a seriously down market, but over long periods I see them as bond-like with an equity upside kicker.   

If RoC was not particularly important to me, or if I was holding in an IRA, and if I wanted a defensive equity income-based CEF, EOI would be worth considering; EOI’s sister fund EOS, which benchmarks to the Russell 1000 Growth index, might be even more appealing if one likes growth over value for the coming year.  Also worth considering would be the single-stock-option, low-to-no RoC BlackRock CEFs CII (S&P 500 with a very modest growth tilt) and its sib BDJ (S&P 500 value tilt).  I hold a modest position now in CII, lower than in the past, and it would be larger now if CII’s prospects for RoC were greater.  

For global equity exposure, Eaton Vance (e.g., EXG) and BlackRock (e.g., BOE) also have some CEFs to consider, which, given their relative track records and shops, I would consider ahead of Doug Albo’s pick IGD from Voya.

I hold BST, from BR, which has been an excellent fund that not only has a nice monthly distribution but has outperformed, in NAV TR, tech ETFs such as the XLK and IYW in recent 3 and 5 year periods.  BST has a global focus, mostly large cap and 70% US.  I also, in recent months, have taken a position in its new sister tech fund BSTZ, which also has a global focus but holds mostly much smaller companies and is only about 55% US.  Given its consistently-growing revenues and expanding margins, IT is still on a roll, and BST and BSTZ are appealing to me.  BSTZ in particular might appeal to those (like me) looking to cautiously increase foreign exposure to a strongly-performing sector via a portfolio with professional management; it distributes 5.7% while trading at a 2.8% discount to NAV.

20 Replies
hardworkindog
Follower ○○

Re: Equity CEFs – Current Picks

I will check these out. How do you feel about HTD?  I just took a pretty big position a few months ago because it has a pretty good history of income and capital gains increases..

0 Kudos
wayoutwest
Participant ○○

Re: Equity CEFs – Current Picks

Appreciate the post, Lakeside7. I actually took a flier on IGD based on Doug Albo's SA article; I bought the turnaround story. As he pointed out, its holdings are virtually identical to IGA (a quarterly payer). I wonder if they will merge at some point.

The way I use equity CEFs is to cover the shortfall between my pension/SS and monthly expenses. Any excess is reinvested back into the CEFs. They currently include UTF, LDP, EXD, HTD, and aforementioned IGD. Not purely common stocks but all tax friendly to one degree or another, held in my taxable account. My debt CEF holdings are 2.5 larger in dollar terms, all in my tax deferred/free accounts.

0 Kudos
Lakeside7
Explorer ○○○

Re: Equity CEFs – Current Picks

HTD is of course a combination CEF with mostly common stock and preferreds.  Last time I looked Hancock had two CEFs, both leveraged, with a partial focus on utilities: (1) HTD, roughly half common stocks (mostly utilities) and half preferreds, and (2) PDT, roughly 2/3 preferreds and 1/3 common stocks (mostly utilities).  Things could be different now.

I am ordinarily not strongly drawn to such combination CEFs, as I usually prefer more focused funds that allow finer tuning of exposure to specific sectors or asset classes.  For example, in infrastructure/utilities with a (somewhat) emphasis on utilities I have held UTG and still do hold UTF, and for preferreds in the past I have held pure preferred CEFs FFC, DFP, JPS, and HPI.  Nevertheless, sometimes combination CEFs like HTD and RNP (REITs + pfds) can trade at greater discounts than either of their components when standing alone, so if one happened to want more exposure to both components such funds can be particularly good deals at the right time.  I held HTD a few years ago when I wanted to increase my exposure to its specific components and when its discount was especially attractive compared to CEFs focused on the specific components in HTD (eg, UTG plus a preferred CEF). 

As you may know, a year ago HTD was Doug Albo’s top pick for 2019.  He has a nice review of the fund here:

https://seekingalpha.com/article/4231056-equity-cefs-top-picks-2019.  Excerpt:

"Both PDT and HTD use a leveraged portfolio of utility stocks and preferred securities to derive their high income.  The major difference is that PDT is slightly heavier weighted in preferred securities (hence why it is a fixed-income based CEF) while HTD is weighted slightly heavier in utility stocks.  There are some other differences between the fund portfolios but there's also a lot of overlap in holdings as well.  So why does PDT trade at a 4.1% premium while HTD [trading at a large discount] has better NAV performance this year (utility stocks have performed better than preferreds) and also has a higher yield?  It doesn't make sense to me.  In fact, if you look at HTD's current 9.1% discount, that is towards the low end of the fund's 5-year Premium/Discount [history]."

I exited most of my exposure to utilities (UTG) and infrastructure (UTF) more broadly, especially in leveraged CEFs, about two years ago when it seemed interest rates were heading higher in a sustained way.  Of course, that move was abruptly reversed last year and utilities zoomed, but I never got back into the space beyond my now-relatively-small holding in UTF.  Utilities seem to be fully-valued right now, if not overvalued, based on current sector P/E compared to its historical range; moreover, cyclicals seem to be the flavor right now among prognosticators in the anticipation of renewed global synchronized growth, and defensives like utilities are not favored (e.g., Credit Suisse and CFRA both have utilities at Underweight for 2020).  But my general sense (not worth betting on) is that utility dividends do not seem threatened (generally), so a new position now may see steady, if not modestly growing, dividends over time but with some intermediate-term stock price risk (which may not be a problem for dividend-oriented holders with a longer time frame). 

Global infrastructure, which includes utilities, is a broader category to consider, given both the broader group of stocks and foreign exposure where valuations are lower than in the US, and the leveraged CEF UTF has in the past been an index (IGF)-beating way (in NAV total return) to get exposure to that sector.  UTF and UTG have been two of the most popular (if not the two most popular) equity CEFs, for very good reason, on this board over the past many years.

0 Kudos
steelpony10
Participant ○○

Re: Equity CEFs – Current Picks

        I’ll add RQI.

0 Kudos
chang
Valued Contributor

Re: Equity CEFs – Current Picks

Isn’t it odd that BST is over five years old with $800m in assets, but BSTZ is 7 months old with $1.5 billion in assets? How does that happen?

0 Kudos
JRinNY
Participant ○

Re: Equity CEFs – Current Picks


@chang wrote:

Isn’t it odd that BST is over five years old with $800m in assets, but BSTZ is 7 months old with $1.5 billion in assets? How does that happen?


These are not open end funds, so the longevity (or, rather, age) doesn't matter.  They come to market in an Initial Public Offering on a certain date, which fixes the number of shares -- works just like a stock IPO - supply adjusts to the demand leading to the IPO date.  Since Blackrock salesforce had a successful BST trading at a premium to parade, and the market environment in 2019 was conducive to gobbling up any risk, BSTZ was an even easier sell.  Plus the fund allocates 20% to private/ unlisted offerings.  BTW, they have BMEZ waiting in the wings for 1/28 - another IPO (Health Sciences Trust II).

JR

Foghorn
Follower ○○○

Re: Equity CEFs – Current Picks

Thanks for the post, I have some cash I need to put to work and this post gave me some options to dig into. And it is refreshing to see all these replies and not one mention of any Pimco fund. 

0 Kudos
JRinNY
Participant ○

Re: Equity CEFs – Current Picks


@Foghorn wrote:

Thanks for the post, I have some cash I need to put to work and this post gave me some options to dig into. And it is refreshing to see all these replies and not one mention of any Pimco fund. 

 


Pimco is known for its fixed income. Equity is usually an overlay strategy. They currently have NRGX, a fairly new energy offering that is still fairly priced (due to unloved sector) that one might find interesting.  

0 Kudos
outandabout
Contributor ○

Re: Equity CEFs – Current Picks


@JRinNY wrote:

@Foghorn wrote:

Thanks for the post, I have some cash I need to put to work and this post gave me some options to dig into. And it is refreshing to see all these replies and not one mention of any Pimco fund. 

 


Pimco is known for its fixed income. Equity is usually an overlay strategy. They currently have NRGX, a fairly new energy offering that is still fairly priced (due to unloved sector) that one might find interesting.  


I purchased NRGX just after Christmas. Up nicely since purchase. Nice dividend!

I had held shares of above earlier, but sold after purchasing shortly after the initial offering.

Take care

0 Kudos
Anitya
Explorer ○○○

Re: Equity CEFs – Current Picks

Nrgx, which I own, is trading almost at par.  If one is interested in this sector, is it better to go with a pure equity CEF or NRGX  which is a mixture of debt and equity?   Most pure equity CEFs in this space are still at good discounts, but they are not PIMCO brand!  I think in terms of covering distributions a pure equity CEF will have to rely on cap gains.

0 Kudos
aubergine
Participant ○○○

Re: Equity CEFs – Current Picks

It's pretty hard to recommend any equity CEFs.  But if someone put a gun to my head and forced me to choose some I'd offer  these names

SPE (does things not replicable in ETFs)

DEX (need to pay attention to voluntary corp actions)

SCD (too rich I think at this instant, has charms for both taxable and deferred accounts)

JRI (reasonable blend of equity like risk, at a tolerable volatility.  big fear would be rising rates)

LGI (vaguely differentiated, and perhaps some discount timing could amplify returns)

CET (Plymouth Rock is a gem and mgmt deserves credit for not blowing it by selling too much)

marymary
Explorer ○○

Re: Equity CEFs – Current Picks

I have meant since this thread was started to say a big thanks to you Lakeside!  A few years ago when I first became interested in cefs I started reading this forum and your holding/explaining the ins and outs of equity cefs, in particular the option income funds.  I agree it's not an area many on here appreciate as bonds/debt are more popular.  However after much studying and reading I bought into some and I have done really well with them.  Love them particularly in my taxable account.  Big smile when I see my year end statement with total income and the much lesser amount that is taxable!

  Doug Albo is one of the few authors on SA that writes on equity cefs unfortunately. I copy/pasted to word an article he wrote three or four years ago on equity cefs in general that's one of the best I've ever read.  So common sense and understandable.

0 Kudos
retiredat48
Participant ○○○

Re: Equity CEFs – Current Picks


@marymary wrote:

I have meant since this thread was started to say a big thanks to you Lakeside!  A few years ago when I first became interested in cefs I started reading this forum and your holding/explaining the ins and outs of equity cefs, in particular the option income funds.  

 

 


+1

R48

0 Kudos
Sheryldell
Participant ○

Re: Equity CEFs – Current Picks

@marymary 

Is the article you referenced above by Doug Albo available anywhere?

If not, can you post it?

0 Kudos
Lakeside7
Explorer ○○○

Re: Equity CEFs – Current Picks

There's a link to the Albo article in the first line of my opening post.

0 Kudos
judger
Explorer ○○

Re: Equity CEFs – Current Picks


@marymary wrote:

I have meant since this thread was started to say a big thanks to you Lakeside!  A few years ago when I first became interested in cefs I started reading this forum and your holding/explaining the ins and outs of equity cefs, in particular the option income funds.  I agree it's not an area many on here appreciate as bonds/debt are more popular.  However after much studying and reading I bought into some and I have done really well with them.  Love them particularly in my taxable account.  Big smile when I see my year end statement with total income and the much lesser amount that is taxable!

  Doug Albo is one of the few authors on SA that writes on equity cefs unfortunately. I copy/pasted to word an article he wrote three or four years ago on equity cefs in general that's one of the best I've ever read.  So common sense and understandable.


A newbie at CEF's in 2019 myself, Mary. Do you have a link to that article?

PS: Reading posts sequentially. Found the answer below. Thank you.

Ooops! I don't think the post LS mentions is the historical you mention. Would still like a link.

0 Kudos
ECEPROF
Participant ○

Re: Equity CEFs – Current Picks


@judger wrote:


A newbie at CEF's in 2019 myself, Mary. Do you have a link to that article?


Judger

I think that this is the article.

But, I am not sure if this is the one because it is about 2019.

I found another one.

He runs a fee based service.

 

0 Kudos
marymary
Explorer ○○

Re: Equity CEFs – Current Picks

One of the articles I referred to is a copy/paste into Microsoft Word which unfortunately I have no way to share.  I dislike how SA has put up their paywall and so many articles I used to bookmark I could no longer get to so now I copy/paste into a word document articles I particularly want to be able to reference.

But I do have a link to another particularly good article he wrote that the link still works https://seekingalpha.com/article/1068501-equity-cefs-9-percent-tax-exempt-yields-being-given-away-th....  Even though the article was written December 2012,  his basic rules remain valid.  I'll look through my folder tomorrow and see if I find another I can link.

0 Kudos
ECEPROF
Participant ○

Re: Equity CEFs – Current Picks

"Microsoft Word which unfortunately I have no way to share.."

Yes, anyone can do it. The process is to use Google drive. I have posted some data and charts here using the links Google generates for those files. Here is the process.

1.  Get  a Google account, if you do not have one. Essentially, sign up for the G-mail account. All others are linked to this G-mail account. I even use paid services, such as Youtube TV, Goggle Voice account tied to my G-mail account.

2. You get a free Google drive of 15 GB space and humpty of other free stuff. You can find out those on your own.

3. Upload the Microsoft Word document (yes, you can upload word document). It may convert to Google document. It is ok because all the features will still be there.

4. By right clicking on the document (uploaded file), you will see an option for sharing with a link.

5. Copy the link and paste it. Everyone here can read the document.

While I writing this post, I am listening in Google play music (where I can store 50,000 songs for free) through the internet and Bluetooth headset. I use a lot of Google's free stuff. I have Google Voice Phone number and I can call anyone in Canada and US for free through internet. I have saved a lot of good quality pictures in Google Photos. Last week, I found out that you can scan old pictures using Google scan and save them in the digital format. I can go on and on. Enough for now.

However, I want you to know that Google tracks most of your activities, most of them harmless. But, if you don't want the tracking, do not do any of the above.

 

 

 

0 Kudos
Announcements

To learn more about the recent changes to Morningstar.com, please see the updated FAQ.

See recent posts and all our forums or access the old forums here.
 

You can read the community guidelines in