This week’s Five for Friday report screens for fixed income Closed-End Mutual Funds (CEFs). For more details on what a CEF is and why they might present an excellent opportunity if bond yields decline, we share our recent article- Bond Bull Market Coming? Take The Road Less Traveled.
We summarize the article as follows:
“There are always opportunities in markets. Sometimes they are obvious and well followed by the public. Other times they lurk in underfollowed markets. We believe we are approaching a period in which bond yields will fall. While a typical investment in bonds, bond funds, or ETFs will prove valuable in such an event, CEFs can do even better.
Steep discounts to NAV and leverage separate CEFs from other fixed-income alternatives. While more volatile and riskier, they can also be more rewarding.”
This week’s screen seeks fixed income CEFs, holding predominately investment-grade debt, employing leverage, and trading at relatively deep discounts to their respective NAV. This week we present six securities instead of five as we want to provide a wider selection of funds.
As you will see below, the funds have all traded poorly over the last few months. This is due to higher yields and increasing discounts to the funds’ respective NAVs. While the graphs may look ugly, they also speak to the potential opportunities when yields start falling and the discounts to NAV normalize.
Fixed Income Fund- Predominately Investment Grade: Including Corporates, Treasuries, Asset and Mortgage-Backed Securities, and Municipal Bonds.
Leverage >25% and <50%
Discount to NAV -5% or more
1-year Average Discount/Premium >0%
1-year Z-score of Discount <-1
Monthly Coupon Payments
Expense Ratio <1.50%
Age of Fund >10 years
Blackrock – BBN
BBN currently trades at a 6.22% discount to NAV. Over the last 10 years it has traded as high as +6% and slightly below -10%. Its discount is currently over 4 standard deviations below average. The fund holds less than 10% in non-investment grade holdings. It predominately invests in municipal bonds with 15-30 year maturities.
Nuveen – NBB
Other than a brief period in 2018, when the discount exceeded -8%, its current discount of -6.8% is the lowest in five years. 20% of NBB’s holdings are not rated and less than 5% are below investment grade. The fund holds taxable municipal bonds with an average maturity of about 20 years.
BlackRock – BHK
Since 2001 BHK has traded at a 10% discount on numerous occasions. As such it potentially has approximately 2% of downside if it revisits -10%. The fund is a hybrid fund holding a wide variety of bond classes including corporate, government, and securitized bonds.
Putnam – PMM
The fund’s discount to NAV has traded as low as -15% which leaves about 8% downside if it were to revisit similar levels. In late 2021 it traded with a 7% premium. 30% of its holdings are not rated and less than 15% are below investment grade. PMM predominately has municipal bonds with 20+ year maturities.
BlackRock – BKT
The fund’s premium in late summer of 2021 approached 10% and has since fallen rapidly. The graph below shows the effect on its price. A large portion of the fund’s holdings is in AAA-rated mortgage-backed securities.
Nuveen – NEV
The fund trades at a -7.76% discount to its NAV which is near its ten-year low discount of -11%. In March of 2021, it peaked with a premium of 9%. Year to date the fund is down 8.4% due to the growing discount as well as higher yields. Its prior worst year was in 2018 when the Fed was raising rates and embarking on QT. It returned -4.28% that year but followed it up in 2019 with a 21% return.
Five for Friday
Five for Friday uses stock screens to produce five stocks that we expect will outperform if a particular investment theme plays out in the future. Investment themes may be relevant to the current or expected market, industry and/or economic trends. Investment themes may not always represent our current forecast.
This report is not a recommendation to buy or sell the named securities. We intend to elicit ideas about stocks meeting specific criteria and investment themes. Please read our disclosures carefully and do your own research before investing.
Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research.
Follow Michael on Twitter or go to 720global.com for more research and analysis.
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