5 Closed-End Fund Buys (And 2 Sells) In The Month Of June 2024

phototechno Every month, I do some buying to build up my monthly cash flow. June 2024 was really no different but I did sell two positions this month as well as adding or initiating five other positions. While I put money to work every month, I also have been letting cash build up because the market has been pushing new highs. It really is mostly the mega-cap tech names driving this push higher, with participation being fairly narrow. We can see that when comparing performance with something like the SPDR S&P 500 ETF (SPY) and the Invesco S&P 500 Equal Weight ETF (RSP). YCharts That said, if we do get some volatility, generally, we can see weakness in closed-end funds as their discounts widen. Discounts in the CEF space overall are still rather wide in comparison to where they have been when going back to 1996—but at the same time, they have been narrowing this year from where we had been at the end of last year. Overall CEF Discount/Premium (RiverNorth) Wider relative discounts can be appropriate as CEFs become less attractive in a higher-rate environment. The majority of these investment wrappers also employ leverage when investing, and those costs have exploded. Many funds have hedged their borrowings, but those hedges will eventually end. Unless we get back to a zero-rate environment, we likely won’t get to see those 1% to 2% or even less borrowing rates that some of these funds were enjoying. Further, CEFs are generally going to be seen as income-oriented investments as they pay higher distributions. They pay higher distributions because they use the added benefit of leverage in some cases or also because they combine their payouts from sources of income, capital gains and/or return of capital. A CEF can essentially pay out whatever they’d like as long as they have the net assets and they don’t go to $0. In other words, they can pay out what they’d like whether it is actually earned or not is another question. Therefore, with cash now being able to earn ~5%, letting some cash build up doesn’t really hurt. Interest rates are expected to be cut in the next year or two, so that might not last for too much longer. However, unless we go back to a zero-rate environment, cash is still likely to earn something going forward. Adams Diversified Equity Fund (ADX) Throughout the month I had added to my position in ADX in anticipation of taking advantage of the tender offer previously discussed in more detail. I wanted to add even more than I have been, but with the market continuing to climb higher, I was also trying to be more reserved. This is a straight equity fund, which correlates very closely with the S&P 500 Index. As the market goes, so will ADX, which means the tactical move of participating in the upcoming tender offer will work out best if the market keeps climbing. The strategy will also work if the market remains flat or if we only experience a minor dip. Any more meaningful pullback in broader equities and this play could result in losses. abrdn Global Infrastructure Income Fund (ASGI) I also ended up adding to my ASGI position this month; this came on the back of selling out of NXG NextGen Infrastructure Income Fund (NXG). Early in June I had written an update on NXG, in which I believed the fund was primed to launch a rights offering. Shares happened to move higher that day, pushing the discount to narrow, so I took the opportunity to sell. Then, on June 10th, they announced the anticipated RO. In general, NXG was responding to how it initially goes with rights offerings. That is, the price takes a dip, then the ex-rights date comes, and the price takes a further hit. Throughout the rights offering period, there is generally negative price pressure in anticipation of the expected dilutive hit to the net asset value. If the fund can move to a high enough premium, that dilution could turn accretive—though that is rather rare to have happen. In the case of NXG, the RO expiration is on July 17. At that point, I’d consider taking a look at potentially adding NXG back to my portfolio. There are a lot of variables to this, of course, and history doesn’t guarantee the future—which this offering might be one of those exceptions. After NXG sold off initially and followed the general pattern that frequently happens, it has started to recover and the fund’s discount has started to narrow once again. YCharts Either way, I won’t lose sleep over this if NXG never gets back into my portfolio again. I took the proceeds from my NXG position and put more to work in ASGI. NXG is a more energy-heavy infrastructure fund compared to ASGI, which actually leans more into the industrial infrastructure space. So, I wouldn’t see them as direct competitors but more complements to provide broader exposure. ASGI, similar to NXG, has been tinkering around with a higher distribution rate. That was bumped up significantly to a 12% NAV average recently after they gave a 9% average NAV target to start off the year. ASGI Distribution History (CEFConnect) I believe this will lead to a decline in NAV if this managed distribution policy is in place over the long term. I think there is a good chance of a significant recovery in the utility/infrastructure space with rate cuts, but 12% plus the fund’s expense ratio is a hard target to achieve year after year. Since it will be adjusted to the 12% average NAV, that means it can be a bit naturally self-correcting in that potential NAV erosion can be slowed down. Additionally, just because I expect the fund’s NAV to struggle long-term does not mean that it can’t perform respectably in terms of providing meaningful total returns. This move also helped to narrow the discount materially, as a higher distribution rate often does. So that was certainly an upside move that I benefitted from. YCharts With this fund’s discount narrowing as well, it is on watch for divestment. Should it push into premium territory, it would be a sell for me, and I’d assess at that time where to potentially put that capital. Flaherty & Crumrine Total Return Fund (FLC) I added to my FLC position this month and covered this fund more recently, along with the Cohen & Steers Tax-Advantaged Preferred Securities and Income Fund (PTA). Earlier in January of this year, I had initiated a position in FLC as a swap from Flaherty & Crumrine Dynamic Preferred and Income Fund (DFP). The general idea is that the fund is trading at a historically wide discount as interest rates increasing put significant pressure on this fund. The fund wasn’t hedged with interest rate swaps, so they saw their borrowing costs explode with nothing to protect them from that headwind—that is unlike PTA, where they had most of their leverage costs hedged with interest rate swaps. Nuveen AMT-Free Municipal Value Fund (NUW) NUW is similar to FLC, and those who have read through my monthly pieces will know this is just a continuation of the last year or so between adding NUW and Western Asset Investment Grade Income Fund (PAI). I alternative between adding these two every month as a more conservative way to play the potential future rate cuts. Neither of these funds are leveraged meaning they shouldn’t really see quite the same upside potential as something like FLC. Eagle Point Income Co (EIC) Another move I made this month was bringing EIC back into my portfolio after selling it quite a while ago. This came as I sold off my position in OFS Credit Company (OCCI). OCCI was in my portfolio for only a relatively short period of time; I initially bought OCCI shares on December 13, 2023, and sold them on June 25 this year. This turned out to be a great ride as the fund went from trading at a large discount to NAV to a premium, similar to where the CLO CEFs generally trade regularly. These funds provide NAV updates monthly, so it isn’t an exact discount/premium that we can see every day like for other CEFs. That said, we can see the general idea from the chart below. YCharts I can’t take all the credit for this move, though, as it was Stanford Chemist’s trade alert that put OCCI back on my radar late last year. In fact, credit goes to him for putting EIC back on my radar again with another trade alert. During the period of holding OCCI, this is what happened from a total return perspective. I also included EIC as well for some context and also notably how different the performance between OCCI and EIC was in terms of total NAV returns. YCharts OCCI might not be a bad fund for investors looking for income, but I was just looking to bank my sizeable profits. Given it was roughly holding the fund for six months, that would annual out to over 40% returns. Of course, that assumes the fund would continue running along the same trajectory. The chances of the fund performing that well over the next six months are quite slim as the discount moving to a premium was the ‘easy gain.’ Now, the fund likely has to actually perform well in terms of its underlying portfolio. It’s not something that is impossible, just improbable. EIC is indeed more focused on CLO debt tranches—particularly BB-rated CLO debt—compared to OCCI’s heavier CLO equity allocation. OCCI Vs. EIC Portfolio Breakdown (Fund Material) However, seeing a comparison against its CLO equity peers, Eagle Point Credit Co (ECC) and Oxford Lane Capital Corp (OXLC), this clearly wasn’t the problem. OCCI has just been struggling to keep up with its peers over the last year. YCharts EIC isn’t necessarily at any sort of particularly massive valuation differential compared to OCCI. The yield itself was also quite similar, making it an easy transition as cash flow wasn’t going to be taking a hit. CLO CEF Watchlist (CEF/ETF Income Laboratory) A final point: it also works out that being more CLO debt-focused should translate into EIC being relatively safer. As “safe” as you can be in what is sometimes a volatile area of the market, with CEFs adding leverage on top of, then also adding in the discount/premium mechanic of these funds.

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