For income investors, closed-end funds, or CEFs, are an attractive investment class that offers high income (generally in the range of 6%-10%), broad diversification (in terms of variety of asset classes), and market matching total returns in the long term if selected carefully and acquired at reasonable price points.

However, CEFs come with their own set of risks and challenges that investors should be aware of. We list various risk factors at the end of this article.

The broader market rally has continued into 2020. Following the market trend, closed-end funds, in general, have performed very well in the last year. However, this also means that most CEF funds are quite expensive today. Discounts are much smaller than usual, and yields are less than what they were a year ago. This makes any new investment decisions even harder to make. But at the same time, as income investors, we cannot afford to sit on a lot of cash. So we continue to be on the lookout for good investment candidates that have a solid track record, offer good yields, and are attractively priced.

For regular stocks, there are several popular metrics that we could use to figure out if the stock was overvalued or undervalued at a given time, though it’s not easy by any means. But it’s even harder to figure out which CEF funds to invest in and if they are attractive buys at a given point in time. Moreover, a CEF fund usually holds a large number of securities, which makes it difficult to analyze the quality of the fund. This series of articles attempts to separate the wheat from the chaff by applying a broad-based screening process to the 500 CEF funds, followed by an eight-criteria weighting system. In the end, we are presented with about 30 most attractive funds to select the best five.

This is our regular series on CEFs where we highlight five CEFs that are relatively cheap, offer “excess” discounts to their NAVs, pay reasonably high distributions, and have a solid track record. We also write a monthly series to identify “5 Safe and Cheap DGI” stocks. You can read our most recent such article here.

We use our multi-step filtering process to select just five CEFs from around 500 available funds.

The selected five CEFs this month, as a group, are offering an average distribution rate of 7.01% and an excess discount/premium of -1.92% (compared to 52-week average). Besides, these five funds have collectively returned 11.60%, 9.09%, and 11.12% in the last three, five, and 10 years. Since this is a monthly series, there may be some selections that could overlap from month to month.

Please note that these are not recommendations to buy but should be considered as a starting point for further research.

Author’s Note: This article is part of our monthly series that tries to discover five best buys in the CEF arena at that point in time. Certain parts of the introduction, definitions, and the section describing selection criteria/process may have some commonality and repetitiveness with our other articles in the series. This is unavoidable as well as intentional to keep the entire series consistent and easy to follow for the new readers.

Goals for the Selection Process

Our goals are simple and are aligned with most conservative income investors, including retirees who wish to dabble in CEFs. We want to shortlist five closed-end funds that are relatively cheap, offering good discounts to their NAVs, paying relatively high distributions, and have a solid and substantial past track record in maintaining and growing their NAVs. Please note that we are not necessarily going for the cheapest funds (in terms of discounts or highest yields), but we also require our funds to stand out qualitatively. We adopt a systematic approach to filter down the 500-plus funds into a small subset.

Here’s a summary of our primary goals:

  • Reasonably high income/distributions.
  • High long-term performance in terms of total return on NAV: We also try to measure if there has been an excess NAV return over and above the distribution rate.
  • Cheaper valuation at the time of buy, determined by the absolute discount to NAV and the “excess” discount offered compared to their history.
  • Coverage ratio: We try to measure to what extent the income generated by the fund covers the distribution. Not all CEFs fully cover the distribution, especially the equity, and specialty funds, as they depend on the capital gains to cover their distribution. We adjust this weight according to the type of fund.

We believe that a well-diversified CEF portfolio should at least consist of 10 CEFs or more, preferably from different asset classes. It’s also advisable to build the portfolio over a period rather than invest in one lump sum. If you were to invest in one CEF every month, in a year, you would have a well-diversified CEF portfolio. What we provide here every month is a list of five probable candidates for further research. We think a CEF portfolio can be an important component in the overall portfolio strategy. One should preferably have a DGI portfolio as the foundation, and the CEF portfolio could be used to boost the income level to the desired level. How much should one allocate to CEFs? Each investor needs to answer this question himself/herself based on the personal situation and factors like the size of the portfolio, income needs, risk appetite, or risk tolerance.

Selection Process

We have more than 500 CEF funds to choose from, which come from different asset classes like equity, preferred stocks, mortgage bonds, government and corporate bonds, energy MLPs, utilities, and municipal income. Just like in other life situations, even though the broader choice always is good, it does make it more difficult to make a final selection. The first thing we want to do is to shorten this list of 500 CEFs to a more manageable subset of around 100 funds. We can apply some criteria to shorten our list, but the criteria need to be broad and loose enough at this stage to keep all the potentially good candidates. Also, the criteria that we build should revolve around our original goals. One important change we made recently from our past practice is that we now demand only a five-year history instead of a 10-year history. With this change, we are able to include many more CEFs that still have a good history and a chance to be excellent income providers in the coming years. However, wherever possible, we assign and include the weight for 10-year NAV performance/ return.

Criteria to Shortlist:

Criteria

Brings down the number of funds to…

Reason for the Criteria

Baseline expense < 2.5% and Avg. Daily Volume > 100,000

Approx. 435 Funds

We do not want funds that charge excessive fees. Also, we want funds that have fair liquidity.

Market-capitalization > 100 Million

Approx. 400 Funds

We do not want funds that are too small.

Track record/ History longer than five years (inception date 2014 or earlier)

Approx. 375 Funds

We want funds that have a reasonably long track record.

UNII* Balance > -$3.00

Approx. 370 Funds

A large UNII (Undistributed Net Investment Income) negative balance would indicate the fund is having problems paying its distributions.

Discount/Premium < +6%

Approx. 335 Funds

We do not want to pay too high a premium; in fact, we want bigger discounts.

Distribution (dividend) Rate > 5%

Approx. 220-240 Funds

The current distribution (income) to be reasonably high.

5-Year Annualized Return on NAV > 0% AND

3-Year Annualized Return on NAV >0%

Approx. 200 Funds

We want funds that have a reasonably good past track record in maintaining their NAVs.

After we applied the above criteria this month, we were left with 206 funds in our list, which is still way too long to present here or meaningfully select five funds.

Note: Most of the data in this article is sourced from Cefconnect.com, Cefa.com, and Morningstar.com.

Narrowing Down to 50 Funds

To bring down the number of funds to a more manageable number, we will shortlist 10 funds based on each of the following criteria. After that, we will apply certain qualitative criteria on each fund and rank them to select the top five.

Six broad criteria:

  • Discount to NAV.
  • Excess Discount/Premium (explained below).
  • Distribution rate.
  • Return on NAV, last five years (long term).
  • Return on NAV, last three years (medium term).
  • Coverage ratio.

Discount to NAV:

We sort our list (of 206 funds) on the discount/premium in descending order since we want to buy when we are offered the largest discount. For this criterion, the lower the value, the better it is. So, we select the top 10 funds (most negative values) from this sorted list.

(All data as of 02/14/2020)

Ticker

Name

Sector

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Discount

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Date

Distrib. Coverage

HGLB

Highland Global Allocation Fund

Global Allocation

42.61%

2.00%

11.29%

-21.09%

-1.50%

-19.59%

-4.22%

-2.35%

1/5/1998

44.23%

RIF

RMR Real Estate Income Fund

Real Estate

27.80%

1.83%

5.92%

-16.32%

3.68%

-20.00%

8.10%

5.97%

12/18/2003

83.86%

DNI

Dividend and Income Fund

US Allocation

0.00%

1.34%

7.50%

-15.85%

5.40%

-21.25%

8.58%

6.36%

6/29/1998

16.36%

NHF

NexPoint Strategic Opportunities Fund

US Allocation

20.18%

1.23%

13.60%

-14.57%

0.73%

-15.30%

4.13%

2.27%

6/29/2006

17.15%

SMM

Salient Midstream & MLP Fund

MLP

20.70%

2.19%

9.43%

-14.20%

1.09%

-15.29%

-11.14%

-12.69%

5/25/2012

93.89%

KMF

Kayne Anderson Midstream Energy Fund

MLP

32.92%

2.82%

8.69%

-13.01%

0.54%

-13.55%

-6.40%

-11.74%

11/24/2010

89.93%

TDF

Templeton Dragon

Asia Equity

0.17%

1.31%

14.55%

-12.81%

-1.42%

-11.39%

10.25%

6.17%

9/8/1994

19.75%

CEE

The Central and Eastern Europe Fund

Emerging Market Equity

0.61%

0.70%

5.38%

-12.14%

0.77%

-12.91%

12.11%

10.51%

3/6/1990

87.05%

MXF

Mexico Fund

Emerging Market Equity

1.61%

6.96%

-11.58%

0.79%

-12.37%

3.54%

-0.61%

6/3/1981

40.74%

IFN

The India Fund Inc

Asia Equity

0.28%

1.32%

11.17%

-10.91%

-0.73%

-10.18%

9.80%

4.02%

2/23/1994

0.00%

Excess Discount/Premium:

We certainly like funds that are offering large discounts (not premiums) to their NAVs. But sometimes we may consider paying near zero or a small premium if the fund is great otherwise. So, what’s important is to see the “excess discount/premium” and may not be the absolute value. We want to see the discount (or premium) on a relative basis to their record, say 52-week average.

By subtracting the 52-week average discount/premium from the current discount/premium will give us the excess discount/premium. For example, if the fund has the current discount of -5%, but the 52-week average was +1.5% (premium), the excess discount/premium would be -6.5%.

  • Excess Discount/Premium = Current Discount/Premium (Minus) 52-Week Avg. Discount/ Premium

So, what’s the difference between the 12-month Z-score and this measurement of Excess Discount/Premium? The two measurements are quite similar, maybe with a subtle difference. The 12-month Z-score would indicate how expensive (or cheap) the CEF is in comparison to the 12 months. Z-score also takes into account the standard deviation of the discount/premium. Our measurement (excess discount/premium) compares the current valuation with the last 12-month average.

We sort our list (of 206 funds) on the “excess discount/premium” in descending order. For this criterion, the lower the value, the better it is. So, we select the top 10 funds (most negative values) from this sorted list.

Ticker

Name

Sector

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Discount

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Date

Distrib. Coverage

RQI

Cohen & Steers Qual Inc Realty

Real Estate

21.01%

1.32%

6.67%

-9.15%

-6.59%

-2.56%

11.74%

8.32%

2/28/2002

31.38%

BUI

BlackRock Util, Infra & Power Opp

Sector Equity

0.12%

1.10%

6.29%

1.09%

-5.06%

6.15%

11.86%

7.31%

11/23/2011

35.40%

TYG

Tortoise Energy Infrastructure Corp.

MLP

41.51%

2.00%

15.58%

-5.98%

-3.17%

-2.81%

-8.29%

-8.99%

2/27/2004

94.05%

ETO

Eaton Vance Tax-Advantaged Glbl Div Opp

Global Allocation

23.03%

1.26%

8.10%

2.07%

-3.16%

5.23%

13.50%

10.53%

4/30/2004

20.62%

GGT

Gabelli Multimedia

Sector Equity

25.98%

1.59%

10.78%

1.24%

-2.81%

4.05%

6.54%

6.32%

11/15/1994

0.00%

NTG

Tortoise Midstream Energy Fund

MLP

40.24%

2.00%

16.87%

-7.65%

-2.46%

-5.19%

-9.51%

-8.24%

7/27/2010

89.66%

HPF

JHancock Preferred Income II

Preferreds

33.83%

1.27%

6.52%

4.08%

-2.24%

6.32%

8.85%

7.74%

11/29/2002

83.37%

ETV

Eaton Vance Tax-Managed Buy-Write Opp

Covered Call

1.14%

8.72%

2.42%

-2.14%

4.56%

10.40%

9.56%

6/27/2005

7.18%

UTF

Cohen & Steers Infrastructure

Sector Equity

25.52%

1.39%

6.76%

-5.33%

-2.07%

-3.26%

16.24%

9.78%

3/30/2004

33.29%

BST

BlackRock Science and Technology Trust

Sector Equity

0.13%

1.08%

5.61%

0.57%

-2.00%

2.57%

24.91%

19.87%

10/29/2014

0.00%

High Current Distribution Rate:

After all, most investors invest in CEF funds for their juicy distributions. We sort our list (of 206 funds) on the current distribution rate (descending order) and select the top 10 funds from this sorted list.

Ticker

Name

Sector

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Discount

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Date

Distrib. Coverage

FMO

Fiduciary-Claymore Energy Infrastructure

MLP

39.17%

1.69%

17.80%

-7.04%

-0.57%

-6.47%

-9.25%

-9.79%

12/28/2004

0.00%

NTG

Tortoise Midstream Energy Fund

MLP

40.24%

2.00%

16.87%

-7.65%

-2.46%

-5.19%

-9.51%

-8.24%

7/27/2010

89.66%

GER

Goldman Sachs MLP and Energy Rena. Fund

MLP

42.25%

1.62%

16.41%

-5.80%

1.19%

-6.99%

-12.86%

-12.81%

9/26/2014

0.00%

TYG

Tortoise Energy Infrastructure Corp.

MLP

41.51%

2.00%

15.58%

-5.98%

-3.17%

-2.81%

-8.29%

-8.99%

2/27/2004

94.05%

GMZ

Goldman Sachs MLP Income Opps Fund

MLP

42.35%

1.66%

14.61%

-0.17%

4.74%

-4.91%

-13.04%

-11.80%

11/26/2013

0.00%

TDF

Templeton Dragon

Asia Equity

0.17%

1.31%

14.55%

-12.81%

-1.42%

-11.39%

10.25%

6.17%

9/8/1994

19.75%

JQC

Nuveen Credit Strategies Income Fund

Senior Loans

38.92%

1.34%

14.55%

-5.36%

3.47%

-8.83%

4.23%

3.87%

6/25/2003

43.17%

GGN

GAMCO Global Gold Natural Resources&Inc

Sector Equity

13.20%

1.35%

14.22%

3.43%

1.80%

1.63%

1.17%

0.55%

3/29/2005

9.90%

NHF

NexPoint Strategic Opportunities Fund

US Allocation

20.18%

1.23%

13.60%

-14.57%

0.73%

-15.30%

4.13%

2.27%

6/29/2006

17.15%

JMF

Nuveen Energy MLP Total Return Fund

MLP

33.58%

1.61%

13.07%

-2.77%

3.00%

-5.77%

-10.08%

-9.04%

2/24/2011

0.00%

Five-Year Annualized Return on NAV

We then sort our list (of 206 funds) on the five-year return on NAV (on descending order) and select the top 10 funds.

Ticker

Name

Sector

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Discount

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Date

Distrib. Coverage

BST

BlackRock Science and Technology Trust

Sector Equity

0.13%

1.08%

5.61%

0.57%

-2.00%

2.57%

24.91%

19.87%

10/29/2014

0.00%

STK

Columbia Seligman Premium Technology Gr

Covered Call

1.16%

7.48%

2.23%

0.16%

2.07%

19.63%

18.16%

11/25/2009

0.69%

ASG

Liberty All-Star Growth

US Equity

0.62%

1.28%

8.00%

-1.96%

-1.07%

-0.89%

17.56%

13.50%

3/14/1986

0.00%

BTO

JHancock Financial Opportunities

Sector Equity

16.07%

1.62%

6.24%

1.00%

2.39%

-1.39%

4.23%

13.11%

8/18/1994

23.94%

EOS

Eaton Vance Enhanced Equity Income II

Covered Call

1.09%

6.31%

1.46%

0.09%

1.37%

15.23%

12.13%

1/26/2005

0.00%

QQQX

Nuveen NASDAQ 100 Dynamic Overwrite

Covered Call

0.92%

6.22%

-0.71%

-0.34%

-0.37%

13.98%

11.88%

1/30/2007

3.73%

CSQ

Calamos Strategic Total Return

US Allocation

29.16%

1.53%

7.71%

0.98%

1.74%

-0.76%

13.84%

11.78%

3/26/2004

14.85%

EVT

Eaton Vance Tax Advantaged Dividend Inc

US Allocation

18.92%

0.19%

6.62%

0.65%

0.88%

-0.23%

12.75%

10.70%

9/30/2003

33.54%

ETO

Eaton Vance Tax-Advantaged Glbl Div Opp

Global Allocation

23.03%

1.26%

8.10%

2.07%

-3.16%

5.23%

13.50%

10.53%

4/30/2004

20.62%

CEE

The Central and Eastern Europe Fund

Emerging Market Equity

0.61%

0.70%

5.38%

-12.14%

0.77%

-12.91%

12.11%

10.51%

3/6/1990

87.05%

Medium Term Return on NAV (last 3-years)

We then sort our list (of 206 funds) on 3-year return on NAV (on descending order) and select the top 10 funds.

Ticker

Name

Sector

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Discount

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Date

Distrib. Coverage

BST

BlackRock Science and Technology Trust

Sector Equity

0.13%

1.08%

5.61%

0.57%

-2.00%

2.57%

24.91%

19.87%

10/29/2014

0.00%

STK

Columbia Seligman Premium Technology Gr

Covered Call

1.16%

7.48%

2.23%

0.16%

2.07%

19.63%

18.16%

11/25/2009

0.69%

ASG

Liberty All-Star Growth

US Equity

0.62%

1.28%

8.00%

-1.96%

-1.07%

-0.89%

17.56%

13.50%

3/14/1986

0.00%

UTF

Cohen & Steers Infrastructure

Sector Equity

25.52%

1.39%

6.76%

-5.33%

-2.07%

-3.26%

16.24%

9.78%

3/30/2004

33.29%

EOS

Eaton Vance Enhanced Equity Income II

Covered Call

1.09%

6.31%

1.46%

0.09%

1.37%

15.23%

12.13%

1/26/2005

0.00%

BME

BlackRock Health Sciences

Sector Equity

0.03%

1.11%

5.49%

4.10%

1.74%

2.36%

15.06%

10.09%

3/28/2005

4.45%

PGZ

Principal Real Estate Income Fund

Real Estate

27.05%

2.08%

6.06%

-7.04%

2.81%

-9.85%

14.56%

9.51%

6/26/2013

80.24%

AWP

Aberdeen Global Premier Properties

Real Estate

5.42%

1.17%

6.88%

-9.00%

1.26%

-10.26%

14.06%

8.12%

4/26/2007

30.46%

QQQX

Nuveen NASDAQ 100 Dynamic Overwrite

Covered Call

0.92%

6.22%

-0.71%

-0.34%

-0.37%

13.98%

11.88%

1/30/2007

3.73%

CSQ

Calamos Strategic Total Return

US Allocation

29.16%

1.53%

7.71%

0.98%

1.74%

-0.76%

13.84%

11.78%

3/26/2004

14.85%

Coverage Ratio (Earnings vs. distributions)

We then sort our list (of 206 funds) on the coverage ratio and select the top 10 funds. The coverage ratio is derived by dividing the earnings per share by distribution amount for a specific period.

Ticker

Name

Sector

Leverage %

Base Exp.

Distrib. Rate

Disc./ Premium

Discount

52 WK AVG Disc/ Premium

3YR Ann. NAV Return

5YR Ann. NAV Return

Date

Distrib. Coverage

GIM

Templeton Global Income

Global Income

0.77%

5.76%

-8.66%

1.38%

-10.04%

1.94%

1.14%

3/17/1988

119.22%

PPR

Voya Prime Rate Trust

Senior Loans

27.46%

1.62%

5.32%

-4.61%

6.84%

-11.45%

3.27%

4.12%

5/12/1988

113.39%

BSL

Blackstone/GSO Senior Floating Rate Trm

Senior Loans

34.16%

1.76%

7.44%

-2.40%

-1.80%

-0.60%

5.37%

5.54%

5/26/2010

112.05%

BGH

Barings Global Short Duration High Yield

High Yield

29.49%

1.65%

9.35%

-2.32%

1.64%

-3.96%

3.91%

6.21%

10/26/2012

110.58%

ARDC

Ares Dynamic Credit Allocation Fund

Senior Loans

30.08%

1.93%

8.14%

-7.85%

3.33%

-11.18%

6.33%

6.59%

11/28/2012

110.51%

TSLF

THL Credit Senior Loan Fund

Senior Loans

27.78%

1.85%

7.88%

-8.56%

3.13%

-11.69%

3.31%

5.09%

9/20/2013

109.70%

BGB

Blackstone / GSO Strategic Credit Fund

Senior Loans

37.73%

2.18%

8.46%

-3.94%

2.61%

-6.55%

5.23%

5.33%

9/26/2012

108.68%

AFT

Apollo Senior Floating Rate Fund

Senior Loans

34.82%

2.26%

7.43%

-8.29%

3.12%

-11.41%

4.83%

5.43%

2/24/2011

108.56%

AIF

Apollo Tactical Income Fund Inc.

High Yield

34.07%

2.24%

7.66%

-7.35%

3.46%

-10.81%

6.79%

6.55%

2/26/2013

106.40%

BGX

Blackstone/GSO Long-Short Credit Income

Senior Loans

39.25%

1.70%

8.41%

2.12%

3.89%

-1.77%

6.48%

6.50%

1/27/2011

105.39%

Now we have 60 funds in total from the above selections. We will see if there are any duplicates. In our current list of 60 funds, there were 14 duplicates, meaning there are funds that appeared more than once. Following names appear twice (or more):

  • CEE, UTF, ETO, ASG, TDF, CSQ, QQQX, STK, EOS, NHF, TYG, NTG (appear 2 times)
  • BST (appear 3 times).

So, once we remove the duplicate rows, we are left with 46 funds.

Narrowing Down to Just 10-12 Funds

In our list of funds, we already may have some of the best probable candidates. However, so far, they have been selected based on one single criterion that each of them may be good at. That’s not nearly enough. So, we will apply a combination of criteria by applying weights to eight factors to calculate the total quality score and filter out the best ones.

We will apply weights to each of the EIGHT criteria:

  • Baseline expense (Max weight 5)
  • Current distribution rate (Max weight 10)
  • Current discount/premium (Max weight 5)
  • Excess discount/premium (Max weight 5)
  • 3-YR NAV return (Max weight 5)
  • 5-YR NAV return (Max weight 5)
  • 10-YR NAV return (Max weight 5, if newer than 10 years, an average of 3-yr & 5yr)
  • Excess NAV return over distribution rate (Max weight 5)
  • Coverage Ratio (Max weight 10). This weight is adjusted based on the type of fund to provide fair treatment to certain types like equity funds. We assign some bonus points to certain types of funds, which by their make-up depend on capital gains to fund their distributions, to bring them at par with fixed-income funds. These fund types include Equity/ Sector-equity (4 bonus points), Real-estate (3 points), Covered-call (2 points) and MLP funds (variable). However, please note that this is just one of eight criteria that are being used to calculate the total quality score.

Once we have calculated the weights, we combine them to calculate “Total Combined Weight,” also called the “Quality Score.” The sorted list of 46 funds on the “combined total weight” is presented below.

Ticker

Leverage %

Base Exp.

Distrib. Rate

Discount/ Premium

Discount

52 WK AVG Disc/ Prem.

3YR Ann. NAV Return

5YR Ann. NAV Return

10YR Ann. NAV Return

Date

Distrib. Coverage

Combined Weight

Expense

Dsitr. Rate

Dis/Prem

Excess Dis

3YR NAV Ret

RTN

RTN

Excess Return Over Distr.

WT. Coverage ratio (adj)

RQI

21.01%

1.32%

6.67%

-9.15%

-6.59%

-2.56%

11.74%

8.32%

15.79%

2/28/2002

31.38%

45.45

3.68

4.45

4.58

6.59

5.00

4.16

5.00

5.00

7.00

UTF

25.52%

1.39%

6.76%

-5.33%

-2.07%

-3.26%

16.24%

9.78%

13.40%

3/30/2004

33.29%

40.74

3.61

4.51

2.67

2.07

5.00

4.89

5.00

5.00

8.00

PGZ

27.05%

2.08%

6.06%

-7.04%

2.81%

-9.85%

14.56%

9.51%

n/a

6/26/2013

80.24%

40.11

2.92

4.04

3.52

0.00

5.00

4.76

4.88

5.00

10.00

BUI

0.12%

1.10%

6.29%

1.09%

-5.06%

6.15%

11.86%

7.31%

n/a

11/23/2011

35.40%

38.59

3.90

4.19

-0.55

5.06

5.00

3.66

4.33

5.00

8.00

CEE

0.61%

0.70%

5.38%

-12.14%

0.77%

-12.91%

12.11%

10.51%

1.34%

3/6/1990

87.05%

38.56

4.30

3.59

5.00

0.00

5.00

5.00

0.67

5.00

10.00

AWP

5.42%

1.17%

6.88%

-9.00%

1.26%

-10.26%

14.06%

8.12%

8.94%

4/26/2007

30.46%

38.45

3.83

4.59

4.50

0.00

5.00

4.06

4.47

5.00

7.00

RIF

27.80%

1.83%

5.92%

-16.32%

3.68%

-20.00%

8.10%

5.97%

13.81%

12/18/2003

83.86%

36.33

3.17

3.95

5.00

0.00

4.05

2.99

5.00

2.18

10.00

ETO

23.03%

1.26%

8.10%

2.07%

-3.16%

5.23%

13.50%

10.53%

11.20%

4/30/2004

20.62%

36.27

3.74

5.40

-1.04

3.16

5.00

5.00

5.00

5.00

5.00

ASG

0.62%

1.28%

8.00%

-1.96%

-1.07%

-0.89%

17.56%

13.50%

13.84%

3/14/1986

0.00%

36.10

3.72

5.33

0.98

1.07

5.00

5.00

5.00

5.00

5.00

BST

0.13%

1.08%

5.61%

0.57%

-2.00%

2.57%

24.91%

19.87%

n/a

10/29/2014

0.00%

34.38

3.92

3.74

-0.29

2.00

5.00

5.00

5.00

5.00

5.00

TDF

0.17%

1.31%

14.55%

-12.81%

-1.42%

-11.39%

10.25%

6.17%

6.80%

9/8/1994

19.75%

34.26

3.69

6.67

5.00

1.42

5.00

3.09

3.40

0.00

6.00

EVT

18.92%

0.19%

6.62%

0.65%

0.88%

-0.23%

12.75%

10.70%

12.36%

9/30/2003

33.54%

32.90

4.81

4.41

-0.33

0.00

5.00

5.00

5.00

5.00

4.00

ARDC

30.08%

1.93%

8.14%

-7.85%

3.33%

-11.18%

6.33%

6.59%

n/a

11/28/2012

110.51%

32.11

3.07

5.43

3.93

0.00

3.17

3.30

3.23

0.00

10.00

QQQX

0.92%

6.22%

-0.71%

-0.34%

-0.37%

13.98%

11.88%

14.30%

1/30/2007

3.73%

31.92

4.08

4.15

0.36

0.34

5.00

5.00

5.00

5.00

3.00

HPF

33.83%

1.27%

6.52%

4.08%

-2.24%

6.32%

8.85%

7.74%

10.10%

11/29/2002

83.37%

31.90

3.73

4.35

-2.04

2.24

4.43

3.87

5.00

2.33

8.00

IFN

0.28%

1.32%

11.17%

-10.91%

-0.73%

-10.18%

9.80%

4.02%

5.64%

2/23/1994

0.00%

30.81

3.68

6.67

5.00

0.73

4.90

2.01

2.82

0.00

5.00

STK

1.16%

7.48%

2.23%

0.16%

2.07%

19.63%

18.16%

13.92%

11/25/2009

0.69%

30.71

3.84

4.99

-1.12

0.00

5.00

5.00

5.00

5.00

3.00

AIF

34.07%

2.24%

7.66%

-7.35%

3.46%

-10.81%

6.79%

6.55%

n/a

2/26/2013

106.40%

30.55

2.76

5.11

3.68

0.00

3.40

3.28

3.34

0.00

9.00

BME

0.03%

1.11%

5.49%

4.10%

1.74%

2.36%

15.06%

10.09%

13.92%

3/28/2005

4.45%

30.50

3.89

3.66

-2.05

0.00

5.00

5.00

5.00

5.00

5.00

EOS

1.09%

6.31%

1.46%

0.09%

1.37%

15.23%

12.13%

12.09%

1/26/2005

0.00%

30.39

3.91

4.21

-0.73

0.00

5.00

5.00

5.00

5.00

3.00

CSQ

29.16%

1.53%

7.71%

0.98%

1.74%

-0.76%

13.84%

11.78%

11.66%

3/26/2004

14.85%

30.12

3.47

5.14

-0.49

0.00

5.00

5.00

5.00

5.00

2.00

ETV

1.14%

8.72%

2.42%

-2.14%

4.56%

10.40%

9.56%

10.49%

6/27/2005

7.18%

30.06

3.86

5.81

-1.21

2.14

5.00

4.78

5.00

1.68

3.00

BSL

34.16%

1.76%

7.44%

-2.40%

-1.80%

-0.60%

5.37%

5.54%

n/a

5/26/2010

112.05%

29.38

3.24

4.96

1.20

1.80

2.69

2.77

2.73

0.00

10.00

DNI

0.00%

1.34%

7.50%

-15.85%

5.40%

-21.25%

8.58%

6.36%

9.75%

6/29/1998

16.36%

29.09

3.66

5.00

5.00

0.00

4.29

3.18

4.88

1.08

2.00

GGT

25.98%

1.59%

10.78%

1.24%

-2.81%

4.05%

6.54%

6.32%

10.83%

11/15/1994

0.00%

28.70

3.41

6.67

-0.62

2.81

3.27

3.16

5.00

0.00

5.00

AFT

34.82%

2.26%

7.43%

-8.29%

3.12%

-11.41%

4.83%

5.43%

n/a

2/24/2011

108.56%

28.53

2.74

4.95

4.15

0.00

2.42

2.72

2.57

0.00

9.00

BGH

29.49%

1.65%

9.35%

-2.32%

1.64%

-3.96%

3.91%

6.21%

n/a

10/26/2012

110.58%

28.33

3.35

6.23

1.16

0.00

1.96

3.11

2.53

0.00

10.00

TSLF

27.78%

1.85%

7.88%

-8.56%

3.13%

-11.69%

3.31%

5.09%

n/a

9/20/2013

109.70%

27.98

3.15

5.25

4.28

0.00

1.66

2.55

2.10

0.00

9.00

BGB

37.73%

2.18%

8.46%

-3.94%

2.61%

-6.55%

5.23%

5.33%

n/a

9/26/2012

108.68%

27.35

2.82

5.64

1.97

0.00

2.62

2.67

2.64

0.00

9.00

BTO

16.07%

1.62%

6.24%

1.00%

2.39%

-1.39%

4.23%

13.11%

12.31%

8/18/1994

23.94%

27.16

3.38

4.16

-0.50

0.00

2.12

5.00

5.00

0.00

8.00

BGX

39.25%

1.70%

8.41%

2.12%

3.89%

-1.77%

6.48%

6.50%

n/a

1/27/2011

105.39%

26.58

3.30

5.61

-1.06

0.00

3.24

3.25

3.25

0.00

9.00

JQC

38.92%

1.34%

14.55%

-5.36%

3.47%

-8.83%

4.23%

3.87%

6.91%

6/25/2003

43.17%

26.01

3.66

6.67

2.68

0.00

2.12

1.94

3.46

0.00

5.50

GIM

0.77%

5.76%

-8.66%

1.38%

-10.04%

1.94%

1.14%

4.11%

3/17/1988

119.22%

26.00

4.23

3.84

4.33

0.00

0.97

0.57

2.06

0.00

10.00

MXF

1.61%

6.96%

-11.58%

0.79%

-12.37%

3.54%

-0.61%

3.48%

6/3/1981

40.74%

25.74

3.39

4.64

5.00

0.00

1.77

-0.31

1.74

0.00

9.50

NHF

20.18%

1.23%

13.60%

-14.57%

0.73%

-15.30%

4.13%

2.27%

10.65%

6/29/2006

17.15%

25.64

3.77

6.67

5.00

0.00

2.07

1.14

5.00

0.00

2.00

PPR

27.46%

1.62%

5.32%

-4.61%

6.84%

-11.45%

3.27%

4.12%

5.40%

5/12/1988

113.39%

25.63

3.38

3.55

2.31

0.00

1.64

2.06

2.70

0.00

10.00

HGLB

42.61%

2.00%

11.29%

-21.09%

-1.50%

-19.59%

-4.22%

-2.35%

n/a

1/5/1998

44.23%

17.74

3.00

6.67

5.00

1.50

-2.11

-1.18

-1.64

0.00

6.50

TYG

41.51%

2.00%

15.58%

-5.98%

-3.17%

-2.81%

-8.29%

-8.99%

3.56%

2/27/2004

94.05%

16.97

3.00

6.67

2.99

3.17

-4.15

-4.50

1.78

0.00

8.00

GGN

13.20%

1.35%

14.22%

3.43%

1.80%

1.63%

1.17%

0.55%

-0.42%

3/29/2005

9.90%

14.25

3.65

6.67

-1.72

0.00

0.59

0.28

-0.21

0.00

5.00

NTG

40.24%

2.00%

16.87%

-7.65%

-2.46%

-5.19%

-9.51%

-8.24%

n/a

7/27/2010

89.66%

10.64

3.00

6.67

3.83

2.46

-4.76

-4.12

-4.44

0.00

8.00

KMF

32.92%

2.82%

8.69%

-13.01%

0.54%

-13.55%

-6.40%

-11.74%

n/a

11/24/2010

89.93%

7.37

2.18

5.79

5.00

0.00

-3.20

-5.87

-4.54

0.00

8.00

FMO

39.17%

1.69%

17.80%

-7.04%

-0.57%

-6.47%

-9.25%

-9.79%

2.42%

12/28/2004

0.00%

6.76

3.31

6.67

3.52

0.57

-4.63

-4.90

1.21

0.00

1.00

SMM

20.70%

2.19%

9.43%

-14.20%

1.09%

-15.29%

-11.14%

-12.69%

n/a

5/25/2012

93.89%

4.22

2.81

6.29

5.00

0.00

-5.57

-6.35

-5.96

0.00

8.00

JMF

33.58%

1.61%

13.07%

-2.77%

3.00%

-5.77%

-10.08%

-9.04%

n/a

2/24/2011

0.00%

-1.90

3.39

6.67

1.39

0.00

-5.04

-4.52

-4.78

0.00

1.00

GER

42.25%

1.62%

16.41%

-5.80%

1.19%

-6.99%

-12.86%

-12.81%

n/a

9/26/2014

0.00%

-5.31

3.38

6.67

2.90

0.00

-6.43

-6.41

-6.42

0.00

1.00

GMZ

42.35%

1.66%

14.61%

-0.17%

4.74%

-4.91%

-13.04%

-11.80%

n/a

11/26/2013

0.00%

-7.54

3.34

6.67

0.09

0.00

-6.52

-5.90

-6.21

0.00

1.00

To structure a CEF portfolio, it’s highly recommended to diversify in funds that invest in different types of asset classes. In our list of 46, if we were to look at the top 30 based on the total quality score/weight (or quality-score above 25), below is the list, which is sorted sector-wise and quality-rating.

Sr. no.

Strategy / Asset-class/ Sector

Position-1

Position-2

Position-3

1

Covered Call

(QQQX)

(STK)

(EOS)

2

Global Equity

(ETO)

( ETG)

3

US Equity

(EVT)

(ASG)

4

Emerging Mkt. Equity

( CEE)

(TDF)

( IFN)

5

High Yield ( Convertibles/ Senior Loans/ Credit Income/ Mortgage securities)

( ARDC)

( AIF)

(CSQ)

6

Municipal

7

Preferreds

( HPF)

8

Real Estate

( RQI)

(PGZ)

(AWP)

9

Utilities and Infrastructure

( UTF)

( BUI)

10

CEF Sector Equity (Financial, Tech, Healthcare, etc.)

(BST)

(STK)

(BME)

Note: None of the municipal funds could make it to the top 30 this time.

If you were to select 10 picks, we would simply pick the top one from each of the above categories.

Final Selection: Our List of Final Top-5

Now, if we had only five slots for investment and need to select just five funds, we will need to make some subjective selections. However, we should be careful to select from different sectors (or asset classes). Since this step is mostly subjective, so it will differ from person to person. Here are the selections for this month, based on our perspective:

Ticker

Name

Sector

Leverage %

Base Exp.

Distrib. Rate

Discount/ Premium

Discount

52 WK AVG Disc/ Prem.

3YR Ann. NAV Return

5YR Ann. NAV Return

10YR Ann. NAV Return

Date

Distrib. Coverage

Combined Weight

(ETO)

Eaton Vance Tax-Advantaged Glbl Div Opp

Global Allocation

23.03%

1.26%

8.10%

2.07%

-3.16%

5.23%

13.50%

10.53%

11.20%

4/30/2004

20.62%

36.27

(QQQX)

Nuveen NASDAQ 100 Dynamic Overwrite

Covered Call

0.92%

6.22%

-0.71%

-0.34%

-0.37%

13.98%

11.88%

14.30%

1/30/2007

3.73%

31.92

(UTF)

Cohen & Steers Infrastructure

Sector Equity

25.52%

1.39%

6.76%

-5.33%

-2.07%

-3.26%

16.24%

9.78%

13.40%

3/30/2004

33.29%

40.74

(BSL)

Blackstone/GSO Senior Floating Rate Trm

Senior Loans

34.16%

1.76%

7.44%

-2.40%

-1.80%

-0.60%

5.37%

5.54%

n/a

5/26/2010

112.05%

29.38

(HPF)

JHancock Preferred Income II

Preferreds

33.83%

1.27%

6.52%

4.08%

-2.24%

6.32%

8.85%

7.74%

10.10%

11/29/2002

83.37%

31.90

Average

23.31%

1.32%

7.01%

-0.46%

-1.92%

1.46%

11.59%

9.09%

11.12%

12 years

50.61%

34.04

Risks

It goes without saying that CEFs, in general, have some additional risks. This section is specifically relevant for investors who are new to CEF investing, but in general, all CEF investors should be aware of.

They generally use some amount of leverage, which adds to the risk. The leverage can be hugely beneficial in good times but can be detrimental during tough times. The leverage also causes higher fees because of the interest expense in addition to the baseline expense. In the tables above, we have used the baseline expense only. If a fund is using significant leverage, we want to make sure that the leverage is used effectively by the management team – the best way to know this is to look at the long-term returns on the NAV. NAV is the “net asset value” of the fund after counting all expenses and after paying the distributions. So, if a fund is paying high distributions and maintaining or growing its NAV over time, it should bode well for its investors.

Due to leverage, the market prices of CEFs can be more volatile as they can go from premium pricing to discount pricing (and vice versa) in a relatively short period. Especially during corrections, the market prices can drop much faster than the NAV (the underlying assets). Investors who do not have an appetite for higher volatility should generally stay away from CEFs or at least avoid the leveraged CEFs.

CEFs have market prices that are different from their NAVs (net asset values). They can trade either at discounts or at premiums to their NAVs. Generally, we should stay away from paying any significant premiums over the NAV prices unless there are some very compelling reasons.

Another risk factor may come from asset concentration risk. Many funds may hold similar underlying assets. However, this is easy to mitigate by diversifying into different types of CEFs ranging from equity, equity covered calls, preferred stocks, mortgage bonds, government and corporate bonds, energy MLPs, utilities, and municipal income.

Conclusion

The underlying purpose of this exercise is to find five likely best funds for investment each month using our screening process. We demand our selections have a solid long-term record, maintain good earnings to distribution coverage (in certain categories), offer reasonably high distributions, and are relatively cheaper and offer a reasonable discount. Also, we ensure that the selected five funds form a diverse group in terms of the type of assets. Please note that these selections are dynamic in nature and can change from month-to-month (or even week-to-week). However, some of the funds can repeat from month-to-month if they remain attractive over an extended period.

The selected five CEFs this month, as a group, are offering an average distribution rate of 7.01% and an excess discount/premium of -1.92% (compared to 52-week average). Besides, these five funds have collectively returned 11.60%, 9.09%, and 11.12% in the last three, five, and 10 years. CEFs, in general, have done very well in the last several months, and everything is a bit pricey. Our selections offer an average yield that’s slightly lower than we wish for, and the discount is less than we expect, but we believe this is the cost of quality.

We believe that the above group of CEFs makes an excellent watch list for further research.



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Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, UNH, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, ARCC, AWF, CHI, DNP, EVT, FFC, GOF, HCP, HQH, HTA, IIF, JPC, JPS, JRI, KYN, MAIN, NBB, NLY, NNN, O, OHI, PCI, PDI, PFF, RFI, RNP, STAG, STK, UTF, VTR, WPC, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. The author is not a financial advisor. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. The stock portfolios presented here are model portfolios for demonstration purposes.

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2020-02-22