Dissecting The Current CEF Sell-Off And Opportunities

Some Ideas

We continue to like the preferreds sector with the Flaherty suite looking increasingly more compelling. The suite has hiked distributions for the second time in recent months, in anticipation of an eventual drop in leverage costs. The valuation of a fund like PFO is also attractive. We hold the Preferred and Income Opportunity Fund (PFO) which trades at a 14.2% discount and a 7.2% yield.

With credit remaining relatively expensive, one strategy is to underweight credit and add other investment strategies such as equity covered calls and Agency MBS. The PIMCO Global StocksPLUS & Income Fund (PGP) is one fund that diversifies across a number of such strategies. The fund has outperformed the average PIMCO taxable CEF in total NAV terms over the longer term however remains at a deep discount valuation vs. the suite as shown below.

The Saba Capital Income & Opportunities Fund (SABA) is the second CEF taken over by the CEF activist Saba. The company has a very strong track record with their longer-term vehicle ETF (CEFS). At the moment SABA holds a combination of CEFs and credit securities and we expect the allocation to CEFs to increase to around a third – a level of its other CEF BRW. Because SABA has a significantly lower management fee vs BRW, we expect its discount to converge towards that of BRW. SABA trades at a 14.5% discount and a 9.35% current yield.

A pair of DWS Municipal CEFs are terminating (KSM this year and KTF potentially in 2026) with the DWS Strategic Municipal Income Trust (KSM) trading at a relatively wide discount of 4.5% and current yield of 3.5%. It presents an attractive holding in the current environment of high Treasury yields, very tight corporate credit spreads and additional alpha i.e. “pull to NAV” from the termination.

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