让我们了解CEF：10个高度推荐的CEF的质量评分

We continue this educational series about CEFs by applying our proposed quality-grading scale to 10 CEFs that come with positive analyst recommendations.

Many CEFs from the sample get good quality grades, but a few do not.

We also arrive at some interesting observations. For example, do option-based strategies have an inherent advantage over leverage strategies?

In my last article in this series (Let’s Learn About CEFs), I introduced the idea of Quality Snapshots. These are visual, color-coded grades of several quality metrics that I am experimenting with for closed-end funds. The idea is to get a quick take on the long-term sustainability and execution of a CEF’s business strategy for long-term investors.

Here is an overview of the metrics I chose and how I score them. For more information on their development, please see this article.

Here’s a summary of the scoring system. NA means “not applicable”: Not every category has six distinct grades.

Here are comments on the development of grades for each category. I still consider this a work in progress.

Moat

This grades the Morningstar Moat ratings for the stocks that the CEF holds. (This is a premium feature on Morningstar, so not everyone has access to it on the free portion of the Morningstar site. You may be able to get it through your local library.)

I average the moat ratings, weighted by each stock’s weight in the CEF’s portfolio. Since the last article, I tightened up the scoring, because my original grade levels were not effectively separating portfolios of differing quality levels.

I don’t give zero points for no-moat stocks, because the lack of a moat does not mean the company cannot be successful.

Financial Health

This is another premium feature from Morningstar, also weighted as to the stocks in the CEF’s portfolio. I also tightened this scale since the last article.

Leverage Ratio

This is available free from CEF Connect and Morningstar, although their figures sometimes differ slightly. I also tightened up this scale, creating more levels than the CEF Connect approach that I used originally in order to get better delineations between CEFs.

NAV Performance

I use the 5-year return on NAV, which is available free from CEF Connect and Morningstar. Their figures often differ slightly.

Distribution Stability

In the last article, I used a scale that had rigid requirements for the number of years since the last cut in a CEF’s distribution. Many readers did not agree, pointing out, for example, that if a CEF is yielding 10% and cuts its distribution by 25%, it is still yielding 7.5%.

I get that point, although such observations are more accepting of the fact that the actual dollars took a tumble than I would like to be. A CEF can now earn a B grade if cuts have been overcome by subsequent increases. Cuts more than 20 years ago are ignored.

I welcome suggestions on what readers consider to be an acceptable record of stable distributions. In the specific CEF presentations later in this article, I display each CEF’s distribution history. Let me know if you would grade it differently from the way I have.

Total Quality Score

This how I would interpret the total quality scores.

The point breaks in the left column might be adjusted by a point or two. That said, my current thinking is that I personally would not buy a CEF unless it scored in the two green ranges, requiring 19 or more quality points.

Remember that equity CEFs represent portfolios, so low-quality stocks in the portfolio can pull down the score for the entire CEF. That is a feature, not a bug, because one of the considerations whenever one buys a fund is that you have to take the good with the bad.

Some investors look for reasons to buy assets. I’m generally the opposite: I look for reasons to eliminate investments from consideration, because I want only top assets in my portfolios.

I have been making notes about CEFs for several months. My selection of CEFs for this article is based on CEFs that I have seen recommended positively by multiple authors in 2019.

My selection process was not scientific. I simply kept a scratch-pad list of CEFs that I saw with bullish recommendations and used hash marks to indicate when more than one source recommend particular ones. I assume that all such recommendations reflected the authors' opinions that the CEFs were of high quality.

I ended up with 10 CEFs that had multiple recommendations. I make no claim that these have been the most-recommended CEFs if someone were to comb through every 2019 article, website, or blog available to investors.

Please note that I am evaluating quality without regard to valuation. A CEF can be high in quality but overpriced. Most or all of the published recommendations took valuation into account, with steep discounts often playing heavily into a particular recommendation.

Therefore, in this article about

in CEFs, I ignore

. By doing so, I do not mean to diminish the importance of valuations. I will cover valuation in a future article. The fact that a CEF is featured in this article is not a recommendation about it.

These 10 CEFs are presented alphabetically. Information was obtained primarily from each CEF’s website and documents (such as fact sheets and official reports). Morningstar and CEF Connect were also used where appropriate.

Ticker: BDJ

: BlackRock, Inc.

8/26/2005

US Equity-Covered Call

Primary investment objective is to provide current income and current gains, with secondary objective of long-term capital appreciation. The trust invests in common stocks that pay dividends and have the potential for capital appreciation. Also utilizes option-selling strategy to enhance distributions. Under normal market conditions, invests at least 80% of its total assets in dividend paying equities. The trust may invest directly in such securities or synthetically through the use of derivatives.

6.6%

Yes, but I found no parameters about distributions, other than that shareholders will automatically have all dividends and distributions reinvested in common shares, unless an election is made to receive cash.

0.84%

The only knock on BDJ is its short history of distribution stability. Like all option-based CEFs in this sample, it gains quality points by not using leverage.

Ticker: BST

BlackRock, Inc.

10/29/2014

Non-US/Other-Global Equity. This label is misleading, as 70% of BST’s holdings are US-based companies, as shown in this graphic from BlackRock.

Objectives are income and total return through combination of current income, current gains, and long-term capital appreciation. Aims to invest at least 80% of total assets in equity securities issued by U.S. and non-U.S. science and technology companies in any market capitalization range. Selects stocks based on their rapid and sustainable growth potential from the development, advancement, and use of science and/or technology (high growth science and technology stocks), and/or potential to generate current income from advantageous dividend yields (cyclical science and technology stocks). Also sells covered call options on a portion of the common stocks in its portfolio.

5.55%

No.

1.08%; no interest expense.

BST is an example of a fund that I would not consider, because of its short history. I understand that many investors would be enticed by the good reputation of BlackRock, the fund’s solid distribution history, and its basic strategy. But the conservative choice here is to give the fund a few more years to compile a track record of performance.

I am leaning toward requiring any fund to have been operating at least 10 years to even consider it.

Ticker: RNP

: Cohen & Steers, Inc.

6/27/2003

US Equity-Real Estate (US)

Primary investment objective is high current income through investment in real estate and diversified preferred securities. Secondary investment objective is capital appreciation. Real estate securities include securities of any market capitalization issued by real estate companies (including REITs).

6.09%

No.

1.93%; includes interest expense.

The low moat rating for the REITs may be because many of them may not have assigned moat ratings from Morningstar. (I did not check this.)

The recent dividend cut – of 67% – is hard to understand based on my own experience with quality REITs. It does suggest that the fund was significantly out-distributing its portfolio’s performance capabilities. The fund is distributing less now than it was 15 years ago.

Given its relatively modest distribution rate and recent severe dividend cut, it is hard to understand why this fund was recommended by multiple sources.

Ticker: STK

Columbia Management Investment Advisers, LLC

11/25/2009

US Equity-Covered Call

Objective is growth of capital and current income. The fund seeks long-term capital appreciation from a concentrated portfolio of technology stocks. The fund also employs a rules-based call option writing strategy designed to provide current income and mitigate downside volatility.

8.62%

The fund has a managed distribution policy, which allows it to distribute long-term capital gains more than once in any one taxable year. I found no other parameters of the plan (i.e., no rules about distribution amounts).

1.16%; no interest expense.

STK has made no quarterly distributions under $0.0625 since its inception just under 10 years ago. I am assuming that the final declaration for 2019 will hit that mark, and so I gave it credit for a full 10 years without a cut.

Ticker: DNP

Duff & Phelps Investment Management Co.

1/21/1987

Equity – Growth & Income

Primary investment objectives are current income and long-term growth of income. Capital appreciation is a secondary objective. Invests primarily in a diversified portfolio of equity and fixed income securities of companies in the public utilities industry. Under normal conditions, more than 65% of the Fund's total assets will be invested in securities of public utility companies engaged in the production, transmission or distribution of electric energy, gas or telephone services. Purchases fixed income security only if, at the time of purchase, it is rated investment grade by at least two nationally recognized statistical rating organizations.

6.2%

Yes. Targets steady distribution at fixed amount per month, and it has hit that amount since 1997.

2.34%, including interest expense

Ticker: EOI

Eaton Vance Management

1/30/2007

U.S. Equity – Covered Call

Primary investment objective is to provide current income, with a secondary objective of capital appreciation. Invests in primarily large- and mid-cap securities that the investment adviser believes have above-average growth and financial strength. Writes call options on individual securities to generate current earnings from the option premium.

7.14%

Yes. However, I could not find distribution targets in the MDP. The fact sheet contains boilerplate that distributions may include amounts characterized for federal income tax purposes as ordinary dividends (including qualified dividends), capital gain distributions, and return of capital. In recent years, a significant portion of distributions has been characterized as return of capital. Distributions are determined based on current assessment of the fund's long-term return potential. As portfolio and market conditions change, the rate of distributions paid by the fund could change.

1.10%; no interest expense

EOI lowered its distribution several times in its first few years of existence. The last such cut was in 2012. It increased its distribution earlier this year.

This is a good illustration of why I think it is a good idea to give CEFs a few years to find their footing. I would expect EOI’s distributions to be much more stable in the coming years than in the 2009-2012 period. That said, they have had uncut distributions for just seven years, which is not a long time when looking for clues as to how a long-term investment is likely to perform.

Ticker: GDV

: Gabelli Funds, LLC

12/28/2003

US Equity-Equity Tax-Advantaged

Investment objective is to seek a high level of total return with an emphasis on dividends and income. In making stock selections, the fund’s adviser looks for securities that have a superior yield and capital gains potential. Under normal market conditions, the fund will invest at least 80% of its total asset value in dividend paying or income producing equity or debt securities. Under those conditions, at least 50% of the fund’s assets will consist of dividend paying equity securities. The fund may invest up to 35% of its total assets in securities on non-US issuers and up to 25% of its total assets in securities of issuers in a single industry.

6.52%

No.

1.1%; no separate interest charge.

This fund cut its distribution during the Great Recession, but has raised it five times since then, back to the level it was before the cuts in 2009. While I found no formal managed dividend policy, its actual results look like those of a company committed to dividend stability when conditions allow it.

Ticker: JCE

: Nuveen, LLC

3/27/2007

US Equity-General Equity

Objective is to provide an attractive level of total return, primarily through long-term capital appreciation and secondarily through income and gains. Fund invests in an actively managed portfolio of common stocks selected from the S&P 500 Index, using a proprietary mathematical process designed and implemented by INTECH, a sub-adviser of the fund. Fund also sells call options on up to 50% of equity portfolio, thus seeking to enhance risk-adjusted performance relative to an all equity portfolio.

6.09%

The fund’s fact sheet refers to “Managed Distribution,” but the only information about it is boilerplate about common sources of distributions, 19a notices, and the like. I did not see anything about targeted distribution levels.

1.01%; no interest expense.

Distribution cut earlier this year. There have been multiple cuts and increases since inception, and its distribution payout now is less than it was in 2008.

Ticker: QQQX

Nuveen, LLC

1/30/2007

U.S. Equity – Covered Call

Designed to offer regular distributions through a strategy that seeks attractive total return with less volatility than the Nasdaq 100 Index by investing in an equity portfolio that seeks to substantially replicate the price movements of the Nasdaq 100 Index, as well as selling call options on 35%-75% of the notional value of the Fund’s equity portfolio (with a 55% long-term target) in an effort to enhance the Fund’s risk-adjusted returns.

6.92%

Yes. Historical distribution sources have included net investment income, realized gains, and return of capital. Distribution amounts vary with market price and NAV. Special distributions, including special capital gains distributions, are contemplated, but I did not see that one has ever been made.

0.92%; no interest expense

QQQX has both raised and lowered its distribution multiple times since inception. Its most recent cut was earlier this year. Repeated variability in distributions is almost guaranteed by the provision in its MDP that distributions will vary with market price and NAV.

Ticker: UTG

W.H. Reaves & Company, Inc. (dba Reaves Asset Management)

2/24/2004

U.S. Equity – Utilities

Objective is to provide high level of after-tax total return consisting primarily of tax-advantaged dividend income and capital appreciation. Normally invests at least 80% of total assets in dividend-paying common and preferred stocks and debt instruments of companies within the utility industry. Remaining 20% of assets may be invested in other securities, including stocks, money market instruments, and debt instruments, as well as certain derivative instruments in the utility industry or other industries.

6.0%

No.

1.9%, including interest expense

While UTG has not been in existence long enough to have a 20-year record of distributions, it has never cut its distribution, and indeed, it has raised it several times. Therefore, I gave it an A in the Distribution Stability category.

Here are the funds arranged according to their quality scores. Each one’s distribution rate (yield on market price) is shown in the last column, but that played no role in the scoring.

A few observations:

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.