In this post we would like to introduce a weekly screen that we have now added to the Analytics page. The screen shows the top and bottom 10 closed-end funds sorted by Z-Score, calculated as a weekly 3-year standard deviation of the fund discount.
We find that the cheapest funds by our metric are interestingly all muni funds and, perhaps not suprisingly, funds that have recently cut their dividends.
There are a number of reasons why muni funds have struggled to maintain distribution rates:
- Increased cost of leverage due to rising short-term costs. As financing transactions (repos etc) are much more short-term in nature, at least relative to the maturity of the assets in the portfolio, an increase in interest rates hurts the NII of funds as they are unable to recycle into higher-yielding assets as quickly.
- Some muni bonds have been called which decreases the yield on fund assets
- Some funds have hedged their interest rate exposure due to expected interest rate hikes by paying on interest-rate swaps which has a drag on net portfolio returns
Muni funds have had a roller coaster year – first trading at a huge premium which collapsed as interest rates began their march higher and have now taken another whammy from distribution cuts. We do not believe they are yet a slam-dunk opportunity but are certainly more attractive than they were before.