We are now back after a short pause (!) having rejigged our back-end analytics.
Please see our updated Yield, Discount and Total Price Index charts on the Analytics page.
In this quick blog post we want to introduce our new Yield screen.
A word of warning before we dive into the meat of the screens. We don’t think it is the right investment approach in the closed-end fund space to pick highest-yielding funds. This is because such funds often follow destructive return of capital which will eventually pressure distributions in the future. We must also warn about a bias in the Income Investing space to favor yield over total return which means that higher-yielding funds tend to trade at tighter discounts which pressure total returns and increase price risk due to potential distribution cuts. The screen is really meant as a starting point for further analysis and discussion.
There are three yield metrics included in the screen:
- absolute yields
- yield percentiles
- 1-year yield changes
The most attractive, funds, all else equal will have a high absolute yield, high yield percentile and highest 1-year yield change.
We also must mention that the past-12 month yield can be quite different from indicative yield i.e. the yield which is annualized from the most recent regular distribution as distributions may have changed over the previous 12 months. Neither yield metric is perfect but the past-12 month yield can be higher than the indicative yield if the fund has been cutting distributions over the past year as many funds have been in the recent past.
- MLP funds such as FEI (First Trust MLP and Energy Income Fund) or EMO (ClearBridge Energy MLP Opportunities Fund) cover about half the list – little surprise here as it tends to be the highest yielding sector. The sector has been beaten up due to ongoing simplifications and distribution cuts with many investors viewing this sector as uninvestable post the energy crash a few years ago. Most recently, the bear market in Oil has put investors off the entire energy space. We think the sector is attractive with many underlying companies showing strong recent earnings.
- A few Covered Call funds such as IRR or STK feature in the table as well. Many of these funds have paid special distributions due to the strong performance of the equity market in the previous year. We don’t think this is indicative of the underlying sustainable distribution capacity. The recent spike in volatility may allow these funds to underperform their benchmarks in the near term, which they otherwise typically fail to do due to high management fees.
- Two local EM debt funds namely EDI (Stone Harbor Emg Markets Total Income) and its cousin EDF (Stone Harbor Emerging Markets Income Fund) feature in the table as well. We would currently avoid these funds as the weakness in local EM currencies will pressure their USD – income generating capacity as the local currency income of these funds will translate into lower USD amounts.