This article was originally published on April 1, 2022 to members of the CEF/ETF Income Laboratory.
March offered investors some respite from the volatility and fairly steady losses experienced in January and February. Of course, these months also presented investors with much better opportunities, as is often the case when market volatility increases. I believe there are still plenty of attractive values in the closed-end fund space – certainly, much better valuations than we saw at the end of 2021.
That being said, I buy positions every month, regardless of the current environment. The only thing that changes is how aggressive or conservative I am when shopping. This allows my income to grow month after month. I came to the market with a lot of purchases in January. I then let the money pile up in February, which meant I wasn’t as aggressive as I should have been in hindsight.
I did the same in March, allowing cash to accumulate in my wallet. In fact, I only started shopping in the second half of the month. So far, with the power of hindsight once again, this also turned out to be incorrect timing as I should have been more aggressive in the first half of the month. Looking at the S&P 500 SPDR Trust ETF (SPY), we can see that the market really started its rebound around the middle of the month.
With that, here are the three funds I bought in March to add to my growing income. All those funds that I had before, I just added to my positions.
BlackRock Health Sciences Trust (BME)
The first one I added was BME. It is a remarkable fund in that it is only one of the few funds to have been created before 2008 and has never reduced its distributions to shareholders. They had paid a quarterly distribution, but then switched to a monthly payment in 2014. When they made this change, it was around the time that they also increased their payment.
In fact, relatively recently we received another boost from the fund. It’s hard to tell from the chart below, but it went from a monthly distribution of $0.20 to $0.2130 starting in October 2021.
This is a welcome increase as they have paid the $0.20 amount since 2015. Currently this equates to a distribution yield of 5.70%, and based on NAV , this equates to a quite sustainable 5.62%.
I cover BME fairly regularly, but here are some basics for those unfamiliar.
BME investment objective is “total return through a combination of income, current gains and long-term capital appreciation”. They will attempt to achieve this through a fairly simple investment policy – “under normal market conditions, at least 80% of its assets in equity securities of companies engaged in the health sciences and related industries and equity derivatives with exposure to the health sciences industry.” They will then implement a strategy of writing covered call options against their portfolio positions. Writing against individual positions can generate an option premium that enhances what they can pay investors.
The fund has rarely traded at a discount to net asset value over the past decade. It did not trade at extreme premiums, but at a more consistent premium. However, that changed in March, which prompted me to take advantage of the opportunity.
Calamos Strategic Total Return Fund (CSQ)
CSQ is similar to BME in that it does not typically trade at a discount for long periods of time, at least in recent years. Prior to around 2018, the fund had traded at a fairly persistent discount.
Still, it’s a position that I consider a more essential part of my CEF portfolio. I have wanted to add to this fund for a while now. The fund touched discount levels and the overall declines in the broader markets opened up an interesting opportunity. That’s even though its bounty hasn’t been as consistent as BME over the past decade.
This is another fund that I cover regularly, so my most frequent readers are probably familiar with this name.
CSQ goal is to seek “total return through a combination of capital appreciation and current income”. They attempt to achieve this simply by; “invest in a diversified portfolio of stocks, convertible securities and high yield corporate bonds.”
The fund can invest where it sees the best opportunities. That’s part of the appeal of active management, the flexibility to adapt to different situations. However, it should be noted that the fund will have “at least 50% equity”.
The fund suffered a series of distribution cuts in 2008/09, so it can’t quite claim the title of being as consistent as a payer. However, one constant thing is frequency, as they have paid a monthly distribution since inception. Right now, the payment is the same $0.1025 per month they had before 2008.
The fund’s distribution yield is 6.99%. Due to trading near par with its net asset value, the net asset value return works out at a similar rate of 6.95%. The fund will rely heavily on capital gains, and they have suffered considerable losses this year. This will be something to watch or consider in the future; however, I don’t believe the NAV rate is still in the danger zone.
EcoFin Sustainable and Social Impact Term Fund (TEAF)
TEAF is a more unusual fund. Unlike BME and CSQ that I bought, this fund is trading at a deep discount and has mostly since inception.
Tortoise launched TEAF with the goal an “attractive total return potential emphasizing current income and uncorrelated assets”. In addition, “access to differentiated direct investments in essential assets” and “investments in tangible long-term assets and services”.
TEAF also aims for “positive social and economic impact”. It is essentially an ESG-focused fund with a focus on infrastructure. A significant portion of their holdings is associated with energy-related infrastructure with experience in the energy field. While unique from other Tortoise funds, it also has significant exposure to industries outside of energy.
Also, unlike the other two funds I bought this month, it shows positive year-to-date results in terms of performance. Nothing very spectacular, but positive in this first quarter of 2022 seems to be noted.
One of the reasons for this is that it is exposed to investments in energy and utilities. Energy leads the sector for the year by a significant amount. In fact, the only other sector that is positive for the year as measured by SPDR ETFs. It’s the utility sector that hangs on as the defensive play.
The fund is unique because it has significant exposure to private investments and a tilt towards renewable energy. This could also explain why the fund’s discount has been so consistent. Private placements can be riskier and more difficult to value. Therefore, investors sometimes leave a larger margin of safety. Additionally, the fund has performed poorly since launch, driving investors away.
Poor performance since launch is definitely not something worth bragging about. Considering the underlying investments, it looks like energy had the biggest negative impact on the fund in 2020. However, it also depends on when you bought that name. My first batch was in September 2021. My second is now this month as the discount is still attractive, in my opinion. Taking that into account, my stock yield only increased by almost 40%, not including any of the distributions.
I also think the underlying investments are quite compelling, at least the idea. Overall, this is a small position in my portfolio, so it won’t make or break me in the long run. Below is a chart of TEAF’s performance since its inception.
March ended on a positive note for investors. However, it still seems like there is a considerable amount of uncertainty going forward. Some caution on the part of investors seems deserved. Looking back, I should have been more aggressive in my purchases in February and early March. That being said, due to these uncertainties in the future, we may have many more opportunities. In the end, I make new purchases every month and increase my income – and that’s really my main goal!