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This article was originally published to members of the CEF/ETF Income Laboratory on October 8, 2022.

I last shared my top ten closed-end fund holdings at the end of June. Since that time, we’ve basically gone back and forth in the market. We reached the lowest of the year in June. We rebounded throughout the summer and have now come back down to new lows for the year in September. October started with a bang but quickly ran out of steam. We were giving up most of the gains the broader markets had made during the two-day rally.

Suffice it to say, any portfolio review for most investors probably wasn’t a fun exercise in 2022. Unless, of course, you’re managing an energy-heavy portfolio. In this case, you are probably sitting in a great position. Energy remains the only positive sector for the year. With support from OPEC’s production cuts, it appears to have provided another potential catalyst to further support the sector.

Sector performance as of 08/10/2022

Sector performance as of 08/10/2022 (Looking for Alpha)

Here’s how my entire CEF portfolio is holding up

According to Fidelity, the returns on my closed-end fund portfolio over the first three quarters (ending September 30, 2022) were -24.10%. (All data will be provided by Fidelity for indexes.)

This compares to the -23.87% decline in the S&P 500, the -24.92% decline in the Dow Jones US Total Stock Market Index and the -26.40% loss in the MSCI Index. ACWI ex USA.

Bonds were no place to hide either. The Bloomberg US Aggregate Bond Index fell -14.61% and the Bloomberg Municipal Bond Index fell -12.13%.

An index composed of 70% stocks and the rest taxable bonds provided a decline of -21.45%.

That being said, I’m not at all worried about my drop of around 24%. Of course, I don’t want to see any losses, but it has to happen. This is especially likely to happen if you are in a bear market at any level.

First, despite the turbulent year, distribution cuts have been minimal at this point. This has ensured that my income continues to grow each month as I put capital to work no matter what the environment does.

The second point about this is that closed-end funds have to deal with the broadening of the discount. That is, the underlying portfolios may hold up better than the actual stock price.

This is where opportunities arise with CEFs in the first place, seizing the opportunity to exploit discounts and bonuses. Discounts on the CEF space have expanded considerably since the start of the year.

CEF rebate/bonus frequency

CEF rebate/bonus frequency (North River)

The third point is that a lot of the funds I hold are leveraged. Therefore, apart from the rebate/bonus mechanism, they will be more volatile overall. In a down year, leveraged CEFs can feel the pinch much worse as moves are amplified.

My Top 10 (10/08/2022)

Despite a volatile year, my top ten hasn’t changed much over the past quarter. I hold a total of 42 positions in my main CEF portfolio; the top ten represent 40.14% of the portfolio at present. This is up from 39.72% previously. However, it is still down from the previous update where the top ten was 43.67%.

I often get the question how can I follow so many positions. First of all, I do this full time. Second, the top positions are really the ones that are close to my heart, since they represent a significant portion of my invested capital.

Top 10 08/10/2022

Top 10 08/10/2022 (Portfolio Viewer)

John Hancock Tax-Advantaged Dividend Income (HTD) and BlackRock Enhanced Equity Dividend (BDJ) remain my first and second largest holdings. Although the HTD allocation was down from 5.58%, it showed earlier. BDJ rose slightly from the weighting of 4.93%.

Unsurprisingly, BlackRock Science & Technology Trust II (BSTZ) declined further as speculative tech continues to get hammered. The weighting was 4.44% towards the end of June. At one time it was by far my largest property. In fact, not too long ago it was in the middle of 2021.

That being said, I added BlackRock Science and Technology Trust (BST) in August, which increased my position in my portfolio. From the tenth largest with a weighting of 2.98% to the current 3.6% and fifth.

Two funds that made another appearance in the top ten are Cohen & Steers Tax-Advantaged Preferred Securities & Income (PTA) and BlackRock Health Sciences (BME). This had moved ahead of Cohen & Steers REIT & Preferred & Income (RNP) and Cohen & Steers Infrastructure (UTF) which previously appeared on the list.

It hasn’t really been replaced, but I just haven’t added to my RNP and UTF positions during that time. PTA, on the other hand, I added some in July and September. I also added a big batch of BME in August. As it seems more likely that we are in a continued mad rush, a large allocation to an unleveraged healthcare fund seemed appropriate.

Here is an overview of the discounts/premiums since the beginning of the year for these funds. For the most part, as noted above, discounts have tended to widen. BME and Reaves Utility Income (UTG) remain fairly close to parity with their NAV. This is usually the case with these funds.

Chart

Y-Charts

Chart

Y-Charts

The BSTZ discount and the PTA discount remain the most attractive. With the reduction of BSTZ which has widened considerably since the beginning of the year. A look below is the YTD performance of these two funds. Total stock price returns relative to total net asset value returns. BSTZ’s portfolio has been incredibly weak, but we can clearly see how much the stock price has been penalized.

Chart

Y-Charts

Although I think all these investments are worth it, I consider BSTZ and PTA to be very attractive at the moment. Moreover, PIMCO Dynamic Income Opportunities (PDO) is also very attractive. The fund increased its distribution after benefiting from strong hedging. The last report showed that the coverage rate over 3 rolling months was 143.71%. The coverage rate at 6 months was 201.34%. On this basis, it is the highest of the PIMCO funds.

It also remains discounted. This is especially true in relation to several PIMCO funds. They often carry bounties.

Although the fixed income space has been affected, and PIMCO funds have not been immune. PDO was trying to join its sister funds in premium territory in July, but that was quickly reversed.

Chart

Y-Charts

BSTZ, PTA and PDO are all quite different funds, but they seem to be among the most tempting offerings around for longer-term investors. If you think we are in continued weakness, then PTA and PDO leverage probably wouldn’t be too appropriate. Similarly, the riskier tech weight BSTZ could also easily see further decline if we take another significant leg lower.

Conclusion

Rebates have widened in the CEF space, which usually creates an opportunity to start investing in these funds. At the same time, they generally remain more volatile precisely because of the discount/bonus mechanisms. On top of that, they are taken advantage of, which amplifies their movements. I hold several non-leveraged funds in my top ten that take a more strategic approach to writing options. This can help mitigate the negative impacts of other leveraged funds held.

It certainly hasn’t been a good performance year for me, but I’m still pretty happy with how things turned out, given the circumstances.