Trading diary: Lying in wait for unpopular high-yielding CEFs

Slow trading days are treacherous for individual investors, but also can offer bargains if you’re willing to place conservative bids. Two high-yield CEFs to consider.

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Italian Prime Minister Matteo Renzi inspecting troops with President Sergio Mattarella in 2015. Image via Wikipedia entry on Prime Minister Renzi. Photo attribution: Presidenza della Repubblica)

WASHINGTON, December 2, 2016 – As we’ve already noted in our companion column, Friday trading action has remained moribund. In fact, it’s been close to flatline most of the day for all three major averages. Even so, the Dow Jones Industrials (DJI) have accelerated to the downside as of 1:45 p.m. EST with large cap stocks in that average currently off some 33 points.

On the other hand, as the Dow surges to record heights in fits and starts, those 33 points—which covered a lot of ground back when the Prudent Man was actually in the business—now represent a relatively paltry 0.18 percent decline in the Dow.

With traders assessing the absurd BLS employment-unemployment figures released this morning, which show U.S. unemployment is down again to stand at a 4.6 percent, and with banks and the international investment community worried about potential Italian instability due to a plebiscite there on Sunday, stocks are wandering around Friday in low-volume trading. That’s likely an indication that most investors view Monday as the day when stock market action will kick back into high gear in one direction or another.


Read also: Misleading jobs report, Italian referendum keep stocks mixed



This kind of uncertainty encourages cautious investors like the Prudent Man to lay low in the weeds, assess current holding, and do as little as possible until trends begin to emerge.

Trading diary

Our holdings are all over the place Friday due to market uncertainty and low volume. This kind of situation tends to make major moves inadvisable until the smoke clears, as buys or sells might prove to be terrible decisions in what might be rather volatile Monday trading action.

We are making an attempt today to acquire more shares of the Tortoise Power and Energy Infrastructure Fund (symbol: TPZ). It’s a closed-end fund (CEF) that holds a variety of energy stocks and related securities. TPZ’s major goal is to provide an above-average yield with at least some potential for capital gains.

Like exchange-traded funds (ETFs), CEFs trade like common stock, unlike more traditional mutual funds. Unlike ETFs, however, many CEF’s trade “at a discount.” In other words, such a CEF trades at a price below and sometimes significantly below the true price of the assets it holds. That can transform certain CEFs that trade at a discount a pretty good deal, allowing the purchase of assets at a discount and providing an above-average yield based on that discount.

Currently, TPZ is trading at a nearly 11 percent discount, providing a current yield of roughly 11 percent annualized. Better yet, TPZ currently boasts a significantly above-average rating of 5 stars from respected ratings and investment advisory firm Morningstar for the current year as well as for a three-year average. Its 5-year rating is currently 4-stars, still awfully good but not as good as 5.

TPZ is somewhat thinly traded and took a hit this morning despite good news in the oil and gas patch this week. That happens to thinly traded stocks, and if you’re in something like this, you have to roll with it. We’re trying to acquire a few more shares close to this morning’s bottom, but the stock is catching a bid again and we might miss our target. But them’s the breaks.

Another investment we’re looking at for our regular account is the BlackRock Virginia Municipal Bond Trust (BHV), another thinly traded CEF that invests more or less exclusively in state and local Virginia municipal bonds. We’ve been in this one before and mostly acquire these shares when looking for tax-free yield.

BHV took a hit yesterday and has recovered somewhat today. But the bid-ask spread is typically wide, and it’s hard to acquire shares at the best price. Current yield here, paid monthly, is an annualized 4.55 percent at the moment. Better yet, the yield is Federal tax-free, although it’s only state tax free if you’re a Virginia resident like the Prudent Man.

Virginia is a constitutionally balanced-budget state and is typically pretty tight with the state coffers. For that reason, many issues in BHV carry the highest ratings possible—AAA—while the bulk of its remaining holdings are at least investment grade.

Unlike TPZ, this one trades at a premium—currently a whopping 11.67 percent. We’d like to see this come down a bit before we make a move. But BHV has usually traded at a premium, given the better-than-average mostly tax-exempt yield plus the quality of this CEF’s holdings.

Volume tends to be amazingly low in this issue, so we always travel with caution in this issue. Right now we’re in watchful waiting mode. But if we can catch one of those momentary drops like the one we missed Thursday, we’d be happy to get hold of these shares. The likely upcoming Fed interest rate increase has been pricing them more favorably than we’ve seen in years.

In short, we’re bidding below market for a couple of issues today, not expecting a hit, but glad to take one if we can get it. Monday should be more interesting.

Have a great weekend.

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