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Yield Hunting: Alt Inc Opps

by Alpha Gen Capital

Alpha Gen Capital

Weekly Commentary | Nov 14, 2021

Nov. 14, 2021 7:31 PM ET | Liberty All-Star Growth Fund (ASG), BBN...

Macro Picture

Inflation concerns were the big news item on the week as the CPI data came out on
Wednesday showed hotter than expected price increases.  This is the highest inflation in
three decades.  The S&P fell on the week for the first weekly loss in 4 weeks and the
first down day nine sessions.  Consumer discretionary shares fared the worst aided by a
steep decline for Tesla after Elon Musk announced he would sell a chunk of his shares.

Energy shares were also especially week as oil prices backed away from recent peaks.
The small materials sector performed best, seemingly helped by the recent passage of
the Biden administration’s USD 1.2 trillion infrastructure bill in the House of
Representatives. 
On the infrastructure legislation front, the odds of swift passage of Biden's Build Back
Better agenda diminished after the release of Wednesday's US inflation data as Senator
Joe Manchin (D-WV), one of two moderate Democratic Senators expressing misgivings
over the legislation, reiterated his concern that the additional government spending
would fuel a further rise in prices. Manchin said inflation is not transitory and is getting
worse. 

Inflation is proving to be less transitory than expected those most experts still believe
inflation will start heading lower soon as supply chain issues work themselves out and
wage gains slow.  Consumers are paying more attention to the inflation story rather than
the job market.  The U. of Mich survey reported that consumer sentiment fell to its lowest
level in a decade due to inflation concerns.  

CEF Market News

Discounts continue their recovery towards their 8-year tights set in mid-August with all
three major areas seeing valuations rise.  The markets for CEF assets continues to be
supportive thought the 10-yr rose moderately last week and the VIX remains slightly
elevated- two things that are usually a headwind for CEF valuations.  

NAV returns were mostly lower in beta categories with convertibles, equities, and utilities
faring the worst.  That makes sense since we saw a jump in the 10-yr yield on the week. 
What doesn't make sense is munis were the best NAV performers rising almost half a
point.  With a higher 10-yr, we would expect munis to be down as well. 

Muni NAVs have seen a nice inflection higher in most funds in the last few weeks.  Here
is NMCO below:

You can clearly see the blue line arrest its decline in late October and start moving
higher again.  Munis have a nice technical setup here with the large supply of
September and October behind them and investors piling/demanding tax-free income.  

Munis (and convertibles) are still the cheapest areas of the fixed income markets. 
Meanwhile, limited duration, global income, preferreds, and utilities are the most
expensive sectors.  This is interesting since its a combination of short-duration and long
duration.  
In individual funds, Barings Corporate Investors (MCI) cheapened the most during the
week and is now near a -5% discount.  This is not as cheap as it was a couple of months
ago but it is relatively compelling at these levels.  Sister fund Barings Participation Inv
(MPV) also saw a big sell off.  

As expected, New America High Income (HYB) sold off.  We stressed its
expensiveness a few times in the last couple of weeks when the fund was trading at a
+7% premium.  No reason for that.  It is back to a small discount but hasn't sold off
enough for me to be interested.

Western Asset High Yield (HYI) was another we were touting as ridiculously expensive
when it was near a 5% premium.  It fell back to a 1.8% premium but has a long way to
go to being a buy.

Two funds we were pushing in the last week were RIV and BCV, a convertibles fund. 
Despite convertible NAVs being down in the last week, BCV rose 1.5% as the discount
closed a bit.  This shows the advantages of buying opportunistically when discounts are
anomalously wide providing downside risk protection.  RIV was a rights offering play
allowing us to get into the fund at $16.81 per share when the share price is back to
$17.53 today.  

Commentary

There remains very little of compelling buys in the CEF space right now.  I continue to
stress maintaining exposure but being selective and opportunistic when you are buying. 
I've jumped on a few opportunities in the last month like NRGX, PGZ, RIV, BCV, and
PFN but those are the only tempting funds.  So I've gotten into them in size in order to
increase me overall CEF exposure.

In munis, I continue to add some taxable munis in my IRA (mostly GBAB but I did add a
small amount of BBN) and MHD, NMCO, and RFM.  

However, I am fully prepared to reduce that exposure again as we approach the year-
end Santa Claus rally period.  This is when, historically speaking, we see tax loss
harvesting abate and incremental demand pick up, rallying shares.  
Of course, discounts are already tight so it remains to be seen how much more they can
rally.  In fact, I would argue we are hoping to pick up pennies in front of the steam roller
at this point since risks abound for CEFs, especially in relation to interest rates and the
Fed.  But the future is unknown and I don't like making binary calls (going to all cash or
going all in).  

The other issue is that all asset classes are rich here- plus crypto.  Everything is
expensive.  Preferreds are trading near their cycle highs (at least $25 retail shares) and
stocks are near all-time highs.  I'm finding places to go in stock lands picking up higher
quality shares of beaten down names following earnings announcements.  

I told one member who didn't know how to position their portfolio given they were 65%
CEFs to consider rotating to open-end equivalents and term funds.  By doing so, you
eliminate most of the discount risk though at the same time you're reducing income.  It's
a delicate balancing act that each individual investor needs to weigh. 

How much risk do you want to take off the table and how much income decline are you
willing to accept?  The answer to that question is highly dependent on each person's
individual circumstance. 

CEF News

Distribution Increase

WF Global Div Opp (EOD):  Distribution increased by 4% to $0.13095

Liberty All Start Growth (ASG):  Distribution increased to $0.18 from $0.17.  Plus a $0.34
distribution for year-end excise tax purposes.

Distribution Decrease

N/A

Ongoing Corporate Actions

Rights Offering
November 10 | RiverNorth Opportunities (RIV):  The fund announced the final results
of its rights offering.  The Fund will issue a total of 4,373,407 new common shares as a
result of the Offering, which closed on November 5, 2021 (the "Expiration Date").  The
subscription price of $16.81 per share in the Offering was established on the Expiration
Date based upon a formula equal to 97.5% of the Fund's reported net asset value per
share on the Expiration Date. Gross proceeds received by the Fund, before any
expenses of the Offering, are expected to total approximately $73,516,972. Shares of
common stock issued pursuant to the Rights Offering will be record date shares for the
purposes of the Fund's November 2021 distribution payable.  The Offering was
oversubscribed and the over-subscription requests exceeded the over-subscription
shares available.

October 5 | Liberty All Star Equity Fund (USA): The Fund is issuing non-transferable
rights ("Rights") to its shareholders of record ("Record Date Shareholders") at the close
of business on October 15, 2021. Record Date Shareholders will receive one Right for
each share held and will be allowed to purchase one additional share of the Fund for
each ten Rights received (the "Primary Subscription"). Shareholders who fully exercise
their Rights may subscribe for additional shares not subscribed for by other
shareholders in the Primary Subscription. If such over-subscription requests exceed the
number of shares available, the Fund may, in its sole discretion, elect to issue additional
shares in an amount of up to 25% of the shares issued in the Primary Subscription.

The offering is subject to the effectiveness of the Fund's Registration Statement

currently on file with the Securities and Exchange Commission ("SEC") and will be made
only by means of a prospectus. The rights offering is expected to commence on or about
October 21, 2021 and to expire on or about November 22, 2021. The subscription price
per share will be 95 percent of the reported net asset value or market price per share,
whichever is lower on the expiration date. Market price per share will be determined
based on the average of last reported sales prices of a share on the New York Stock
Exchange on the expiration date and the four trading days preceding the expiration date.

Tender Offer
November 8 | Templeton Global Income (GIM):  The fund announced that it has
commenced an issuer tender offer to purchase for cash up to 93,900,910 of its common
shares, representing 70% of its issued and outstanding common shares. Unless
extended, the tender offer will expire at 11:59 p.m., New York City time, on Tuesday,
December 7, 2021. Subject to various terms and conditions described in offering
materials distributed to shareholders: (1) purchases will be made at a price per share
equal to 99% of the Fund’s net asset value (NAV) per share as of the close of trading on
the first business day after the expiration of the offer; and (2) if more shares are
tendered than the amount the Board has authorized to purchase, the Fund will purchase
the number of shares equal to the offer amount on a prorated basis.

The Fund will likely sell portfolio instruments during the tender offer to raise cash for the
purchase of common shares. Thus, during the pendency of the tender offer, the Fund
will likely hold a greater than normal percentage of its net assets in cash and cash
equivalents and may not be able to meet its investment goals and invest consistent with
its investment strategy. Upon conclusion of the tender offer, the Fund is expected to
have sufficient assets to continue to meet its investment goals while also continuing to
deliver on its mandate to provide high current income by paying monthly distributions to
shareholders who remain invested in the Fund.

Mergers

October 14 | Nuveen Diversified Dividend Income (JDD), Nuveen Tax-Adv Total

Return (JTA), and Nuveen Tax Adv Div Growth (JTD):  have approved a proposal to
reorganize the funds. JDD, JTA and JTD will combine into a single new fund, Nuveen
Multi-Asset Income Fund (NMAI), having a new investment mandate. The combined
fund will continue to employ a multi-asset strategy, but will more dynamically allocate its
portfolio with the objective of providing total return though high current income and
capital appreciation. Subject to the satisfaction of certain customary closing conditions,
the transactions are expected to become effective before the market opens on 22
November 2021. The funds are anticipated to begin transitioning their portfolio prior to
the reorganization, with additional portfolio transition occurring after the reorganization is
complete.
August 6 | PIMCO Dynamic Income (PDI), PIMCO Dynamic Credit and Mortgage
Inc (PCI), and PIMCO Income Opp (PKO):  Shareholders approved the proposals
necessary for PIMCO Dynamic Credit and Mortgage Income Fund (“PCI”) (NYSE: PCI)
and PKO to reorganize with and into PDI. (No action was needed from shareholders of
PCI.)

In connection with the reorganizations, PIMCO has agreed to a 75% management fee
waiver for PKO that will be in effect for two months following today’s approvals. In
addition, PDI’s annual management fee rate will decrease from 1.15% to 1.10% of its
average daily total managed assets effective as of the date of the closing of the
reorganization of PCI into PDI.  In light of the existing similarities in the Funds’
investment strategies and holdings, PIMCO generally does not expect to restructure
PKO’s or PCI’s portfolios or reposition their holdings to a significant extent prior to the
reorganizations in order to align with PDI’s investment strategies. However, as of today
through the closing of both reorganizations, PKO and PCI will be in a “transition period”
during which PIMCO may need to reposition the assets of PKO and PCI to align with the
investment strategies of PDI and prepare to transfer the assets of PKO and PCI. During
this time, PKO and PCI may not be pursuing their investment objective and strategies,
and limitations on permissible investments and investment restrictions will not apply.

Statistics
Sector:
Core:
All CEFs:

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Disclosure: I/we have a beneficial long position in the shares of ALL MENTIONED
either through stock ownership, options, or other derivatives.

I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it. I have no business relationship with any company whose stock is
mentioned in this article.
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