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Reaves Utility Income Fund: It’s Been A Tough Year

UTG is a well-regarded utility CEF. But that won’t protect you or it from losses in difficult markets. However, that doesn’t mean it isn’t a good fund. Reaves Utility Income Fund’s (NYSEMKT: UTG ) net asset value is down roughly 11.5% so far this year. That’s a rough showing, and investors have clearly been spooked, sending the market price of UTG down nearly 13% over the same span. That’s increased the discount of this well-respected fund, but not enough to scream buy… yet. What it does UTG is a utility fund, but takes a broad look at the space, including everything from the typical electric utility to telecom to oil to railroads. While utilities do make up around half the portfolio, the broader exposure means that UTG has more to offer on the diversification front. That can be a good thing, but also a bad thing — for example, owning oil and gas companies hasn’t been the best thing since the middle of 2014 when oil prices began to crumble. Still, Reaves has a long history of successfully navigating the various markets in which it invests. For example, over the trailing ten years through August, UTG’s annualized net asset value, or NAV, return is roughly 9%. That compares favorably to Vanguard Utilities ETF (NYSEARCA: VPU ), where the return was around 6.7%. Both numbers include reinvested distributions. And to UTG’s credit, its dividend has never included return of capital. It has always been made up of either income or capital gains. That said, capital gains have been a big piece of the puzzle in recent years, so a market downturn could make it harder for the CEF to maintain that streak. But if history is a guide, it will do whatever it can to keep return of capital to a minimum. The fund’s fees are a little high, with the expense ratio historically floating between around 1.5% and 2%. However that includes the interest costs associated with UTG’s use of leverage (it’s about 25% levered). The actual management fee has normally trended in the 1.2% area. That’s still high compared to an exchange traded fund like VPU, but not unreasonable for a closed-end fund. And for many investors, the added return will be more than worth the added expense. Yield is another place where UTG shines. While it’s nice that the fund has never dipped into capital to pay a distribution, the bigger number is that the yield is around 6.5%, paid monthly. That compares to VPU’s far less impressive yield of around 3.5%. Again, for the right investor, the added cost may be worth the added income benefit. And at 6.5% the yield isn’t so high that you have to fear a divided cut, which is a real risk for funds that yield 10% or more during a market downturn. So what’s going on now? But this year hasn’t been a good one for UTG. To be fair, that’s more a function of the market than the managers. UTG’s around 11.5% year-to-date NAV decline is roughly in line with the drop shareholders of VPU have experienced. In other words, Reaves Utility Income Fund is doing okay in a tough environment. However, spooked investors don’t usually care about things like that. They get scared and sell. So investor sentiment has been worse than performance, as shown by the nearly 13% drop in UTG’s market price. Which has left the fund’s discount to around 3%. That said, UTG isn’t a screaming buy. True, it is a good fund and anyone looking at the space should clearly be considering it. But the average discount over the past six months is around 4.7%, and the average over the past three years is around 4.7%. Based on its history, the discount is clearly still within a reasonable range. However, looking at the fund’s history a little closer, a discount in the 7% to 8% range is possible and would be a much better opportunity. This, however, doesn’t happen often. In fact, there are times when Reaves Utility Income Fund traded at a premium to its NAV. That’s not the norm for a closed-end fund. But Reaves has a great history, increasing the disbursement eight times since the fund started paying dividends in 2004 without a single distribution cut. And, as noted above, the distribution has never included return of capital. Add in the solid total returns and you can see that there’s a good reason why investors like the fund. Watch this one If you are looking for a diversified utility fund right now, you should consider UTG. It is truly a good fund that you should be comfortable owning for a long time. That said, if you are looking for a bargain, I don’t think UTG is there just yet. But with market volatility kicking up, keep a close eye on UTG, because fickle investors may just give you the opportunity to buy in on the “cheap.” Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Opportunity In Calamos Convertible Opportunities And Income Fund

Summary The recent sell-off in the CEF space has brought CHI to a discount value not seen since the financial crisis. 2- and 4-year z-scores in excess of negative 3.5 indicate extreme oversold conditions. CHI offers a current 10.91% yield with a possible chance of capital appreciation. With a fixed number of shares, CEFs can exhibit substantial premia or discounts to their net asset values [NAVs]. When investors become pessimistic, they become inclined to sell their CEF holdings even it if means selling at a price below the intrinsic value of the fund. Not surprisingly, the recent market turmoil has punished CEFs especially hard. As detailed in my recent article entitled ” Sell-Off In CEF Space Brings CEFL’s Discount To Record High “, 20 of the 30 constituents of the fund-of-funds CEFL (NYSEARCA: CEFL ) are at or close to 52-week high discounts. Exploiting of mean reversion in CEFs is a potential strategy to lock in higher yields as well as the chance for capital appreciation. In a July 2014 paper entitled Exploiting Closed-End Fund Discounts: The Market May Be Much More Inefficient Than You Thought , authors Patro, Piccotti and Wu provide significant evidence of mean reversion in closed-end fund premiums. This article identifies an opportunity to buy the Calamos Convertible Opportunities And Income Fund (NASDAQ: CHI ) at a greater discount than any time since the financial crisis. The fund Pertinent details for the fund are shown below. Details were obtained from Morningstar , CEFConnect or Calamos . CHI Inception 6/2002 AUM $731M Avg. volume 293K Yield (on price) 10.92% Yield (no NAV) 9.72% Adjusted yield (on price) 8.51% Adjusted yield (on NAV) 7.57% Leverage 28.34% Premium/discount -10.91% 5-year average P/D -0.30% Expense ratio 1.35% Active expense ratio 0.65% Morningstar rating **** As can be seen from the table above, CHI currently sports a 10.92% yield on price, while distributing 9.72% on its NAV. The reason for this discrepancy is due to its wide discount of -10.91%. Additionally, CHI uses 28.34% leverage. The adjusted yields shown assume 100% leverage for easier comparison to an unleveraged fund. CHI charges a total expense ratio of 1.35%. I previously devised an “active expense” metric that takes into account two factors: leverage and the expense ratio charged for a corresponding passive instrument. Taking into account the 28.34% leverage of CHI and the 0.40% expense you would to pay for the SPDR Barclays Convertible Securities ETF (NYSEARCA: CWB ), the price for the active management of CHI is a reasonable 0.65%. In terms of composition, CHI has its majority of assets in convertibles (57.06%), followed by corporate bonds (38.54%). Short-term debt and equity make up a very minor component of CHI. Widening discount Until recently, both CHI and the benchmark ETF CWB have had robust performances over the past few years. As can be seen from the graph below, CHI and CWB moved very closely from Jan. 2013 to around Mar. 2015 of this year. However, a major divergence suddenly appeared over the last few months, causing CHI to underperform by some 15% over brief period. What was the cause of CHI’s underperformance? Tracking the market price and NAV changes of the fund reveals the answer. As can be seen from the graph below, while the NAV of CHI decreased by around 10% over the past few months, mainly due to a general malaise in the high-yield credit market, the market price of CHI slumped by 20% over the same time period. The premium/discount chart of CHI over the past 1-year period shows this clearly (source: CEFConnect). Historical premium/discount Just having a wide discount alone is not good reason to buy a CEF. For mean reversion to take place, one must consider the historical premium/discount behavior of the fund. As can be seen from the chart below (source: CEFConnect), the current discount of CHI has reached levels that have not been seen since the financial crisis. Moreover, that was also the only time that the discount has exceeded -10%. In the boom years of 2002 to 2007, CHI actually experienced premia of 10%-20%, although this is unlikely to be replicated given that the ETF CWB became available from 2009 onwards. The following chart shows the current, and 1-, 3- and 5-year premium/discount values for CHI (data from CEFConnect). The z-score is a measure of the deviation of the premium/discount value of CEF from its historical value taking into account the volatility of said value. The following chart shows the 1-, 2- and 4-year z-scores for CHI (source: CEFAnalyzer). Mathematically, the 1-year z-score of -2.59 means that the discount would be expected to appear 0.48% of the time, the 2-year z-score of -3.52 corresponds to a 0.02% probability of appearance, and the 4-year z-score of -3.93 represents a measly 0.004% probability of occurrence. However, one should understand that this doesn’t mean that there’s a 99.996% chance that the discount will narrow, only that the observed discount is an extremely rare statistical occurrence. Moreover, it could be that the current discount represents a “new normal” of sorts, rendering the historical premium/discount value meaningless. Nevertheless, the z-score is a good starting point for gauging the sentiment of CEFs. Historical performance Besides having a large and negative z-score, it is also important to consider the historical performance of a fund. The following chart shows the total return performances of CHI, CWB and the SPDR Barclays High Yield Bond ETF (NYSEARCA: JNK ) since early 2009, the inception date of CWB. CHI Total Return Price data by YCharts We can see from the chart above that CHI has remained competitive with CWB and JNK from early 2009 to the start of 2015. As the premium/discount of CHI remained within a narrow range of +5% to 5% during this time, the price total return profile of CHI during this period roughly approximates its NAV total return profile during this time. The outperformance of CHI over CWB and JNK during rising markets is expected due to CHI’s use of leverage. Moreover, CHI has posted respectable NAV returns since inception in 2002. The following chart shows the annualized price and NAV returns of CHI over various historical time periods (source: Calamos). We can see that CHI’s historical performance has been very strong, with a 10.0% annualized return since 2002, and a 10-year annualized return of 7.3%. Keep in mind, however, that CHI uses leverage, which is currently at 28.34%. Distribution CHI pays a monthly distribution of $0.095, representing an annualized dividend yield of 10.92%. The following chart shows the dividend history of CHI since inception (source: CEFConnect). (click to enlarge) The dividend has been remarkably stable since 2008. However, one warning sign is that the fund has been paying out some of its distributions from return of capital over the past 12 months. My calculations show that 19.8% of the past year’s dividends consisted of return of capital. If this continues, the return of capital distributions will either erode CHI’s NAV, or force a distribution cut. Summary The sell-off in the CEF space has pushed CHI’s discount to levels not seen since the financial crisis. The extreme 2- and 4-year z-scores in excess of -3.5 indicate severe pessimism regarding the fund. Purchasing CHI now allows an investor to lock in a higher yield as well as the opportunity for capital appreciation if mean reversion takes place. Moreover, CHI has a strong historical track record since 2002, and its expense ratio is also reasonable. Risks of CHI include interest rate risk and credit risk of the underlying holdings, as well as a further widening of the discount value. The former risks can be somewhat reduced by pairing a long position in CHI with a short position in CWB and/or JNK, but the latter risk remains. (See my previous articles here and here for previous examples of where mean reversion allowed annualized profits of ~20% to be made on CEF pairs trades). Disclosure: I am/we are long CHI, CEFL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Summer Madness To Nut Case? A Fall Preview Of ETFs

Summer 2015 saw investors sweating it out on the markets as the U.S. stock market ran into a correction territory thanks to the China gloom, Fed uncertainty, emerging market weakness and slumping commodities. Perhaps they should have stuck to the popular trading adage “Sell in May and Go Away”. After all, the May end to early September period has historically been known for melting profits at the bourses. This time around, the markets went berserk with performances swinging from sky-high in certain sectors to dreadful by others. Will the markets continue to shake in fall as well? Let’s check out: Housing Booms The housing market fired on all cylinders in summer thanks to soaring demand for new and rented homes, rising wages, accelerating job growth, affordable mortgage rates, and of course increasing consumer confidence. Among the most notable data, new home construction jumped to an almost eight-year high in July and existing home sales rose to an eight-year high. Further, homebuilder confidence in August surged to a level not seen in decades. The robust numbers spread optimism across the sector with the iShares U.S. Home Construction ETF (NYSEARCA: ITB ) and the SPDR Homebuilders ETF (NYSEARCA: XHB ) touching new highs on August 18 and 19, respectively. Both the ETFs have a decent Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook and were up 3.6% and 0.1%, respectively, over the past three months. The outperformance is likely to continue in the coming months given that the residential and commercial building industry has a solid Zacks Rank in the top 29%. China Glooms China has been roiling the global stock markets since the start of the summer with worries intensifying last month when the country surprisingly devalued its currency renminbi by 2% to ramp up exports. After that, sluggish factory activity data heightened fears of China’s hard landing and the resultant global damage. This led to terrible trading in China ETFs, which were the hot spot at the start the year. Even the latest round of monetary easing by the People’s Bank of China (PBOC) to fight the malaise did not help the stocks to recover the losses. Given the steep decline in the stocks, China ETFs had a bloodbath with the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) and the Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF (NYSEARCA: ASHS ) stealing the show. Each of the funds was down over 20% in August and nearly 53% over the past three months. CNXT has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook while ASHS has a Zacks ET Rank of 3. Rough trading in China is likely to continue at least in the near term given that the world’s second-largest economy is faltering with slower growth, credit crunch, a property market slump, weak domestic demand, lower industrial production and lower factory output. Corporate profits are also lower than a year ago. Additionally, a slew of recent measures are not helping in any way to revive investors’ confidence. Further, most analysts believe that China will continue to face a long period of uncertainty that would result in more volatility Crazy Run of ‘The Oil’ After a stable start to summer, oil saw a frenzied August, showing large swings in its prices. In fact, the commodity exhibited the maximum volatility in 24 years . This is because oil price enjoyed its biggest rally of more than 25% in the last three days of August but softened again as worries about growth in the Asian powerhouse resurfaced. U.S. crude was trading around $60 per barrel for most of the first half of summer but gradually dropped to nearly $38 per barrel on August 25 – a level not seen since 2009. Oil suddenly sprung up to over $49 per barrel for a three-day period ending August 31, and again retreated to around $46 per barrel. Even after the spectacular three-day performance, energy ETFs failed to recoup their losses made in mid-to-late summer. In particular, stock-based energy ETFs like the First Trust ISE-Revere Natural Gas Index ETF (NYSEARCA: FCG ) and the PowerShares S&P SmallCap Energy Portfolio ETF (NASDAQ: PSCE ) plunged 35.9% and 32.4%, respectively, over the past three months while futures-based energy ETFs like the iPath S&P Crude Oil Total Return Index ETN (NYSEARCA: OIL ) and the United States Oil ETF (NYSEARCA: USO ) lost 31.6% and 27%, respectively. FCG and PSCE have a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook. The outlook for oil and the related ETFs look dull at present given the unfavorable demand and supply dynamics. In fact, the International Energy Agency (IEA) in its recent monthly report stated that the global oil market would remain oversupplied through 2016 though lower oil prices and a strengthening economy will boost oil demand at the fastest pace in five years. Yet, demand is currently not as strong as expected given the China slowdown and weakness in emerging markets. Automotive Thrives The U.S. automotive industry is on top gear with fat wallets, rising income and increasing consumer confidence adding adequate fuel. This is especially true as auto sales have been consecutively on the rise over the past four months with sales remaining above the healthy 17-million mark. The industry is likely to flourish going forward given that the economy is gaining traction after the first-quarter slump. Economic activity is picking up, labor market is strengthening, consumer spending is increasing, and the housing market is improving. Additionally, lower gasoline price is a huge boon to auto sales. The upside can be further confirmed by the solid Zacks Industry Rank, as about two-thirds of the industries under the auto sector have a strong Zacks Rank in the top 30%, suggesting growth ahead. Investors could ride out this surging sector with the only pure play the First Trust NASDAQ Global Auto Index ETF (NASDAQ: CARZ ) . The fund was a victim of recent broad sell-off, shedding 16.4% over the last three months. However, the ETF has a solid Zacks ETF Rank of 2 with a High risk outlook, urging investors to take advantage of the current beaten down price. Link to the original post on Zacks.com