Wall Street's Deepest Values: 5 Cheap CEFs Yielding 7%+

Discounted closed-end funds (CEFs) are highlighted as a contrarian investment opportunity for income-seeking investors, with many trading at significant discounts to net asset value (NAV), some exceeding 10-12%, and offering high distribution yields up to 9.7%. The article details various strategies, including covered-call funds like Nuveen's DIAX, tech-focused funds such as Neuberger Berman's NBXG, and leveraged multi-asset funds like Virtus's ZTR, alongside micro-cap and global allocation options. While these CEFs present compelling valuations, the analysis notes that some have exhibited historical underperformance relative to benchmarks or carry specific risks inherent to their strategies, despite attractive payouts.

Analysis

The market for closed-end funds (CEFs) is presented as an inefficient corner offering significant value, characterized by high distribution rates ranging from 7.5% to 9.7% and substantial discounts to net asset value (NAV) between 11% and 12%. However, a detailed review of the highlighted funds reveals a critical divergence in total return potential and risk profiles. Funds like the Virtus Total Return Fund (ZTR) and the Nuveen Dow 30 Dynamic Overwrite Fund (DIAX) exhibit cautionary traits; ZTR, despite a 9.7% yield and an 11% discount, has shown stark underperformance with muted recoveries, a concerning signal for a leveraged fund. Similarly, DIAX's covered-call strategy results in significant underperformance versus the Dow, making its 8.4% yield less appealing except in a range-bound or declining market. Conversely, other funds present more compelling arguments. The Calamos Global Dynamic Income Fund (CHW) trades at a 10.7% discount, more than double its five-year average, and demonstrates favorable, albeit volatile, performance against its benchmark. The Neuberger Berman Next Generation Connectivity Fund (NBXG) offers a unique thematic exposure to AI and connectivity, and while it has lagged the broader tech sector, its recent performance shows promise, supported by an 11.2% discount. The analysis underscores that while headline yields and discounts are attractive, the underlying strategy, source of distribution, and historical total return are paramount differentiators of opportunity versus potential value traps.

Key Decisions for Investors

• Investors should prioritize total return analysis over headline distribution rates, as funds like ZTR and DIAX demonstrate that high yields can mask significant underlying asset underperformance.
• Evaluate the nature of the discount to NAV; funds such as CHW, trading at a discount more than double its historical average, may present a tactical opportunity, whereas a persistent discount like RMT's should be viewed as a structural characteristic rather than a temporary bargain.
• Consider aligning CEF selection with market outlook and risk tolerance, for instance, utilizing covered-call funds like DIAX for a neutral-to-bearish market view, or exploring leveraged, positively-trending funds like CHW and thematic plays like NBXG for a higher-risk, growth-oriented strategy.
• Scrutinize the source of distributions, noting the difference between distributions from options premiums (DIAX), realized capital gains (RMT), or leveraged income (ZTR, CHW), as each carries distinct implications for sustainability and risk.