Bear Market Thoughts: Is Closed-End Fund Investing 'Chasing Yield?'

It's really all about the assets which drives returns.
Managers can pay out anything they want.
Were we yield chasing with our MLP and CLO positions? I say no.
Remember CEF investors, don't just focus on the yield!
Author's note: This article was initially released to CEF/ETF Income Laboratory members on April 6, 2020.
Closed-end funds have taken it on the chin the last two months. Not only are prices and NAVs of funds way down (but price more so than NAV, but that's a topic for another post), but also distribution cuts are likely coming too. Not surprisingly, this brings out the possibly well-meaning but also overly simplistic comments about how CEF investing is "chasing yield". The insinuation is that by only focusing on yield, CEF investors are forgetting about risk.

In this Bear Market Thoughts, I'd like to address the question, "Is Closed-End Fund Investing 'Chasing Yield'?"
Don't just focus on the yield!
It is an unfortunate fact that many CEF investors do in fact "chase yield" while ignoring risk. CEFs are dominated by retail ownership, and it is understandable that many such investors do strongly seek out the ability to receive a high income from their investments. This is, in my opinion, why certain CEFs get bid to massive +50%-plus premiums despite the fact that their performances aren't better compared to their peers at the portfolio level. This type of yield chasing invariably does not end well. When the inevitable distribution cut occurs, the premium (and share price) usually collapses, saddling the investor with capital losses equivalent to many years of distributions (see Why CEF Distribution Stability Is Overvalued).
On the other hand, at the CEF/ETF Income Laboratory, one of our favorite sayings is "remember CEF investors, don't just focus on the yield!"
Fun fact, how many times have I mentioned the yield of a fund in the title of an article over the last year? The answer is zero times! In fact, in the nearly... Read more