Published Thu, 14 May 2020 05:22:05 -0400 on Seeking Alpha
HIE is looking attractive once again.
Near 4% annual alpha available from discount contraction due to term structure.
However, take note of high energy/midstream allocation.
Author's note: This article was released to CEF/ETF Income Laboratory members on April 29, 2020, with certain numbers updated. Please check the latest data before investing.
The main thesis is that potential "pull-to-par" alpha from Miller/Howard High Income Equity Fund's (HIE) term structure means that the current discount is attractive.
HIE is a high dividend closed-end equity fund that we had owned in our original Tactical Income portfolio from way back in 2016, but sold it as its discount contracted to near parity.
Why did we sell it? HIE is a term fund, due to liquidate on November 24, 2024. Therefore, when the fund traded up to near parity, there would be not much alpha potential left to be harvested from discount contraction at that point.
It should be noted that the liquidation event is not an iron-clad guarantee. A one-year extension is possible by the Board's decision. Any further extension requires the approval of shareholders. From the fund website:
The Fund has a 10 year term limit. It will terminate on November 24, 2024 unless the Board of Trustees determines that it is in the best interests of the shareholders to extend the term limit for one year or if shareholders vote to shorten or extend the life of the Fund.
Funds usually aren't able to just abolish the liquidation mandate willy-nilly. To convince shareholders approve the change they usually have to offer sweeteners such as a tender offer for their shares which in effect allows an investor to cash out at NAV. And the wider the discount near the liquidation date, the less likely that investors will want to approve anything other than liquidation.
In any case, having a term structure is still better than no term structure when it comes to potential discount... Read more
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