Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
With global macro risks running high and high yield spreads running low, it’s a bad combination for investors seeking out a high yield. Treasury bills offering more than 5% make for a good safe yield, but trying to reach into the double digits still requires pushing the boundaries of risk and low credit quality. Given that the risk of a market blow-up and recession still remains above average, I’ve been advocating in this space that investors manage both credit quality & duration risk while reaching for yield. It’s a delicate balance that may still prove dangerous in a deeper economic downturn.
The Nuveen Core Plus Impact Fund (NPCT) tries to diversify away a lot of risk by targeting both investment-grade and junk bonds from all around the world. That should help limit some downside risk, but the exposure to lower quality debt and the use of leverage still make this a risky proposition. Adding to the uncertainty is the fact that it’s only a 2-year old fund and hasn’t participated in a lot of market cycles. Nuveen is one of the biggest CEF providers in the world, so the management team is strong, but is it enough to overcome these obstacles?
Fund Background
NPCT seeks total return through high current income and capital appreciation, investing primarily in fixed income investments while giving special consideration to certain impact and environmental, social and governance (ESG) criteria. It may invest up to 50% of managed assets in below investment-grade investments, but no more than 10% in investments rated CCC or lower at the time of investment. The fund can invest without limitation in investments of foreign issuers, with no more than 30% of managed assets going to emerging market countries. NPCT also uses leverage to enhance yield and total return potential.
I’m not sure there’s much of an advantage to be had in the ESG criteria. This fund debuted right around the time where this was a hot topic, but the ESG craze has largely died out at this point. I think the all-quality, all-world aspect of NPCT is one of its biggest advantages. This adds a degree of flexibility should conditions change, but a 10% annual turnover ratio probably means that what you get is what you’re going to stick with. Still, if you can diversify away some unnecessary risks, all the better. The cost of implementing leverage, however, is very high, something that’s going to be an ongoing problem for any fund using leverage in this higher rate environment. That’s going to continue working against this fund, potentially at the risk of making it a persistent below average performer.
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