IIM Vs. NUV: Invesco And Nuveen Value Municipal CEFs Compared

(This article was co-produced with Hoya Capital Real Estate)

Introduction

Stocks are classified as either Value or Growth. In the rated-bond world, that divide is referred to as investment-grade or “junk”, with the first set also being referred to as Value by fund managers, such as the two CEFs reviewed here. Regardless of the classification by rating or tax status, 2022 was a year fixed income investors never want repeated as all rates rose as the FOMC pushed up short-term rates to fight inflation.

Last year saw rate climb to level last seen pre-COVID.

This caused almost all fixed income assets to get clobbered, especially Municipal Bond funds since they have some of the longest durations.

I included the PIMCO Investment Grade Corporate Bond Index ETF (CORP) to provide a comparison to that class of investment-grade bonds. We see that duration did matter and all the tax-free funds outperformed CORP.

In this article, I compare two Municipal Bond CEFs that invest in what they classify as Value bonds:

• Invesco Value Municipal Income Trust (NYSE:IIM)
• Nuveen Municipal Value Fund (NYSE:NUV)

Later, in the comparison section, I will show how each has performed and also include a High-Yield Municipal CEF to see if investors benefited by avoiding the riskier part of the market.

Invesco Value Municipal Income Trust review

Seeking Alpha describes this CEF as:

States. The fund primarily invests in investment grade municipal securities which include municipal bonds, municipal notes, municipal commercial paper, and lease obligations. It employs fundamental analysis with bottom-up security selection approach to create its portfolio. IIM started in 1993.

Source: seekingalpha.com IIM

IIM has $625m in assets and shows a Forward yield of 5%. The CEF comes with 144bps in fees according to Seeking Alpha; the Invesco site doesn’t list this.

IIM holdings review

I will start my review with the credit rating allocations, which I calculate to give IIM an overall rating of “A”.

Next is the maturity allocation, which helps set the portfolio duration, which drives how the change in interest rates moves the asset’s price.

The Effective Duration is 12.7 years; WAM is 17.9 years. As for maturing bonds being replaced by higher yielding ones; under 1% are available for that over the next three years. I found a new allocation on Morningstar, that I have missed in the past, coupon allocation.

IIM has a high allocation to Zero-Coupon bonds as I suspect their PIK level could be zero unless one went into bankruptcy, the usual reason for PIK payments. Morningstar lists the WAC at just over 5%.

The top five states are, though that does not mean the state itself was the Issuer.

Like stocks, municipal bonds come in multiple types too, and IIM is very spread out. If I counted right, about 26% are tax-revenue supported.

The Call schedule shows about 20% could be before 2025, though as rates rise, the odds of a Call go down.

Top holdings

IIM holds 566 different assets.

IIM distribution review

IIM cut its payout four times in 2022, going from a monthly rate of $.064 to the current $.0507. With little portfolio turnover (<10%), I contributed that to the increasing cost of keeping a 37% leverage ratio. In two of the last months of 2022, IIM had to use a small percent of ROC to maintain even the reduced payout. Last reported earnings were below the payout and the UNII balance was negative; not good signs that the current payout will hold for long.

IIM price and NAV review

The next chart shows a clearer picture of how the premium/discount has moved over the recent five year; Since Inception shows the same pattern.

With a 1-year Z-score of -.81, IIM is trading at a favorable discount level, as the chart indicates too.

Nuveen Municipal Value Fund review

Seeking Alpha describes this CEF as:

The fund invests in undervalued municipal securities and other related investments the income, exempt from regular federal income taxes that are rated Baa or BBB or better. It employs fundamental analysis with bottom-up stock picking approach to create its portfolio. The fund benchmarks the performance of its portfolio against the Standard & Poor’s (S&P) National Municipal Bond Index. NUV started in 1987.

Source: seekingalpha.com NUV

NUV has $1.9b in assets and shows a Forward yield of 3.8%. Here, the fees are only 48bps, almost 100bps under IIM’s! With only 1% leverage, that explains most of the fee discrepancy and is a big difference between the two CEFs: leverage or the lack there of. NUV states the leverage has an annual cost of 2.5%.

NUV holdings review

Nuveen posts some common values for the NUV portfolio.

The rating allocations are:

Morningstar gives NUV a A+ overall credit rating; my calculation shows the same. The maturity schedule is:

NUV has more bonds maturing within three years than does IIM, giving it a slight edge in buying bonds with higher yields, though that is not a guarantee since rates could have been higher when the maturing ones were issued. NUV has 10% of its portfolio callable over the next year.

NUV has even a larger allocation than IIM did for the Zero-coupon/PIK category. The data provided by Nuveen itself shows these are probably all Zero-coupon bonds, few, if any PIKs. Like IIM, the majority are in the 4-6% coupon range. Nuveen consolidates their sectors more than Invesco does.

One difference that stands out is the 42% of bonds tied to tax revenue flows; much higher than IIM’s. More state data was found for NUV.

Nuveen also provides the Top Issuers, which is important as many have multiple bonds in the portfolio.

Top holdings

These represent 16% of the portfolio, which holds 468 assets.

NUV distribution review

Assuming this pattern reflected the direction of overall interest rates, one might hope for a payout boost sometime in 2023, though that didn’t happen in 2022.

NUV price and NAV review

Unlike IIM, the data older than five years also shows several times when the CEF sold at a premium, though the post-COVID levels are some of the best. The current discount (4.09%) scores a positive .47 Z-score, not as attractive, historically speaking, as IIM’s current discount.

Comparing portfolios of the two CEFs

I added the Nuveen Municipal High Income Opportunity Fund (NMZ), which I reviewed in late 2021, to the mix. I guess because many municipal bonds are not rated and few are rated below investment-grade, this was the closest name that indicated they might focus lower on the credit scale, though their overall credit rating is above “junk”.

Factor	IIM	NUV	NMZ
Assets	$625m	$1.9b	$1.2b
Fees	144bps	48bps	143bps
Leverage	37%	1%	40%
Yield	5.0%	3.8%	5.2%
Premium/Discount	-8.4%	-4.1%	-5.75%
Duration/Maturity (yrs)	12.7/17.9	8.0/15.4	18.3/22.8
A- rated or better	62%	80%	9%
Below BBB-	8%	3%	10%
Not rated	14%	7%	70%
Overall rating	A	A+	BBB+

Click to enlarge

Credit ratings seems to show NMZ invests lower on the credit scale, but the extreme level of Not-rated bonds held by NMZ makes that rating more questionable than the others. The ability of leverage to boost the yield is evident.

Leverage’s effect on risk is now evident as both funds with high usage have much higher StdDev than NUV does. Despite having the lowest CAGR, NUV has the best Sharpe and Sortino ratios due its lower risk. Ownership seems to come down to an investors appetite for leverage-enhanced results.

Portfolio strategy

First consideration is one’s margin tax rate, both federal and state, and where you are in those brackets. This is needed to compare what your after-tax yield is, and then comparing that to the yield available from taxable bonds. Even more important at this time is your view on where interest rates are going. That will influence where on the duration/maturity timeline you want to be. Shorter when rising; longer when rates have peaked, which experts believe will be this summer.

Investors in states with high incentive tax rates, need to review if there is a single-state fund; some of which I recently reviewed.

• NKX Vs. PCQ: Comparing CA-Only Muni CEFs
• MUJ Vs. NXJ: There Is A Clear Winner, NJ Residents
• NRK Vs. NAN: Comparing Nuveen NY State Municipal Bond CEFs

Links to other recent Municipal bond articles:

• NEA Vs. NUW: Clear Winner Between These Nuveen AMT-Free CEFs
• PMF: PIMCO Muni Bond CEF Giving Nuveen A Challenge
• NKX Vs. PCQ: Comparing CA-Only Muni CEFs
• MUJ Vs. NXJ: There Is A Clear Winner, NJ Residents
• NRK Vs. NAN: Comparing Nuveen NY State Municipal Bond CEFs

Final thought

Any due diligence should include what other classes of fixed income funds have done for investors. Here is a sampling of possibilities.

Many of those tickers were recently reviewed by me or other SA Contributors.