JPS: Strong-Yielder CEF Trading At A Discount (NYSE:JPS)

Nuveen Preferred & Income Securities Fund (NYSE:JPS) is a closed-end fixed income mutual fund (“CEF”) invested in preferred debt securities, convertible debt securities, and convertible preferred securities mostly rated BBB. The fund has consistently paid a monthly dividend for the past 20 years. The yield has mostly ranged between 6 to 8 percent, which is extremely healthy from the point of view of income-seeking investors. The price has dropped by 28 percent this year, which may raise some concern among investors.

However, this fixed-income CEF is generating its yield primarily from the dividend or coupons from its fixed income securities. Weighted coupon currently stands at 6.21 percent, which keeps the fund in a reasonable sound position with respect to dividend payment. The fund is trading at 11 percent discount to its Net Asset Value, which might make investors interested in this fixed income fund. In my opinion, there are primarily two factors to be cautious about JPS: its high expense ratio of 1.8 percent; and the fact that only 7.35 percent of the entire investment is rated A or above.

Nuveen Preferred Securities Income Fund

Nuveen Preferred & Income Securities Fund was launched by Nuveen Investments, Inc., and is co-managed by Nuveen Fund Advisors LLC and Spectrum Asset Management, Inc. The fund was formed on June 24, 2002 as Nuveen Quality Preferred Income Fund 2, and renamed later. The fund’s primary objective is to seek current income consistent with capital preservation, and it benchmarks its performance against ICE BofA USD Contingent Capital TR Index. The fund has a very high expense ratio of 1.8 percent. However, the ratio has come down from the 2.58 percent recorded during March 2019. The fund has been able to generate a consistently high yield despite such a high expense ratio.

The Fund may invest without limit in U.S. dollar-denominated securities of foreign issuers. It may also hedge its exposures through futures contracts on a maximum 35 percent of its Managed Assets. Currently, JPS has an asset under management (AUM) of $1.65 billion and has a market capitalization of $1.44 billion. This CEF has a relatively very high leverage of 40 percent. More than half of its portfolio is invested in bonds and preferred stocks of renowned banks. Another 30 percent is invested in Insurance companies and companies operating in the capital market.

Components and Inherent Risks of JPS’s Investment Portfolio

Nuveen Preferred Securities Income Fund has invested in bonds of financial institutions such as Bank of America Corporation (BAC), Truist Financial Corporation (TFC), MetLife, Inc. (MET), Nationwide Financial Services, Inc., HSBC Capital Funding Dollar I L.P., The Charles Schwab Corporation (SCHW), Huntington Bancshares Incorporated (HBAN), The Bank of New York Mellon Corporation (BK), Nordea Bank Abp (OTCPK:NRDBY), Wells Fargo & Company (WFC), MetLife Capital Trust IV, BNP Paribas SA (OTCQX:BNPQF), DnB Bank ASA (OTCPK:DNBBY), Prudential Financial, Inc. (PRU), UBS Group AG (UBS), AXA SA (OTCQX:AXAHY), Zurich Finance (Ireland) DAC, Citigroup Inc. (C), etc.

Similarly, the fund has invested in preferred securities of financial institutions, especially banks, such as Société Générale Société anonyme (OTCPK:SCGLF), Barclays PLC (BCS), Credit Suisse Group AG (CS), Lloyds Banking Group plc (LYG), BNPQF, PNC Financial Services Group, Inc. (PNC), Liberty Mutual Group Inc., UBS Group Funding (Switzerland) AG, Crédit Agricole S.A. (OTCPK:CRARF), ING Groep N.V. (ING), Banco Santander, S.A. (SAN), UBS, WFC, KeyCorp (KEY), Farm Credit Bank of Texas (OTC:FCTXZ), Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), NatWest Group plc (NWG), Morgan Stanley (MS), The Allstate Corporation (ALL), UniCredit S.p.A. (OTCPK:UNCFF), Standard Chartered PLC (OTCPK:SCBFF), Danske Bank A/S (OTCPK:DNSKF), and JPMorgan Chase & Co. (JPM), etc.

JPS also has investments in capital contingent securities (CoCos). These are hybrid instruments that allow banks to convert them into equity if certain capital thresholds are breached. Contingent convertibles were created to help undercapitalized banks and prevent another financial crisis like the 2007-08 financial crisis. By the very nature of its portfolio, JPS runs a very high credit risk. Hence, the financial health and metrics of the banking sector are of utmost importance for this fund. Fortunately, we are not witnessing any major signs of vulnerability, something we witnessed during the global financial crisis.

It’s quite common for fixed income CEFs to have a higher investment in preferred stocks of banks, as the banks usually raise a significant portion of capital through preferred stocks. This happens due to the obligatory requirements of maintaining Tier 1 capital, in which one of the most popular instruments is preferred stocks. However, the fund is well diversified geographically and has invested almost half of its assets in fixed income securities outside the United States.

As most investments are done in fixed income generating securities of renowned financial institutions, the fund is quite safe from the credit risk or default risk. Thus, although only 7.35 percent of the entire investment is rated A or above, the fund is credible enough. Moreover, almost 78 percent of its investments are rated BBB. BBB ratings indicate expectations of low default risk, and the capacity to pay for financial commitments is considered to be adequate. The only concern remains that adverse business or economic conditions may probably impair this capacity.

Investment Thesis

Currently, the stock is trading at a discount to its NAV. This suggests that the stocks are available at a value which is lower than what it is actually worth. More importantly, this fund doesn’t always trade at a discount to its NAV. Thus, investors should take advantage of this current value, and try to accumulate this stock. Most of its investments are in banks and insurance companies, and thus theoretically there lies a downside risk in case another financial crisis breaks out. The fund is using high leverage, too. However, due to its investment grade collaterals, the risk will not be that high.

There is a possibility of this fund to trade at a deeper discount to its NAV than at present. However, that will depend primarily upon the macroeconomic situation in the coming months. If there are further interest rate hikes, then the price probably will move further south, as the income of this fund will remain almost the same. At the same time, if the market becomes more bearish, there will be a possibility of this fund performing better than the rest, due to its nature of generating fixed income. With that view, I would hold this fund for at least another quarter, and wait for an opportune moment to accumulate further shares.