PHT: A Pick From Our CEF Screen – Pioneer High Income Trust (NYSE:PHT)

This article was originally published a month ago – since then the fund’s discount has tightened about 3%, with the current yield falling about 0.4%. We still find value in the fund, though it has diminished somewhat.

In this article, we highlight a fund that has popped up on our daily CEF screen which we maintain at Systematic Income. The Pioneer High Income Trust (PHT) is a high yield CEF which boasts a number of attractive metrics, from historical absolute and risk-adjusted returns, to distribution coverage, yield, discount valuation and fee. We think this combination of attractive features should support the fund in the medium term.

Meet PHT

PHT is a $417 total asset high yield-focused CEF trading at a 6.75% discount and a current yield of 8.5%. The fund is allocated 65% to US high yield with 10% in international high yield and another 7% in emerging markets. In credit quality, the fund has nearly half of its assets allocated to single Bs, with another quarter in double Bs and 18% in CCCs or not-rated buckets.

The fund has a below-average fee at 0.98% vs. the sector average of 1.19%. The combination of below-average fee, wider-than-average discount and higher-than-average yield is pretty powerful and makes the fund’s discount-adjusted fee 0.45%, which is less than half the sector average and on par with passive ETFs.

Fund Distributions And Yield

PHT has a very curious distribution trend. We can see that relative to its sector, the fund has cut much more aggressively in the early part of the last 5 years. However, the trend over the last few years has stabilized.

Source: Systematic Income CEF Tool

The fund’s current yield at 8.5% is well above the sector average of 7.72%. The combination of bigger than average cuts with a bigger-than-average current yield suggests to us that the fund used to be a massive overdistributor.

Source: Systematic Income CEF Tool

This is indeed what we find. At the present moment, however, the fund’s distribution coverage at 99% (as of September 30, 2019) is well above the sector average of 92%.

In the past year, PHT has seen two positive developments for distributions. First, it has raised its distribution by nearly 4%, outperforming the sector, which bodes well for a fund that now appears to follow a more conservative distribution policy. Secondly, since its last earnings report, 1-Month Libor, which serves as the base rate for the fund’s leverage facility, has fallen by about 0.3%, which has boosted earnings by 0.15% on net assets, all else equal.

Taking a look at the composition of PHT’s yield, we can see that the fund wrapper is able to add about 1.2% of additional income to its 7.2% portfolio yield, which is quite attractive, in our view, and well above the sector average of just 0.4% additional yield added by the fund wrapper over the underlying assets.

Source: Systematic Income CEF Tool

Finally, the fund’s 3-year net NAV (NAV excluding distributions) is above the sector average, meaning it has done a better job of conserving its post-distribution asset base. A higher net NAV trend generally makes it less likely for funds to engage in efforts to conserve assets such as tender offers or distribution cuts. These efforts often hurt shareholders, as they can hammer prices.

Decent Historical Performance

The historical NAV performance of PHT has been pretty good. The fund has only slightly underperformed the sector on a 5-year NAV basis, but has outperformed more recently over the last 1 and 3 years.

Source: Systematic Income CEF Tool

Very oddly, the fund has had a negative price performance over the 5 years, although this is connected to its price deflation after it began a series of sharp distribution cuts.

One reason the fund has made it on our screen is its excellent historical alpha, measured as the sector pairwise average risk-adjusted NAV return, which is well above the sector average.

Good Risk Control

PHT boasts a below average NAV volatility, which is a pleasant surprise given its above-sector yield.

Over the last couple of years, the fund’s drawdown has mostly been in line with the sector average. Prior to that, PHT suffered a calamitous price drawdown, driven by the combination of a high premium and steep distribution cuts.

Source: Systematic Income CEF Tool

Attractive Discount Valuation

What muddies the discount valuation discussion a little bit is the huge premium deflation PHT suffered in the early part of 2015.

Source: Systematic Income CEF Tool

If we zoom in on the data below zero, we can see that since its massive premium deflation, the fund used to trade mostly in line with the sector average. More recently, however, the fund’s discount moved wider of the sector average, which makes it attractive, in our view.

Source: Systematic Income CEF Tool

Macro Picture Priced For Perfection

If there is one fly in the bullish ointment, it is the macro picture. Credit spreads of single-B rated firms – the largest rating allocation bucket of the fund – are close to post-crisis tights, which makes the fund’s assets quite expensive in historical terms. That said, the economy does appear to be coming out of a recent slowdown, and corporate interest coverage is still relative healthy. However, we would not rule out a correction in credit spreads, which could pressure the sector NAVs.

Conclusion

We like PHT across a number of metrics – its good historical performance and alpha, excellent distribution coverage and yield, attractive discount valuation and low fee. Although the underlying asset class is priced for perfection, we think the humming economy and relative attractiveness of the fund should support it in the medium term.

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Disclosure: I am/we are long PHT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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