VVR And PHD: Monthly Floating Rate CEFs

It looks like interest rates may be higher for longer than previously reckoned. If so, that should be a boon to floating rate income vehicles, such as Pioneer Floating Rate Fund (PHD) and Invesco Senior Income Trust (NYSE:VVR).

Fund Profiles:

Both funds are closed-end funds. VVR began in 1998 and PHD started in 2004.

VVR seeks to provide a high level of current income consistent with preservation of capital. VVR invests mainly in floating or variable senior loans. VVR is much larger than PHD with over 10X the average daily volume and over 3X PHD’s asset base. VVR had 571 holdings as of 12/31/23 vs. 292 for PHD.

Both funds use ~32% leverage and PHD has a higher expense ratio of 4.25% vs. 3.57% for VVR. Both funds pay monthly distributions.

Dividends:

VVR has a much higher five-year distribution growth average of 13.5% vs. 9.4% for PHD. VVR had its biggest distribution growth years in 2021 and 2022, after maintaining its payouts in COVID-challenged 2020.

PHD cut its payouts by 7.8% in 2020 and has had annual growth ever since, with 2022 and 2023 seeing its biggest distribution increases.

At $4.19, VVR yields 12.32%, whereas PHD yields 11.62%. VVR should go ex-dividend next on ~5/10/24, and PHD should go ex-dividend this week, on 4/18/24.

Holdings:

VVR’s sector exposures were stable since autumn 2023 – its top sector remains Service, at 16.1%, followed by Healthcare, Chemicals, Gaming/Leisure, and Manufacturing.

PHD’s sector exposure saw more changes in the past half year. Consumers increased from 19% to 22.5%, and Capital Goods fell off of the top 5 sectors, being replaced by Basic Industry.

VVR’s biggest maturity exposure is 3-5 years, at 56.7% followed by 1-3 years, at 20.65% and 5-10 years, at 19.18%.

PHD’s maturities are somewhat shorter than VVR’s, with ~15% maturing in under two years.

Both firms favor B-rated securities, although VVR has a much lower exposure to them, at 31.6%, vs. 56.87% for PHD. The biggest difference in quality between the two funds is that VVR holds 40.87% in unrated securities, vs. just 6.74% for PHD.

PHD has a larger exposure to BB-rated issues, at 22%, vs. 10.26% for VVR.

Performance:

PHD has outperformed VVR on a total return basis since our previous article on these two funds, ringing up a 19.16% total return, vs. 17.36% for VVR. Both funds trailed the S&P 500 on a price performance basis.

Looking back further, PHD outperformed VVR on an NAV basis over the past year, but VVR has performed better during the past 3, 5, and 10 years, in addition to outperforming PHD on a price basis over the past 1, 3, 5, and 10-year periods:

Valuations:

Since NAV/Share is calculated at the end of each trading day, you have to look at the most recent closing values to determine the current NAV discount or premium. Buying CEFs at a deeper discount than their historical average discounts/premiums can be a useful strategy due to mean reversion.

At its 4/12/24 closing price of $4.29, VVR was selling at a 4.63% premium to its NAV/share, which is much higher than its 1-, 3-, and 5-year average prices to NAV of -3.26%, -5.87%, and -8.38%.

PHD’s 7.03% discount to NAV was more in line with its 1-, 3-, and 5-year average prices to NAV of -10.89%, -7.92%, and -8.63%, although it wasn’t as deep of a discount as those historical averages.

Parting Thoughts:

VVR’s price to NAV is well above historical averages – we’ll wait for a price that’s more in line with past discounts.

PHD looks closer to a buying prospect based upon its NAV discount, but it’s not quite there yet, so we advise waiting for a deeper discount. Another issue to be aware of is that the rate debate could shift rapidly over the coming months, which would impact floating rate vehicles such as VVR and PDH.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.