(This article was co-produced with Hoya Capital Real Estate)
I promised a reader a post-merger follow-up post once Nuveen releases the new Nuveen Select Tax-Free Income Portfolio (NYSE: NXP) composition. This article makes this, in addition, compares NXP to other national Nuveen tax-exempt CEFs with different values for important variables.
High-income investors are turning to tax-free funds to improve their after-tax returns. Although they help investors avoid federal income tax, income from municipal bonds is included in the calculation of its MAGI, or modified adjusted gross income, a figure used by IRMAA and certain other IRS eligibility rules.
While some of the other municipal bond strategies seem better choices, of the three investment-grade, non-leveraged CEFs, NXP is the best..
Nuveen Select Tax-Free Income Portfolio Review
Seeking Alpha describes this CEF as follows:
The Fund’s investment objective is current income exempt from ordinary federal income tax, consistent with the preservation of capital. The fund invests in high quality municipal securities rated Baa and BBB or better. It compares the performance of its portfolio to the Standard & Poor’s (S&P) national municipal bond index and the average of Lipper General and Insured Unleveraged unleveraged municipal debt funds. The original NXP fund was launched in 1992. Its two related funds were integrated into NXP at the end of 2021.
Source: Alpha Research
NXP has $688 million in assets under management and is yielding 3.9%. Nuveen charges a fee of 29 basis points, which is less than many Nuveen CEFs, because NXP uses no leverage.
Nuveen includes this statement on its possible asset allocation strategy.
The Fund may invest up to 20% of its assets under management in municipal securities rated below investment grade or deemed by the manager to be of comparable quality, of which up to 10% of its assets under management may be rated below B-/B3 or comparable quality. The Fund may invest in municipal inverse floating rate securities, also known as callable bonds. The Fund’s use of callable bonds to more effectively implement its investment strategy may create up to 10% effective leverage.
Source: nuveen.com NXP
Nuveen provides the above basic data on NXP’s portfolio.
The Underlying Issuer’s ability to tax represents almost 50% of the portfolio, of which almost 30% is restricted as to its source of income (ie not general tax revenue). This compares to my estimate of 40% when the funds merged. The top 10 state exhibitions are:
California dominates the portfolio, as before. Assuming these are backed by state revenues, they should currently be secure as the state has posted a $62 billion surplus! These weights are close to my estimates.
With BB and below considered lower quality debt, NXP is almost completely invested in IG bonds, as one would expect. I couldn’t find their rules for selling bonds when ratings fell below IG levels.
NXP invests in longer dated bonds, resulting in a weighted maturity of over 14 years. Only 9% of the portfolio matures over the next four years, limiting a natural rollover to higher coupons that should be available over this period compared to today. The new coupons must be close to 5% to be higher than the average coupon of the current portfolio.
The 10 largest holdings above represent 16% of the portfolio. This is what I estimated from the NXP Top 20, post-merger, using data from 10/31/21.
These were the largest estimated sector and state allocations using the same data.
As interest rates have all but dropped since 1995, NXP’s payout has followed suit. Over the past three months, NXP has not earned enough to cover its payments. This could indicate that another reduction could occur.
Review of price and net asset value
The latest price is down 17% from the initial value and is currently below the worst level that occurred during the COVID crash. The Total Return has been close to zero since, then after a strong recovery. Historically, it looks like NXP is at a good buy point. The following chart compares price to net asset value.
NXP owners, like me, should have viewed last summer as a “grab the cash and run” moment based on the historical high the bounty reached at that time. Even on a total return basis, NXP is down more than 25% from the peak. The current discount of 7.27%, while the best since 2020, is only average in terms of depth.
Nuveen categorizes its domestic tax-exempt CEFs into three groups: high yield, investment grade, and blended. NXP belongs to the Investment-Grade group. I included a leveraged CEF from this group in the comparison: NIQ.
- Nuveen Municipal High Income Opportunity Fund (NMZ)
- Nuveen Mid-Duration Municipal Term Fund (JNV)
- Nuveen Intermediate Duration Quality Muni (QIN)
|Cut||$695 million||1300 million dollars||$648 million||$176 million|
|# of titles||266||867||419||175|
|Average coupon (x zeros)||4.82%||6.18%||5.62%||5.49%|
|Average bond price (x zeros)||$103.99||$90.75||$99.43||$105.10|
|East. Portfolio Rating||YY-||BBB+||A-||A+|
As you can tell from the duration/maturity differences, NMZ has a much longer portfolio, which is why it has the lowest average bond price. Using data from Nuveen, I estimated what the weighted bond rating of each portfolio corresponded to (this does not take into account unrated bonds whose percentages were very different). The average coupon reflects these results.
NXP is the only one used without leverage, but that doesn’t seem to have reduced the volatility investors have experienced with this CEF compared to others. The HY CEF, NMZ, provided the best CAGR, with risk ratios close to the best set, held by NID.
While some of the other municipal bond strategies seem like better choices, of the three non-leveraged investment-grade CEFs, NXP is the best.
For investors in states with high personal income taxes (CA, NY, NJ, etc.), you should first look at bond funds that focus on your home state. Nuveen offers such funds for the above states as well as several others. Depending on your goal of after-tax income versus total after-tax return, you should consider taxable municipal bond options such as the Nuveen Taxable Municipal Revenue Fund (NBB) to stay in the municipal bond sector or in one of the many corporate or US government bond funds available. Here’s how three other Nuveen CEFs compare to NXP since 2014.