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

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Nuveen Preferred & Income Securities Fund (NYSE:JPS) is a closed-end fixed income investment fund (“CEF”) investing in preferred, convertible debentures and convertible preferred securities, most of which are rated BBB. The fund has consistently paid a monthly dividend for the last 20 years. That yield is usually between 6 and 8 percent, which is extremely healthy from the point of view of income-oriented investors. The price has dropped up 28 percent this year, which could raise some concerns among investors.

However, this fixed-income CEF primarily generates its returns from the dividend or coupons from its fixed-income securities. The weighted coupon currently stands at 6.21 percent, which puts the fund in a reasonably solid position in terms of dividend payments. The fund is trading at a discount of 11 percent to its net asset value, which could attract investors to this bond fund. In my opinion, there are two main things to be wary of about JPS: its high expense ratio of 1.8 percent; and the fact that only 7.35 percent of the total investment is rated A or higher.

Nuveen Preferred Securities Income Fund

Nuveen Preferred & Income Securities Fund was established by Nuveen Investments, Inc. and is co-managed by Nuveen Fund Advisors LLC and Spectrum Asset Management, Inc. The Fund was incorporated as Nuveen Quality Preferred Income Fund 2 on June 24, 2002 and later renamed. The Fund’s primary objective is to provide current income consistent with the preservation of capital and compares its performance to the ICE BofA USD Contingent Capital TR Index. The fund has a very high expense ratio of 1.8 percent. However, the ratio has fallen from the 2.58 percent recorded in March 2019. Despite such a high expense ratio, the fund was able to achieve a consistently high return.

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The Fund may invest without limit in US Dollar denominated securities of foreign issuers. He can also hedge his risks through futures contracts up to a maximum of 35 percent of his assets under management. Currently, JPS has assets under management (AUM) of $1.65 billion and a market cap of $1.44 billion. This CEF has a relatively very high leverage of 40 percent. More than half of the portfolio is invested in bonds and preferred shares of well-known banks. Another 30 percent is invested in insurance companies and companies active on the capital market.

Components and inherent risks of JPS’s investment portfolio

The Nuveen Preferred Securities Income Fund has invested in bonds issued by financial institutions such as Bank of America Corporation (BAC), Truist Financial Corporation (TFC), MetLife, Inc. (MET), Nationwide Financial Services, Inc. and HSBC Capital Funding Dollar I LP, 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.

The Fund also has preferred securities from financial institutions, particularly 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 SA (OTCPK:CRARF), ING Groep NV (ING), Banco Santander, SA (SAN) , UBS, WFC, KeyCorp (KEY), Farm Credit Bank of Texas (OTC:FCTXZ), Banco Bilbao Vizcaya Argentaria, SA (BBVA), NatWest Group plc (NWG), Morgan Stanley (MS), The Allstate Corporation (ALLE) , UniCredit SpA (OTCPK :UNCFF), Standard Chartered PLC (OTCPK:SCBFF), Danske Bank A/S (OTCPK:DNSKF) and JPMorgan Chase & Co. (JPM), etc.

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JPS also invests in equity related securities (CoCos). These are hybrid instruments that allow banks to convert them into equity if certain capital thresholds are exceeded. Contingent convertibles were created to help undercapitalized banks and prevent another financial crisis like the 2007-08 financial crisis. Due to the nature of its portfolio, JPS takes a very high credit risk. Therefore, the financial health and metrics of the banking sector are of paramount importance to this fund. Fortunately, we don’t see major signs of vulnerability like we saw during the global financial crisis.

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

As most of its investments are in fixed income securities of reputable financial institutions, the fund is reasonably safe from credit or default risk. So although only 7.35 percent of the total investment is rated A or better, the fund is credible enough. In addition, nearly 78 percent of investments are rated BBB. BBB ratings indicate a low risk of default and the ability to pay for financial obligations is considered to be sufficient. The only concern remains that adverse business or economic conditions are likely to affect this capacity.

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The stock is currently trading at a discount to its NAV. This indicates that the shares are available at a value lower than their real value. More importantly, this fund doesn’t always trade at a discount to its NAV. Therefore, investors should take advantage of this current value and try to accumulate this stock. Most investments are in banks and insurance companies, so there is a theoretical downside risk if another financial crisis hits. The fund also uses high leverage. However, due to the investment grade collateral, the risk is not as high.

There is a possibility that this fund is trading at a higher discount to its NAV than it is currently. However, this will primarily depend on the overall economic situation in the coming months. Any further hikes in interest rates should see the price move lower as this fund’s returns are flat. However, if the market turns bearish, there is a chance this fund will outperform the others due to its fixed income nature. With that view, I would hold this fund for at least another quarter and wait for an opportune moment to add more shares.

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