|Shares Out. (in M):||88||P/E||0.0x||0.0x|
|Market Cap (in $M):||1,123||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
To be clear, NRK is manifestly not the next multi-bagger. Nor is it exciting (and it no doubt will garner a poor VIC rating). Moreover, to many on VIC, the idea of buying a closed-end fund (CEF)—and thus paying (high) management fees to another manager (in this case Nuveen, a leader in the space)—is anathema. However, for those like us who agree with James Montier that today’s markets present a “hideous opportunity set”, NRK provides an attractive risk-reward proposition and the opportunity to earn double-digit taxable-equivalent yields while we patiently await a more attractive opportunity set.
NRK is a CEF that invests in municipal debt that is triple tax free in New York and as such may be most interesting for PAs, especially for those many VIC members that have the privilege of living in NYC and “enjoying” the highest marginal tax rates in the country. At yesterday’s close of $12.82, NRK trades at an 8.56% discount to NAV and yields 6.46%, which is a double-digit taxable-equivalent yield to NYC residents in the highest tax bracket. With roughly 90% of its assets in muni debt rated A or better (over 70% rated AA or better), we think this is an attractive yield for the risk assumed. Although there has been much press (much of it inaccurate) on the woeful state of public finances, New York is in pretty decent shape (as reflected in the ratings) and should not have any Illinois or Rhode Island type issues in the next few years (the longer term may be a different story). Of course, like most fixed income CEFs, NRK achieves these yields by employing some leverage (in this case approximately 38% leverage at an annualized cost of 43 bps). With 87 million shares outstanding and average daily volume of over 100,000 shares, NRK is relatively liquid by CEF standards.
In its 11+ year history, NRK has traded at discounts to NAV between 0-20%, though the vast majority of the time discounts have been 3-8%, with the extreme 20% discount occurring briefly during the peak of the financial crisis, which of course was a fabulous buying opportunity across the CEF space. The discount widened last year with the sharp selloff in muni debt following the perfect storm of the taper talk and associated rate surge together with negative sentiment from the Detroit bankruptcy and Puerto Rico’s woes. (As an aside, NRK has 3.8% of the fund in Puerto Rico debt, but virtually all of it is in debt backed by sales tax receipts, which I understand is among the most secure of the island’s debt issues, though I am no expert in PR debt.) Muni funds endured some 30+ weeks of outflows last year before the exodus subsided, and fund flows are now flat to modestly positive. For those of you like me who have just done your taxes, it is an eye-opener how effective rates for the highest earners have increased, and I believe the demand for muni debt in high tax states like New York is bound to increase, as are the tax rates in such jurisdictions.
I know many in the VIC community believe a spike in interest rates is just around the corner (we do not), and duration risk is probably the biggest risk in NRK, though it is one we happen to be comfortable with today. Even with the carnage in the market last year, for example, NRK’s NAV was down less than 8%. We believe the yield provides ample compensation for the risk, especially relative to fixed income alternatives such as high yield debt (a misnomer if there ever was one given the puny yields they offer relative to their risk and history). NRK is not something to buy and forget, for sure, but we believe it offers an attractive total return potential relative to its risk in an environment where we are having difficulty finding investments that present such a favorable tradeoff. For all the information you need on NRK, see the Nuveen website, here: https://www.nuveen.com/cef/Product/Overview.aspx?fundcode=NRK.