Term Trust Closed-End Fund Added to Portfolio

By Tim McPartland

While we are always skeptical of owning closed-end funds (CEFs), we do on occasion stumble upon one that fits our needs in almost all respects.

Meeting our needs means that the share price appears to have limited downside, the issue has a satisfactory current yield and the security has a relatively short duration to maturity. Very few CEFs can meet our needs in all these regards.

An issue that we have determined fits the above needs is the Invesco High Income 2023 Target Term Trust (NYSE: IHIT). Many of you may be familiar with Term Trusts, even though I very rarely find closed-end funds worth buying. However, the timing seems right to purchase this CEF. IHIT appears to be one of those rare issues that works even for conservative investors like us. It is helpful that most of the holdings in the trust are investment grade.

In November 2016, IHIT completed an initial public offering (IPO) at a price of $10 per share with a projected initial net asset value (NAV) of $9.835. The trust has a termination date of December 1, 2023, when it intends to liquidate with $9.835 per share returned to the investors. It should be noted that the fund’s Trustees have the option of extending the termination date for six months.

Proceeds from the IPO were invested primarily in floating-rate commercial mortgage-backed securities with maturity dates within six months of the trust termination date. The trust does use leverage of approximately 25% provided by reverse repo arrangements as a method to borrow at a very low interest rate.

Monthly distributions are paid to the investor and thus far these have been 5 cents per month (60 cents annualized) for a current yield of just over 6%. This monthly distribution can change as the intent is to pay back $9.835 per share at termination. It may be necessary that some earnings be held back to hit this target as the termination date gets closer.

The NAV of IHIT has been running in the $10.05 per share area and shares have traded at a sizable discount to NAV at $9.54-to-$9.80 per share during the last month. It has been very unusual for IHIT to trade at a discount to NAV by more than a few cents per share. That is the reason we have moved to make a purchase in a model portfolio, as well as in personal accounts.

The initial offering document for IHIT shares can be found here.

We have purchased shares in the Short/Medium Duration Income Portfolio, as we had a 12% cash position in that model. While the 6% yield falls short of the 7% target for this portfolio it certainly is better than “cash.”

IHITs latest semi-annual report can be found here.

While we have reviewed the financials of the trust, we encourage all potential investors to do their own due diligence prior to any purchase.