Written by Nick Ackerman, co-produced by Stanford Chemist.
Ecofin Sustainable and Social Impact Term Fund (NYSE:TEAF) has witnessed a substantial widening of its discount to net asset value per share. The fund’s discount has reached the ~24% mark. This fund stands out due to its exposure to a unique blend of infrastructure assets, including MLPs, pipeline companies, education, and senior living facilities. Notably, over half of its portfolio comprises private investments, making it an intriguing but speculative infrastructure play possibly worth considering.
Following the broader equity market’s brief correction territory in October, the fund’s performance took a hit. While it began a rebound, it faltered swiftly. The widening of the fund’s discount further restrained its recovery, with the fund’s NAV outperforming its share price. The muted rebound from the October lows also contributed to this outcome.
Underlying Fundamentals of TEAF
- 1-Year Z-score: -2.81
- Discount: -24.03%
- Distribution Yield: 9.54%
- Expense Ratio: 1.85%
- Leverage: 11.30%
- Managed Assets: $231 million
- Structure: Term (anticipated liquidation date around March 27, 2031)
TEAF was launched with the goal of “attractive total return potential with emphasis on current income and uncorrelated assets.” Additionally, it provides “access to differentiated direct investments in essential assets” and “investments in intangible, long-lived assets and services.” The fund also aims to target a “positive social and economic impact.”
The fund’s modest leverage can be advantageous in a higher-rate environment. Given the volatility in the energy space, the portfolio’s significant investment in fixed-income securities helps mitigate additional volatility. However, the total expense ratio climbs to 2.66% when accounting for leverage costs, making it relatively high.
A significant portion of the portfolio comprises private investments, leading to a higher operational expense ratio. Despite the leverage costs, the fund’s advisory fee is notably higher compared to its peers.
Noteworthy Discount Widening
A substantial discount alone may not signify much, but in relative terms, TEAF’s discount is strikingly wide. With a 1-year z-score approaching -3, this level of discount is atypical outside of periods of higher volatility. Looking back over the fund’s history, it is trading well below its historical deep discount levels.
Despite the potential for further widening, historical evidence suggests that the fund can exceed even its pandemic-induced wider discount. Given its high allocations to private investments, skepticism is warranted, but the current speculative play seems to offer a compelling upside. Historically, the fund’s performance has been lackluster, adding another year of mediocre performance in 2023.
Should the fund revert to its average discount, the potential upside could be considerable, serving to cushion downside moves or fortify potential upside movements from the current levels. The term nature of the fund further adds a potential angle despite its distant maturity date. The sizable discount at this juncture translates into an annualized alpha of 3.34%, offering a guaranteed alpha compared to a non-term fund invested identically. This underscores the significant potential upside, even with the fund’s termination not imminent until 2031. However, extensions or terminations could alter the fund’s dynamics, and a guaranteed alpha does not ensure positive performance results.
Given the speculative nature of TEAF, uncertainty has been a consistent theme since the fund’s inception, as highlighted in the author’s previous coverage titled “Unique Opportunity With Unique Risks.”
Investor Appeal: Distributions Along The Journey
The monthly distributions potentially make this speculative play more bearable within one’s portfolio. However, caution should be exercised owing to the fund’s history of lackluster performance and the inherent risks associated with its significant exposure to private investments. The unique blend of infrastructure assets and the wide discount might make TEAF an appealing speculative bet but suitable only for investors comfortable with significant risk exposure.
To sum up, TEAF’s substantial discount and unique infrastructure exposure make it a compelling, albeit speculative, investment opportunity. The fund’s history of lackluster performance must be factored in, ensuring investors understand the risks associated with its sizable allocations to private investments.
Investors seeking a speculative play with an appetite for risk might find TEAF’s wide discount and unique infrastructure exposure intriguing. However, a cautious and measured approach is imperative while considering this speculative bet.
