HomeMost PopularJLS: This 9.1%-Yield Higher-Quality CEF Clocks In Another Net Income Rise

JLS: This 9.1%-Yield Higher-Quality CEF Clocks In Another Net Income Rise

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This article focuses on the Nuveen Mortgage and Income Fund (NYSE: JLS), a closed-end fund (CEF) that currently offers a 9.1% yield and trades at a 14% discount. JLS primarily invests in mortgage and securitized assets, with a significant holding of floating-rate assets. To provide an update, we review JLS’s recent semi-annual shareholder report.

The most recent report shows a 13% increase in net income for the fund, continuing the upward trend seen since 2021. This steady rise in net income has enabled the fund to consistently increase its distributions.

Given the current economic climate of an inverted yield curve, tight corporate credit spreads, and a resilient household sector, we believe holding a position in JLS is favorable. The fund’s strong performance since 2022, rising net income, attractive valuation, and three consecutive distribution hikes further support this view. We continue to include JLS in our Defensive Income Portfolio.

Fund Snapshot

In the broader multi-sector credit space, JLS stands out for two distinctive features. Firstly, it allocates to high-quality assets, with a majority of its investments rated investment-grade. Secondly, JLS has a relatively short duration of just 2, which has contributed to its resilience since the end of 2022, as shown in the chart below:

Systematic Income

JLS primarily invests in securitized assets, including mortgage-backed securities and asset-backed securities. These assets encompass various types of residential and commercial mortgages, credit cards, auto loans, aircraft ABS, and more.

Nuveen

While these assets may differ from traditional bonds and loans, they are popular in the institutional investment space. It’s worth noting that JLS is not the only CEF that allocates a significant portion of its portfolio to securitized assets, as they make up about half of the portfolios of PIMCO taxable CEFs.

About half of JLS’s portfolio consists of floating-rate assets, providing some protection amid a changing interest rate environment.

Nuveen

Income Profile

The fund has total assets of $145 million, with approximately half allocated to floating-rate exposure, equivalent to around $73 million in floating-rate assets. Factoring in the $41 million in repo assets, which are also floating-rate, leaves a net amount of $32 million in net floating-rate assets, accounting for roughly a third of JLS’s NAV. In other words, a 1% increase in base rates would result in a 0.3% rise in the fund’s net income. This explains the increase in net income over the past year, coinciding with the rise in short-term rates.

Breaking down the fund’s semi-annual net income figures reveals consistent growth over the past three years. The uptrend accelerated in late 2022, driven by the lagged effects of a jump in Libor earlier that year.

We predicted in our last update that net income would continue to rise, and that is indeed what has happened, with a 13% increase from the previous semi-annual period. While we expect net income to continue growing slightly, we do not anticipate another significant jump as base rates have leveled off in anticipation of the Federal Reserve’s potential pause or a single future rate hike.

Systematic Income CEF Tool

Fiscal year-to-date, the fund has distribution coverage of 93.2%. However, this coverage is likely understated due to the lag between base rate changes and their impact on net income. Therefore, we expect the current coverage to be closer to 100%.

Nuveen

The fund has a modest duration of approximately 2, which is half that of corporate bond funds and a quarter of leveraged Muni funds. This shorter duration has helped mitigate the impact of rising Treasury yields on JLS’s performance. It maintains leverage of around 28%.

Unlike many other funds, particularly PIMCO CEFs, which have reduced their borrowings, JLS has maintained relatively stable borrowing levels. This stability can be attributed to three factors: JLS’s relatively low NAV beta, which reduces the risk of forced deleveraging; its starting leverage, which provides room for leverage to increase in case of a decline in NAV; and its rising net income, making maintaining leverage a sensible strategy.

Systematic Income CEF Tool

Takeaways

We maintain JLS in our Defensive Income Portfolio. One notable risk for the fund is a potential crisis in the commercial mortgage space. However, concerns regarding the sector have significantly diminished in recent months. Additionally, JLS’s higher-quality holdings should help weather a challenging scenario for commercial real estate. Another risk is a sharp decrease in short-term rates, which could partially reverse the net income gains achieved by the fund in the past year. Nevertheless, the relatively low beta of JLS to short-term rates and its moderate leverage help mitigate this risk.

Despite tightening valuations in the sector, JLS’s discount has remained wide, further enhancing its appeal.

Systematic Income CEF Tool

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