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NXG: Deep Discount, Big Distribution Boost

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Written by Nick Ackerman, co-produced by Stanford Chemist. This article was primitively published to members of nan CEF/ETF Income Laboratory connected February 3rd, 2023.

NXG NextGen Infrastructure Income Fund (NYSE:NXG) mightiness not beryllium a money that 1 is acquainted pinch astatine first. However, this is nan erstwhile The Cushing NextGen Infrastructure Income Fund (SZC), arsenic they've had a flimsy sanction alteration and a ticker alteration since our past update. Nothing else changed successful terms of nan fund's objective, finance argumentation aliases guidance team.

This marks nan latest translator of nan fund, arsenic this was a vastly different money respective years ago. This was a pure-play power money earlier nan COVID crash; aft that, it changed its sanction and finance objective. It's now been adjacent to 3 years since that modulation to incorporated investments successful infrastructure plays much broadly alternatively than specifically focused connected energy. I felt that this added elasticity was a bully point astatine nan time.

I still for illustration to put successful hybrid power costs alternatively than pure-play power funds. So for me, I'm still a instrumentality of this allocation. Although carnivore successful mind that they still transportation plentifulness of power vulnerability too, which tin make nan money much volatile.

Since our past update, we've besides seen a ample boost successful their monthly distribution. With reasonably beardown results from nan fund, nan distribution output connected NAV could mean much boost imaginable successful nan future. Along pinch this large boost, we person nan latest fiscal year-end yearly study available, making it a cleanable clip to supply an wide update. The ample discount connected this money continues to persist, which still presents an opportunity for investors to see this fund.

Finally, 1 much alteration that shouldn't impact nan day-to-day, but Jerry Swank, connected January 27th, 2023, resigned arsenic a Trustee of nan Fund.

On January 27, 2023 Jerry V. Swank resigned arsenic a Trustee of nan Fund. The Board of Trustees appointed John H. Alban to service arsenic an willing trustee of nan Fund to capable nan vacancy created upon nan resignation of Mr. Swank. Mr. Alban will service nan remainder of Mr. Swank's word arsenic a Class II trustee of nan Fund. The word of nan Class II trustees of nan Fund continues until nan yearly gathering of nan shareholders to beryllium held successful 2024.

The Basics

  • 1-Year Z-score: -0.49
  • Discount: -22.50%
  • Distribution Yield: 7.73%
  • Expense Ratio: 1.87%
  • Leverage: 25.91%
  • Managed Assets: $190 million
  • Structure: Perpetual

NXG will "seek precocious full return pinch an accent connected existent income." To execute that objective, nan money will "invest astatine slightest 80% of its nett assets, positive immoderate borrowings for finance purposes, successful a portfolio of equity and indebtedness securities of infrastructure companies, including: [i] power infrastructure companies, [ii] business infrastructure companies, [iii] sustainable infrastructure companies, and [iv] exertion and connection infrastructure companies. The Fund will put nary much than 25% of its Managed Assets successful securities of power maestro constricted partnerships ("MLPs")."

This is simply a reasonably mini money coming successful astatine little than $200 cardinal AUM, that's including their ~26% leverage too. This often intends little regular trading volume, meaning a ample investor tin person trouble entering aliases exiting a position hastily. The mean regular trading volume, according to CEFConnect, comes successful astatine 8,114 shares daily.

Speaking of nan fund's leverage, they reduced their full borrowings pinch nan latest yearly report. Borrowings came down from $56.41 cardinal astatine nan extremity of November 30th, 2021, to $41.41 cardinal astatine nan extremity of fiscal 2022. Their leverage is taxable to a adaptable complaint based connected LIBOR positive 1%. That intends arsenic liking rates were rising rapidly, their borrowing costs were besides rising astatine a swift pace.

This isn't immoderate different from astir different leveraged CEFs, but it is thing to beryllium alert of regardless. The mean liking complaint for nan anterior fiscal twelvemonth came successful astatine 2.55%. With LIBOR pushing astir 4.5% much recently, leverage costs would person ballooned to complete 5%. The fund's full disbursal ratio was 2.88% erstwhile including nan leverage costs.

Performance - Attractive Discount

Before nan fund's modulation to see a broader portfolio of infrastructure plays, it had been 1 of nan better-performing power funds. There are respective costs 1 could include, but to get a bully mixture, I've included Tortoise Energy Infrastructure Corp (TYG), Center Coast Brookfield MLP & Energy Infrastructure Fund (CEN) and Kayne Anderson Energy Infrastructure Fund Inc. (KYN).

Chart

Ycharts

Even aft nan COVID crash, NXG was nan top-performing money connected a full NAV return basis. One of nan reasons for this is that they had reduced leverage nan twelvemonth earlier while astir different peers held their leverage patient - being forced to deleverage their portfolio into nan lows connected separator calls.

Chart

Ycharts

TYG had besides changed its finance argumentation to see investments successful a much wide consciousness of infrastructure aft nan COVID crash. So today, that money is besides a spot different but still carries important weight to power investments.

Despite this, nan fund's discount is now trading astatine astir an all-time depth. Through 2021 it started to trim rather substantially; however, 2022 saw this widen retired importantly again.

NXG Discount/Premium History

NXG Discount/Premium History (CEFConnect)

Distribution - Big Bump

One of nan reasons for nan fund's immense discount seems to stem from it being 1 of nan lowest-yielding CEFs retired there. That was earlier nan latest bump to $0.27 per month. This was nan first bump aft slashing nan distribution successful 2020, which was really nan fund's first trim successful its history.

NXG Distribution History

NXG Distribution History (CEFConnect)

Previously it was quarterly, but they held nan balanced monthly payout erstwhile adjusting nan frequency. That was done a clip erstwhile nan power assemblage had been performing poorly connected a regular ground from astir 2015 to 2020. 2020 was simply nan large finale for nan power collapse.

With that raise, we are astatine a overmuch much appealing 7.73% distribution complaint connected shares. Due to nan monolithic discount, nan money really only has to gain 5.99% to person nan distribution covered.

It isn't adjacent to achieving that higher level it had previously, but that's wherever it is simply a spot interesting. The existent NAV is correct adjacent rubbing nan pre-COVID clang level and has been supra it connected juncture successful nan past 2 years. So pinch nan rebound successful nan broader marketplace and nan thief of power investments performing truthful well, NXG had recovered.

NXG NAV and Share Price

NXG NAV and Share Price (CEFConnect)

Other power costs that were highly leveraged are still good beneath ever, coming backmost to their erstwhile NAV level.

To screen nan fund's distribution, we would often first look astatine nett finance income. As an equity fund, we cognize they'll trust connected superior gains too, but we want to spot what they tin get covered by nan dividends and liking of nan underlying portfolio first. In this case, 1 mightiness look shocked that it is simply a antagonistic amount.

NXG Changes successful Net Assets

NXG Changes successful Net Assets (NXG Annual Report)

This goes backmost to investing heavy successful power investments and including MLPs. They often administer retired return of superior distributions. For this fund, to get to nan NII figure, you return full finance income minus nan expenses and minus nan return of capital.

Instead, we would want to look for nett distributable income aliases distributable rate flow. In that case, we spot that DCF sum comes to 83.4%. That's rather important for an equity fund, requiring rather minimal superior gains to screen nan gap.

NXG DCF

NXG DCF (NXG Annual Report (highlights from author))

To thief screen that gap, nan money besides utilizes an options strategy. That contributed $861,015 successful nan anterior fiscal year. That unsocial astir put nan money astatine 100% of distribution coverage.

Now that nan fund's distribution has been raised to an yearly $3.24, nan full distributions should travel to astir $8.43 million. That would mean that DCF sum would still travel successful astatine a hefty 66%. That's still good supra nan sum we spot from galore different equity costs successful nan infrastructure space.

When looking astatine nan taxation classification of nan distributions, nan money had been capable to utilize nonaccomplishment carryforwards to offset gains. Besides nan ROC distributions nan money receives, this is different measurement they tin support their distributions arsenic ROC. That tin beryllium tax-friendly for investors arsenic it reduces an investor's costs ground alternatively than beryllium taxable successful nan existent year.

The Fund utilized $11,859,285 of superior nonaccomplishment carryforward during nan fiscal twelvemonth ended November 30, 2022. As of November 30, 2022, for national income taxation purposes, superior nonaccomplishment carryforward is comprised of short-term superior nonaccomplishment of $2,377,584 and semipermanent superior nonaccomplishment of $4,793,747.

Only a mini information of nan fund's distribution successful 2021 was classified arsenic mean income, and a information of it was considered qualified dividends. The remainder of nan distributions were each listed arsenic non-dividends. I person not seen immoderate accusation connected 2022's classifications yet. However, if I were to assume, it should beryllium similar.

NXG's Portfolio

The managers successful this money are rather busy. They reported a portfolio turnover of 124.56% past year. That was aft they transitioned done fiscal 2021 and listed a 125.8% turnover. Prior to these 2 years, nan money was still reasonably progressive but overmuch little so, pinch turnover successful 2020 astatine 71.35%, 2019 astatine 59.32% and 2018 astatine 74%.

Some of this tin beryllium owed to nan money carrying a comparatively mini number of holdings. At astir 61 holdings, according to CEFConnect, it wouldn't return flipping that galore positions to commencement adding up to a worldly magnitude of turnover.

Despite being a reasonably narrowly focused portfolio, nan breakdown by manufacture is extensive. This tin lead to rather nan diversification overall, but nan largest weightings transportation immoderate reasonably meaningful allocations. All 3 apical weightings are related to nan fossil substance power space, specifically. They comprise 38.4% of nan portfolio. As I said, nan money still carries a important weight to nan power space.

NXG Asset Allocation

NXG Asset Allocation (NXG Annual Report)

Some of nan weightings present will correspond only 1 sanction - reflecting nan constrictive number of holdings. Even for immoderate of nan larger weightings listed above, it's only represented by 1 position. The utilities, for example, is nan sole position of Clearway Energy (CWEN.A). That is listed arsenic 5.4% of managed and 4.6% of nett assets.

The largest position for nan money is Atlantica Sustainable Infrastructure (AY) astatine astir a 4.4% weighting. This is listed arsenic a star manufacture position and helps bump up that class weighting successful this fund. This is followed by MPLX (MPLX), an MLP finance that they place arsenic a large-cap MLP. These 2 positions thief show nan hybrid attack of NXG rather perfectly, mixing successful fossil fuels pinch renewables to get an wide complementary attack to investing successful nan infrastructure power space.

Conclusion

NXG changed its ticker and its sanction somewhat recently; however, location was nary basal alteration to nan money pinch that change. The money trades astatine a heavy discount and precocious importantly bumped up its monthly distribution. While nan output is rather enticing connected a stock value basis, nan existent underlying portfolio doesn't person to output that overmuch to person it covered. This would beryllium owed to nan monolithic discount; nan NAV complaint is only astir 6%. That intends we could spot further increases successful nan future. However, I wouldn't needfully expect it immoderate clip soon aft this ample bump.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

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