Western Asset Mortgage Opportunity Fund (DMO) Stock

Invesco S&P International Developed Momentum ETF holds 183 international stocks with high momentum. The IDMO ETF is overweight in financials, quite heavy in Japan, and has fundamental growth characteristics. IDMO has outperformed other momentum ETFs in the same stock universe over the last seven years.

Western Asset Mortgage Opportunity Fund has outperformed since its initial "Buy" rating. The fund has reached fair value, and future returns will primarily come from dividends. DMO remains focused on non-agency RMBS bonds and GSE risk transfer securities, which carry credit risk.

Western Asset Mortgage Opportunity Fund Inc. is a fixed income CEF focused on mortgage bonds that offers a supported 12% yield. DMO pursues a different strategy than most mortgage funds by purchasing junior and subordinated tranches of MBS bonds, taking true credit risk. The housing market is currently 'stuck' rather than experiencing a collapse, which is favorable for DMO's collateral.

For the first month in three, equity CEFs (-0.59% on a NAV basis) suffered losses while their fixed-income CEF (+0.49%) counterparts on average posted plus-side returns. At month-end, 11% of all CEFs traded at a premium to their NAV, with 12% of equity CEFs and 10% of fixed-income CEFs trading in premium territory. Income & Preferred Stock CEFs (+1.44%), for the first month in four, outpaced the other classifications in the equity CEF universe for January.

DMO allocates primarily to residential mortgage assets. It has delivered a third distribution hike in a row, equating to a 13.4% yield on price. The fund's primarily residential mortgage allocation provides an attractive diversifier in income portfolios and is anchored off strong household credit metrics. We continue to hold the fund in our High Income Portfolio.

We provide a July update for the PIMCO CEF taxable suite. Taxable coverage fell for the second straight month while tax-exempt coverage remained stable. PIMCO is doing a tender offer of their very expensive auction-rate preferreds.

We review CEF market valuation and performance through the last week of July and highlight recent market action. CEFs continued to march higher this week, closing out July in good form. CEF returns should be gauged in the context of the broader asset class rather than just within the narrow sector.

We last discussed DMO about a year ago, highlighting the strong potential for a dividend hike due to a rising net income trajectory. As expected, the fund has indeed hiked the distribution which, along with its wide discount, translates to a 11.55% current yield as of this writing. The fund's primarily residential mortgage allocation provides an attractive diversifier in income portfolios and is anchored off strong household credit metrics.

The Western Asset Mortgage Opportunity Fund has seen its discount narrow from the deepest levels it was at previously. The fund increased its distribution despite coverage still coming in light, though the good news is seeing NII increase due to floating rate exposure. DMO's portfolio is made up of both residential and commercial MBS exposure, as well as some smaller allocations to other asset-backed securities.