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We are always investing in uncertain times. The 10-Year Trap: High past performance is often a warning, not a green light. Diversified Resilience: A "dog-like" peace of mind comes from knowing your cash flow is from various sectors, so you never have to sell at bad prices.
The CLO Equity CEF sector has doubled in size over the past two years, driven by new entrants and favorable market conditions. Key catalysts include a benign default environment, tightening credit spreads, and the attractiveness of floating-rate assets amid a flat/inverted yield curve. CLO Equity funds benefit from embedded options like reinvestment and call options, which enhance returns during periods of market volatility.
We review the CEF market valuation and performance through the third week of April and highlight recent market action. Nearly all CEF sectors finished in the green this week, though month-to-date performance remains underwater. The median CEF sector discount has bounced off the trough, trading near the longer-term historical average, recovering close to half its April drawdown.
Our previous articles on OCCI have consistently held a bearish view due to its history of value destruction. The fund has recently hit new lows, comparable to the depths of the COVID-19 market crash. We look at the secondary securities, or puppies as we like to call them.
Collateralized loan obligation CEFs offer high yields but come with significant leverage, volatility and higher risk, making them less appropriate for all income investors. Baby bonds and preferred offerings from CLO CEFs provide safer, more stable income, balancing risk-reward when it comes to seeking income. We have new offerings in the space since our last update, leading to greater diversification potential and increasing the viability of setting up a ladder of maturities.
The yield curve is normalizing, and we aim for 8%+ yields with low downside deviation in our low-duration portfolio. OCCI has higher leverage and worse credit metrics compared to ECC and OXLC, but its preferred stock, OCCIN, offers an 8.5% YTM. Despite OCCI's lower credibility, OCCIN's low duration and yield make it a viable addition for diversification in our low-duration portfolio.
We take a look at the action in preferreds and baby bonds through the first week of October and highlight some of the key themes we are watching. Preferred stocks saw slight declines as Treasury yields rose, but year-to-date returns remain strong, outperforming REITs and BDCs. Lower-priced preferreds offer better capital gain potential and are more attractive due to lower negative convexity compared to higher-priced counterparts.
We take a look at the action in preferreds and baby bonds through the fourth week of September and highlight some of the key themes we are watching. Preferred stocks were on the week with credit spreads near their tightest level in over five years. Standard Chartered's lawsuit over transitioning from Libor to SOFR highlights opportunistic investor resistance due to differing crisis dynamics between the rates.
Hewlett Packard Enterprise, NewtekOne, Great Elm Capital, and OFS Credit Company have all priced new offerings, including convertible preferred stock and exchange-traded notes, with varying terms and yields. Investors can purchase newly introduced preferred stock at wholesale prices on the OTC, potentially avoiding capital loss if prices drop. CDx3 tracks past preferred stock and ETD offerings, providing alerts when securities fall below par value, offering insights into discounted investment opportunities.
OFS Credit Company has historically underperformed, with poor risk-adjusted returns. We examine why the fund has done so well over the last six months. We go over the recently issued preferred shares and tell you where you can do much better with lower risk.
Collateralized loan obligation closed-end fund preferreds and baby bonds can offer relatively secure sources of income generation for investors. These offerings are subject to stricter regulations under the 1940 Act, limiting leverage and that can provide more security to these instruments. New offerings since our last update include EICC and CCIA, which naturally came with higher issued yields thanks to the higher rate environment.
OCCI remains one of the worst performing funds in its category, lagging behind competitors in total return NAV. Recent performance improvements due to discount to NAV evaporating. The preferreds offer a better opportunity and a safer yield.
OFS Capital and Eagle Point Credit are very similar closed-end funds holding assets of the same type. Both offer safe-term preferred stocks protected by a 50% leverage limit. OFS Capital term preferred stock, symbol OCCIN, currently offers a 9.23% yield to maturity (annualized return), clearly the best in the sector. On the other hand, Eagle Point Credit's new term preferred, symbol ECCF, has a YTM of only 7.52%, worst in the sector, trades over par, and has the worst taxation.