The "why" remains the most important part of the game. If you outperformed or underperformed, one needs to understand why that happened. Today, we will go over the recent performance of a high yield fund, OFS Credit Company Inc. (NASDAQ:OCCI) and look at how the statements above apply to this one.
Previous Coverage
On our first article on this fund, we gave it a Sell rating. This was about two years back in August 2022. If you ran with that and just avoided the fund, instead of getting enamored with its imaginary yield of 26% (at the time), you did pretty well. The fund has lagged Treasury bills by a fairly decent margin.
If you account for how much you would pay in taxes and heartburn medication, the returns are even worse. In between, we shifted to a neutral recommendation as the setup for less problematic in September 2023. That was actually a sound point as in this timeframe, the fund did fairly well.
Now let's look at the most recent sell rating and why it has not worked.
The Core Thesis
OCCI remains the worst performing funds over its history in the category of CLO focused funds. This is certainly true among the CEFs we track in this area, though there might be others we are not aware of. OCCI's track record against Oxford Lane Capital Corp (OXLC), Eagle Point Credit Co Inc. (ECC) and XAI Octagon Floating Rate & Alternative Income Trust (XFLT) is downright shocking. Note that we are showing total return NAV and if you plot total return based on price you will get slightly different numbers.
You will also get a smoother chart as three of these four funds release NAV on a quarterly basis. XFLT is the only one that provides a daily NAV. But whichever way you look at it OCCI remains a laggard.
CEF Connect throws all these CLO funds in a broader category called senior loans. We don't see this as a bad idea. There are lot of similarities between senior loans and CLOs. Both assets are designed to add some alpha over high yield bonds held by junk bond funds. XFLT owns both, and many other CEFs dabble in ownership of both. So how did OCCI do against this broader category? Pathetically. We have compared the NAV changes to the category NAV. Price changes are more fickle. You can see below that OCCI's NAV return lagged the category NAV return over 1 year by more than 17%. Over 3 and 5-year periods, the annual lag was about 5%.
This is a fairly huge amount. It is hard to find funds in their category that have done that poorly. Even abrdn Global Premier Property Fund (AWP), a fund we have regularly criticized, has lagged less over 5 and 10 years versus its category NAV.
So right off the bat, you have to be skeptical when some new bold bull comes along and says, "Hey, you want a 17% yield, buy the worst performing fund in its category." If a fund cannot match the category average over multiple timeframes, you should only get interested if there is a catalyst for change. If management is being overhauled or if Saba Capital is trying to close the discount to NAV, sure, it might be worth a speculative opportunity. But if you are hanging on for a miracle on Wall Street, then you are the part of the same suckers that ran after this fund at $20 on its IPO.
What Is Happening Of Late?
As we mentioned above, the returns since late 2023 have been good. That is easily explained by this simple chart. The discount to NAV was rather extreme back then, and that was the fundamental reason why we went to a "hold" rather than a "sell" in September 2023. That discount has evaporated and powered returns when you look at price changes.
You can see this if you run a total return NAV versus a total return price since November.
There is probably a zero percent chance that the collective will be stupid enough to put this at a 20% premium to NAV. So those tailwinds are done. What you will notice in the chart above is that the compression still took place from our last article, and this is the bulk of the return profile.
We remain wary of chasing income in a fund where things have not worked out in the best of times. As the credit cycle turns, we think this fund likely has negative total returns. Whether or not it accomplishes that, its odds of at least lagging the risk-free rate are incredibly high. We maintain a Sell on this.
OFS Credit Company, Inc., 5.25% Series E Term Preferred Stock Due 12/31/2026 (NASDAQ:OCCIN)
While we continue to rate the common units as a sell, the preferreds are definitely far better. OCCIN is a term preferred and currently sports a yield to maturity of 8.27%.
8.27% might be scoffed at by some of those enamored with OCCI's high distribution rate, but we think the entire category of senior loans (not just OCCI) will struggle to deliver anything in that ballpark over the next two years. If we had to make a bet on OCCI, we would run with OCCIN. We tend to trade in and out of term preferreds and perpetual preferreds quite frequently, and generally aim for better risk-adjusted returns versus a buy and hold. But with the coverage limitations which restrict the fund from adding stress to the preferreds, we think this might work for buy and hold investors as well.
If the Company fails to maintain asset coverage of at least 200% as of the close of business on the last business day of any calendar quarter and such failure is not cured by the close of business on the date that is 30 days following the filing date of the Asset Coverage Cure Date, then the Company will be required to redeem, within 90 days of the Asset Coverage Cure Date, shares of preferred stock, including Series E Term Preferred Stock, at least equal to the lesser of (1) the minimum number of shares of preferred stock that will result in us having asset coverage of at least 200% and (2) the maximum number of shares of preferred stock that can be redeemed out of funds legally available for such redemption. (see prospectus for further information).
Source: Quantum Online
This one was added to our fixed income trading portfolio some time back at $22.59 (when it had a yield to maturity of 9.1%). At present, this is still ok in there, but we might be seeing some better opportunities elsewhere.
Are you looking for Real Yields which reduce portfolio volatility?
Conservative Income Portfolio targets the best value stocks with the highest margins of safety. The volatility of these investments is further lowered using the best priced options. Our Enhanced Equity Income Solutions Portfolio is designed to reduce volatility while generating 7-9% yields.
Take advantage of the currently offered discount on annual memberships and give CIP a try. The offer comes with a 11 month money guarantee, for first time members.
