The Angel Oak Financial Strategies Income Term Trust (FINS) may have caught the eye of income investors due to its attractive yield, wide discount and higher-quality profile. Who doesn’t like high yield, modest leverage, cheap price and quality? That’s like buying an amazing mansion at the cost of a burned down hovel. What’s not to love?
Trouble is there is no free lunch in markets.
The fund’s low leverage and higher-quality tilt to investment-grade rated bank debt means the fund’s underlying yield generation is subpar. Add to that the fund’s extremely high management fee of 1.35% on total assets (by comparison PIMCO charges between 0.6-1.15%).
All of this results in a distribution coverage of around 70% and a NAV income yield of just 4.6%.
It’s true that the fund’s discount is on the wider side, however, from a fair-value perspective it’s actually not wide enough since the management team claims around 20% of the fund’s income.
Finally, investors should remember that owning higher-quality assets in a CEF wrapper does not result in a higher-quality holding since the CEF discount will tend to widen sharply in a drawdown. For example, while the fund’s NAV only fell 12% this year, its price fell 41%. A 41% drop in price is not what I would call a high-quality holding. Investors will be better off holding investment-grade bonds in an open-end fund wrapper.
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