The TCW Strategic Income Fund (TSI) cut its most recent quarterly distribution by 40% which itself followed a 30% cut. At this point the fund has a tiny distribution rate of 2.65%. A number of people expressed surprise by the cut.
It’s worth keeping 4 things in mind, however.
First, the fund doesn’t have any leverage which would have decreased in cost (most fixed-income CEF credit facilities are floating-rate) and increased fund income.
Secondly, the fund holds floating-rate assets via its non-agency RMBS holdings. The coupons of assets would have gone down in line with lower LIBOR. It’s important to remember that LIBOR is set at the start of the (typically) quarterly payment period. So, the drop in LIBOR would not have fully fed into the fund’s June-announced distribution.
Thirdly, the fund’s allocation is very high-quality – nearly a third of the fund is in AA/AAA securities which don’t yield much more than 1%.
Fourthly, the fund’s fee is not huge but it’s also not small – overall it’s around 1% on net assets. This means that about a third of the portfolio yield just goes to pay the fee leaving investors on the hook for 100% of the risk and 0% of the income.
In our view, the fund is likely earning a bit more than it’s currently very low distribution rate but not a ton more. So, why the surprise?
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