WDI: A 7.5% Yield Multi-Sector Entrant From Franklin Templeton

The Western Asset Diversified Income Fund (WDI) is a recently launched multi-sector credit fund. It has a 1.10% fee which is quite steep in the credit space. Unfortunately, the trend in CEFs has been to increase fees – you can see this trend in the PIMCO CEFs that started off around 0.6-0.8% a few decades ago and their more recent funds are at 1.15% (PDO, PCI, PDI). This is obviously at the same time as overall yields have moved lower which means that CEF management fees have eaten up an increasing share of fund income.

Maybe CEF shareholders don’t have the same kind of power as BDC shareholders who have enjoyed a steady decrease in fees both base management fees as well as incentive fees. In any case, WDI is also a term CEF with an expected termination date in 2033. The fund is trading at a 4.9% discount which translates to about a 0.47% PTN Yield i.e. the annual headwind you get from discount compressing to zero. This is a best-case scenario as the board can extend termination for 2 years and, obviously, shareholders can always vote to get rid of the termination and turn the fund into a perpetual fund.

A 0.47% PTN Yield is on the high side in the space with the average PTN Yield near zero. WDI will be run at 20-30% leverage with some CLO holdings so it should be on the higher-yielding side in the Multi-Sector space plus the PTN Yield tailwind. So far it looks OK at a 4.9% discount which is about 9% wider of the sector average (surprisingly the median discount is basically identical to the average premium of 3.8% despite funds like PTY that I would have expected to skew the average higher). Obviously, hard to gauge alpha etc. for WDI.

It’s too early to gauge performance as it’s still holding quite a bit of cash and doesn’t appear to use leverage. NAV at $19.90 is not far from the $20 IPO. Its duration is expected to be on the low side initially according to the fact sheet. People are probably disappointed with the price performance which is down closet to 6% since the IPO and so may be dumping it. It is worth picking up some if this keeps going.

Thanks for reading.

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