Why Our 9.7%-Yielding BDC Portfolio Is Up 5% Year To Date

To get things started the chart below compares the performance of the BDC sleeve to the broader BDC sector. Year-to-date the sleeve has outperformed the sector by close to 7%. It has also delivered a positive total return of more than 5% – a nice positive diversification boost in a very difficult market environment for income assets. Investor tempted to get BDC exposure with a CEF should be aware that the actively managed FGB has returned -2% year-to-date in total NAV terms and a miserly 0.5% per annum over the last 5 years. 

What has allowed our BDC sleeve to perform well so far this year? 

First, it is focused which allows for outperformance. A number of other commentators have highlighted that they like to hold somewhere on the order of 15+ BDC positions which is not far from half the sector. Such a wide portfolio allocation makes it more difficult to drive significant outperformance and to concentrate capital in the most attractive positions. 

Second, it is positioned specifically for those companies that will benefit more from rising short-term rates. This has helped them given the very sharp run-up in Libor this year which rose by 1% so far and is expected to rise close to 3% in the next 12 months.

Third, it is positioned with a margin of safety – focusing on those BDCs with a consistent ability to deliver strong results while also featuring attractive discount valuations. 

Fourth, it is positioned with a more defensive orientation – focusing primarily, though not exclusively, on BDCs with higher-quality portfolios and a greater focus on first-lien loans. 

An important point here is that this stance is not going to outperform in all market environments but is more likely to outperform during risk-off periods such as the one we are going through now. This kind of positioning can allow investors to maintain their allocations rather than go through the typical cycle of selling low and buying-back high. And it also allows investors to reallocate from more stable securities such as these to those securities that have been beaten down.

We currently hold 6 BDCs in our sleeve while eyeing two more given the drop in the sector this week. 

Thanks for reading.

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