Over 2021, and, in particular, its second half we dialed down our CEF allocation in our suite of Income Portfolios as the following chart shows.
We did this because of the fact that credit CEFs, more broadly, were trading at, frankly, stupidly low underlying yields of around 4%. Most income investors missed this fact because CEFs themselves kept pumping out decent yields, however, the issue was that their underlying asset yields were horrible. We illustrate this in the chart below where we show the underlying portfolio yield of the typical high-yield bond CEF portfolio. This figure represents the yield that the fund’s assets actually earn rather than the distribution that the fund makes.
Over 2021 we rotated some of our CEF allocation into preferreds, particularly high-coupon, Fix/Float issues which have had relatively low durations and were not particularly impacted by the recent rise in interest rates. The fact that preferreds don’t trade at discounts was another factor behind their resilience relative to CEFs.
This week we started to reverse this rotation, moving back from these resilient preferreds back into CEFs. For example, we rotated from our (AAIC.PC) position to a CIK position. AAIC.PC is down 1% year-to-date in total return terms while CIK is down 15% on the same basis and down 19% on a price basis.
This kind of periodic rotation is what allows our Income Portfolio to continue to generate additional alpha above and beyond the income that the portfolios receive.
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