Looking for ways to take advantage of floating rates? There are a number of fixed-end, floating-rate funds that focus on this strategy, including the XAI Octagon Floating Rate & Alternative Income Term Trust (New York stock market :XFLT).
“The Trust invests in an actively managed portfolio of floating rate credit instruments and other structured credit investments in private markets. Under normal market conditions, the Trust will invest at least 80% of the assets under management in senior secured loans, CLO debt and CLO equity. It aims for an attractive total return by emphasizing the generation of income through several stages of the credit cycle. (XFLT website)
XFLT has $244 million in pooled assets, with 462 holdings – it went public in 2017.
We found several other CEFs in the area of floating rates, including:
-BlackRock Floating Rate Income Trust (BGT)
-Eaton Vance Floating Rate Main Fund (EFR)
-Eaton Vance Floating Income trust rate (EFT)
-BlackRock Floating Rate Income Strategies Fund (FROM)
-Nuveen Floating Rate Income Opportunities Fund (Junior)
-Pioneer Variable Rate Trust (DOCTORATE)
XFLT is the newest fund, with the highest expense ratio at 5.26%, the highest leverage at 40.83%, and the highest average volume of this group at ~ 169K.
EFR is by far the largest fund, with a market capitalization of $2.56 billion. Its expense ratio of 2.18% is in the middle bracket, as is its leverage of 35.89%.
FRA has the lowest expense ratio, at 1.54%, and the lowest leverage, at 30.52%.
PHD is the smallest fund, with a market capitalization of $116 million. Its spend ratio of 2.45% is the second highest, after that of XFLT, while its average volume of 77.4,000 is the second the lowest.
BGT has the lowest spend rate, at 1.60%, the second the lowest leverage, at 30.83%, and the lowest average volume, at 73,000.
EFT and JRO both went public in 2004 and have very similar expense ratios of around 2.18%. JRO uses a leverage of 38.66%, compared to 34.80% for EFT, and has a much higher average volume of 156,000, compared to ~95,000 for EFT:
At $6.93, XFLT is yielding 12.64%. It pays $0.073 and becomes ex-dividend on 3/14/23, with a payment date of 4/3/23.
For its fiscal year ending 9/30/22, XFLT had $26 million in NII, -$1.65 million in realized gains, but paid out $28 million in distributions, with a distribution coverage of 0, 87X, slightly better than its coverage ratio of 0.85X in its fiscal year. However, it also recorded $21.89 million in unrealized gains in the year ending 9/30/21, compared to -$61 million for the year ending 9/30/22:
All of these CEFs pay monthly distributions, which come largely from income, with very little return on capital. The 2022 distributions of XFLT had 6.6% ROC.
Given that there have been eight consecutive rate hikes by the Fed, it would make sense for floating rate funds to also increase their monthly distributions over the past 12 months.
However, this has not been the case with XFLT – despite having the highest yield of this group, management has not made any monthly rate hikes in the last 12 months.
While PHD made the most monthly payout increases, six, for a total payout/share increase of 46%, BGT and FRA, both BlackRock funds, both saw a cumulative increase of 67%, achieved via two monthly increases. BGT and FRA yield 11.15-11.16%, while PHD yields 11.24%, 2nd in line behind XFLT’s 12.64% yield:
XFLT’s largest allocation is in Senior Secured Loans at 44.71%, followed by CLO Equity at 34.86%, CLO Debt at 14.21%, High Yield at 3 .85%, and second-tier secure investments, at 2.31%:
Its top 10 makes up 12.23% of its portfolio, with Carlyle US CLO 2020-4A its top holding. Carlyle Group (CG) manages $373 billion in assets. There are three CLO of Elmwood, an independent alternative investment manager established in 2018. Elmwood specializes in long-only investment strategies in performing credit markets.
The 5-9 year maturity bucket accounts for 43% of XFLT’s holdings, followed by around 37% in 10+ year holdings (surprisingly) and around 20% in 0-4 years.
Continued market volatility drove XFLT’s portfolio valuations down over the past financial year ending 9/30/22, with CLO equity holdings being the main drag on performance. XFLT issued 6.98 million common shares, under an ATM program, raising approximately $60 million.
BGT had the best ~ total return over the past year at -1.55%, compared to -9.63% for XFLT, -6.6% for the S&P 500 and -4% for the financials sector, XLF.
So far in 2023, XFLT has been the leader, gaining 9.65%, just ahead of EFR, at 9.46%, and well ahead of the S&P and the financial sector.
JRO sits 7.9% above its 52-week low, the closest to that figure in the band, while XFLT is the highest, at 17.46% above its low.
Looking back, XFLT’s 3-year and 5-year price returns lead this group, at 7.6% and 3.65% respectively, while its 3-year net asset value return also leads the way. .
FRA has the 2nd best 3-year price return at 5.81%, while BGT has the second-best 3-year NAV return and the best 5- and 10-year returns:
Because NAV/unit is calculated at the end of each trading day, you should review the most recent closing values to determine the current NAV discount or premium. Buying CEFs like ECCs at a larger discount than their historical average discounts/premiums can be a useful strategy, due to mean reversion.
At its closing price of $6.91 on 3/2/23, XFLT was trading at a 4.7% premium to its net asset value of $6.60, compared to its average premiums on 1.3 and 5 years of 4.25%, 4.82% and 3.36%. .
From inception in 2017 through September 2022, XFLT traded at an average premium of 3.52% to NAV. XFLT’s launch price was $10.00 and its initial NAV was $9.78.
BGT’s 8.95% discount is cheaper than its 3-year average and in line with its 5-year average, while EFT’s -7.76% discount is cheaper than its 3- and 5-year averages years of -6.43% and -7.65%:
We hope this article has given you a good starting point for your due diligence in the world of variable rate CEFs. As you noticed, there is no clear winner for all the metrics covered in this article. Long-term, XFLT has the best NAV performance over the past three years, while BGT has done the best over the past 5- and 10-year periods.
All charts are provided by Hidden Dividend Stocks Plus unless otherwise stated.