Adding CEFS for Diversification

Sold ARDC (3.7% Allocation)

This closed end fund is a mix of various credit instruments: corporate loans, corporate bonds, and 2 types of collateralized loan obligations, or CLOs. I still like the floating rate elements of the fund, but the fixed rate elements are at risk of losing value if inflation/higher interest rates return. More importantly, the 35.77% leverage is looking more expensive, now that interest rates appear less likely to shrink. 

All of this might be tolerable if ARDC was trading at a reasonable price. However, it is now trading at a premium to Net Asset Value of 1.55%. In March of 2024 when I reviewed ARDC, the 10% yield was attractive. Now at 8.9%, the yield and price are less compelling. The recent dividend reduction from $0.1175 to $0.1125, was also a negative.

Sold STWD (2.36% Allocation) 

Continuing with the interest rate theme, STWD was poised to benefit from rate cuts due to its focus on lending in the real estate market. It has been a decent place holder for the past couple of years, paying a consistent distribution, while its price moved sideways. I have nothing against Starwood, but if I’m going to experience concentration risk with an individual operator (versus the diversification of a fund), I’m looking for added value. That could take the form of lower volatility, share price growth, or dividend growth. None of these appear to be on the horizon for STWD.

Sold OBDC (1.58% Allocation)

OBDC is a solid Business Development Company, but it’s not in my top 5 (which will be explored in an upcoming video). My reason for selling is over allocation. OBDC has become the largest holding in the PBDC fund, which in turn…is my largest holding. OBDC is 13.21% of the PBDC portfolio. I like OBDC, but not enough to double down on it.

Bought CEFS (5% Allocation)

CEFS is an ETF that actively manages a diversified portfolio of closed end funds. In other words, a fund of funds. The kicker is that it’s managed by Saba Capital, and they’re a prominent activist investor. That means they proactively take action to increase the value of the funds they invest in. I reviewed CEFS in this recent episode, and said that I’d like to start a position while the yield is above 8%. Currently, the yield is 8.54%.

NLY-F: Increased Allocation from 1.86% to 3.25%

I don’t currently hold any mortgage REIT common stocks because I consider them too risky. However, occasionally I’ll hold their preferred shares because they offer less risk (and a lower yield) than their common stock cousin. I was in the process of trimming the NLY Series F preferred share holding because a decline in interest rates would reduce its distributions. However, the interest decline pace has slowed, and the reduction in distributions has been modest. The next payout will be $0.599/share on the last day of March. 

This preferred share can be redeemed (“called”) by NLY at any time at a price of $25, so it's important not to pay much more than $25 for this stock. At $26, it’s a little pricey, so price sensitive buyers could wait until it's closer to $25 to reduce their “call risk”.

EICC: Increased Allocation from 1.01% to 2.41% 

This is another preferred share and at $25.03, is more attractively priced than NLY-F (above). The issuer, Eagle Point, is in the CLO business. I also hold their common stock, EIC, which comes with more risk (and a higher yield). The appeal of this preferred share is the low price volatility. For a more detailed analysis of EICC, I’ll link an article below from Seeking Alpha:

EICC Analysis linked here.