Opportunities In Income Securities That Have Lagged The Rally

Core Insights - The income market has seen significant price increases, with only local emerging market debt showing negative returns year-to-date [2] - A countercyclical value-based approach has led to the reduction of risk exposure in income portfolios, resulting in the exit from high-performing assets like Gladstone Capital [4] - The closed-end fund (CEF) sector presents opportunities for attractive yields without chasing overpriced assets, with specific funds highlighted for their potential [8] Group 1: Market Performance - The income assets and broader financial market have experienced substantial growth, with a year-to-date return of 20% in some sectors [2] - Local emerging market debt is the only sector in the red year-to-date, indicating a divergence in performance across income sectors [2] Group 2: Investment Strategy - The company has adopted a countercyclical value-based allocation strategy, reducing risk exposure when compensation for risk is low [4] - Exited positions include Gladstone Capital, which was trading at a nearly 30% premium to NAV, indicating it is fully priced [4] - The Nuveen Preferred and Income Term Fund was also exited due to limited room for further outperformance as its discount approaches zero [5] Group 3: CEF Sector Insights - The Flaherty suite of CEFs is recommended for investors seeking exposure to preferreds, with the Flaherty & Crumrine Preferred Income Opportunity Fund trading at a 12% discount and a 6.7% yield [8] - The limited duration CEF sector has diverged from the loan CEF sector, presenting inefficiencies that could be exploited [7] - The PGIM Short Duration High Yield Opportunities Fund is noted for its double-digit discount and decent entry point, with a nearly 60% allocation rated BB and above [10] Group 4: Specific Fund Recommendations - Bain Capital Specialty Finance is highlighted for its 6% discount and 10.8% yield, with a favorable NAV profile despite past dilution [12] - The Nuveen Municipal Credit Fund is attractive due to its high-quality profile, wide discounts, and potential for tighter discounts as leverage costs fall [14] - Blue Owl Capital Corporation III is noted for its high-quality portfolio and a 10.9% dividend yield, trading at a 4% discount [16]