Darren415
This article was first released to Systematic Income subscribers and free trials on Oct. 24.
CLO (collateralized loan obligation) equity closed-end funds (“CEFs”) like Oxford Lane Capital Corp (NASDAQ:OXLC) and Eagle Point Credit Company Inc. (NYSE:ECC) continue to appeal to income investors due to their high distribution rates. In this article, we highlight some of the misconceptions that surround these funds. The key takeaway is that while these funds undoubtedly carry risk, some investors tend to be worried about the wrong things. We also highlight how investors can think about valuations of the CLO Equity asset class in gauging attractive entry points. Within the trio of CLO Equity CEFs, we see value in ECC, trading at a flat discount and a 16.4% current yield.
Key CLO Equity CEF Misconceptions
In this section, we highlight some of the key misconceptions we have come across in the commentariat relating to these funds as well as to the CLO Equity asset class more broadly. Ultimately, income investors are best served when they get a fuller picture of the risk/reward on offer.
CLOs will do X because of Y
This is a bit of a pet peeve but a lot of commentary across both CLO Equity and CLO Debt securities speaks blithely about “CLOs” as in CLOs will do X or Y in this or that market environment. It doesn’t make any sense to speak about CLO performance or behavior in general terms. That’s because CLO Debt and CLO Equity have extremely different risk / return…
