Market Sector Update
- Volatility and uncertainty continued in the credits markets from the fourth quarter into the beginning of 2016. The credit markets reached a low on Feb. 11, with spreads at a six-year high of 919 basis points.
- Despite the horrible start, the asset class rebounded from the Feb. 11 bottom and posted a gain of 3.25% (BofA Merrill Lynch High Yield Master II Index). The rebound was primarily driven by an uptick in commodity prices, dovish global central bank policy narrative, incremental improvements across a broad range of global issues and an influx of cash into the asset class.
- New issue activity remains somewhat subdued but slightly accelerated during the quarter. High yield and loan newissue volumes increased in March for the third consecutive month. The high-yield issuance totaled $28.2 billion in March (a 10-month high) and raised activity to $51.2 billion for the quarter. That said, new-issue volume totaled $95.6 billion through the first quarter of 2015.
- Since the market’s low point on Feb. 11, the bounce in CCC non-commodity related high-yield bonds (+11.08%) has handily outperformed non-commodity B (+5.34%) and BB-rated bonds (+5.24%). CCC-rated bond spreads remain 176 basis points wide of where they began December, whereas spreads have slightly narrowed for BB (16 basis points) and B (5 basis points).
- The Fund returned 2.26% at net asset value, underperforming the benchmark for the quarter.
- The share price return was 6.17% for the quarter, outperforming the majority within the High-Yield Closed-End Funds category.
- The portfolio continues to be invested with a mix of high-yield corporate bonds and senior loans across the noninvestment grade credit spectrum. The portfolio is composed of approximately 82% corporate bonds and 16% senior loans. The loan portfolio is split fairly evenly between first and second lien loans.
- The majority of the portfolio is invested in single B credits (53%) with the remaining exposure primarily in double BB credits (23%), and triple CCC credits (20%).
- The Fund continues to utilize leverage and, as of quarter end, was levered with total regulatory leverage at 32.55% at an average cost of 95 basis points.
- Recent economic data is pointing to continued slowing in manufacturing activity. There are also few signs of inflation, and companies continue to struggle to exhibit top-line growth. Finally, instability in China continues to weigh on the markets. Given this environment, we think the U.S. Federal Reserve could have a hard time making the case for any additional rate increases throughout 2016.
- Given market uncertainties, we believe it is prudent to maintain a higher cash balance going forward as well as to maintain a more balanced portfolio in regards to liquidity and risk.
- Our goal of finding businesses that offer the best risk-adjusted return characteristics will continue as it is our belief that bottom-up fundamental credit analysis should produce better relative performance in both up and down credit cycles.
The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2016. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Any securities or sectors mentioned are based on what the managers feel may be newsworthy and may or may not reflect holdings in this portfolio. It is not intended to represent that an investment in these securities or sectors was or will be profitable. Past performance is no guarantee of future results.
Risk factors. The price of the Fund’s shares will fluctuate with market conditions and other factors. Fund shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation. Closed-end funds frequently trade at a discount from their net asset values (NAVs), which may increase an investor’s risk of loss. At the time of sale, shares may have a market price that is below NAV, and may be worth less than the original investment. There is no assurance that the Fund will meet its investment objective. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than with higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized, may be subject to restrictions on resale and sometimes trade infrequently on the secondary market.
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