A Very Niche Bond Fund With A 10% Yield
But The Environment Needs To Be Just Right
Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
Tech and AI have controlled a lot of the narrative in 2023, but one of the economy’s more consequential sectors has been the financials. They’ve been highly sensitive to the aggressive moves in the interest rate markets while recovering from the failures of Silicon Valley Bank, Signature Bank and others. Investors have been conversely burned and rewarded throughout the year, but uncertainty still remains high and the real estate market may now be bearing down on this sector too. It’s safe to say that anybody investing in financials today is exposing themselves to an above average level of risk to do so.
One of the more unique plays on this sector isn’t on the equity side, but fixed income. The Angel Oak Financial Strategies Income Term Trust (FINS) focuses on financial sector debt instruments in a very niche-oriented investment product, something not typically available in the fund space. This is a perfect example of a fund where you need to dive into the details to understand 1) what exactly it’s investing in and 2) how it’s going to be impacted by the environment it’s operating in. Credit quality, duration risk, sector exposure and rate sensitivity all need to be considered carefully to determine whether this is the right fund at the right time.
Fund Background
FINS is a closed-end fund that seeks current income with a secondary objective of total return. It utilizes a banking sector debt-centric strategy, which exhibits low historical correlations to other areas of the market. It will focus on high quality credit with at least 50% of the fund’s portfolio being rated investment grade or, if unrated, judged to be of investment grade quality by the managers. FINS also uses leverage to enhance yield and total return potential.
This is certainly a very targeted portfolio and one whose market you probably need to have an opinion on in order to consider it. Is it ideal as a long-term holding in a portfolio? Perhaps in small quantities. The fund’s management team advertises its low correlation to interest rates, so there’s likely some diversification benefits, but it sure seems too narrow to consider in larger allocations. I’m a fan of most funds that offer access to very unique markets for retail investors, but in the end, it’s all about structure and composition. The focus on investment-grade debt over the junk bonds that typically dominate fixed income CEFs is an attractive feature, especially in the current market environment.
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.