In his recent article entitled “Where to Go for Double-Digit Yields,” Randall Forsyth explores the high-yielding, but lesser-known, asset class of collateralized loan obligations (“CLOs”). Forsyth explains that CLOs are comprised of leveraged loans, making them similar to high yield bonds. However, he notes that CLOs have two primary structural advantages over high yield bonds, namely that they are higher up in the capital structure and that their floating rate nature offers protection in a rising rate environment.
Forsyth also suggests that closed-end funds represent a better fund structure for CLOs (and other illiquid assets) relative to mutual funds. He provides three examples of closed-end funds that invest in CLOs, including the XAI Octagon Floating Rate & Alternative Income Term Trust (“XFLT”). XFLT, he says, offers more protection and less risk than funds with a higher allocation to CLO equity and also offers a higher-yielding alternative to exchange-traded funds containing floating rate loans.
Kimberly Flynn, XA Investments Managing Director of Alternative Investments, contributes to the article. She adds that XFLT utilizes an institutional strategy structured specifically to provide individual investors with liquidity (CLOs are typically an illiquid investment) and low correlation to movements in stock or bond markets.
The author notes that while CLOs have generated high yields and low risk (they even performed well during the ’08-09 credit crisis), closed-end funds with CLO exposure tend to have higher fees than most closed-end funds.
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