Despite market volatility, CLO equity tranches offer high-yield income and portfolio diversification with relatively low risk, making them a compelling investment option. OFS Credit Company Inc. is recommended for its strong distribution coverage, stable NAV, and recent low-cost investments in new CLOs. Active management in CLOs allows for portfolio adjustments during economic downturns, potentially outperforming other asset classes in a recession.
Our previous articles on OCCI have consistently held a bearish view due to its history of value destruction. The fund has recently hit new lows, comparable to the depths of the COVID-19 market crash. We look at the secondary securities, or puppies as we like to call them.
OFS Credit Company has historically underperformed, with poor risk-adjusted returns. We examine why the fund has done so well over the last six months. We go over the recently issued preferred shares and tell you where you can do much better with lower risk.
OCCI offers a high dividend yield of 18.6%, making it appealing for income investors despite its 60.7% price decline since inception. The fund's portfolio focuses on CLO equity and debt, benefiting from interest rate cuts but sensitive to rate hikes. OCCI's distribution is well-covered by net investment income, ensuring stability and potential growth through reinvestment and a 5% DRIP discount.
The largest holdings in my Income Compounder portfolio include CLO CEFs OXLC, ECC, OCCI, and CCIF. CLOs have grown into a $1.2 trillion asset class, offering attractive equity tranches with double-digit returns and bond-like cash flow. OCCI and OXLC offer high monthly distributions, with OXLC reporting strong core NII exceeding distributions and potential for further increases.