CLO Equity Fund Largest Discount to NAV: A Deep Dive into 6 Uncoverable Gems

Introduction

Closed-end funds (CEFs) have been gaining popularity among investors seeking income and diversification. CLO equity funds, a type of CEF, offer exposure to a portfolio of collateralized loan obligations (CLOs), providing investors with access to floating-rate debt and potential returns. However, like any investment, CLO equity funds can trade at discounts or premiums to their net asset value (NAV), creating opportunities for value-oriented investors.

Uncovering the Deepest Discounts

As of January 10, 2023, several CLO equity funds traded at significant discounts to NAV, providing potential investment opportunities:

Factors Driving Discounts

The discounts to NAV can be attributed to various factors, including:

• Rising interest rates: As the Federal Reserve raises rates, the value of fixed-income assets, such as CLOs, can decline. This has contributed to the widening discounts on CLO equity funds.
• Economic uncertainty: Concerns about a potential economic slowdown have dampened investor sentiment towards CLOs and other riskier assets.
• Technical factors: Selling pressure and low trading volume can exaggerate discounts, creating opportunities for nimble investors.

Value Potential

The current discounts to NAV present potential value for investors who are willing to tolerate volatility and believe in the long-term recovery of the CLO market. By purchasing funds at a discount, investors can lock in potential upside when the market recovers.

Table 1: Historical Discount Performance

Risk Considerations

While discounts to NAV can present opportunities, it is important to consider the risks involved:

• Market volatility: The discounts on CLO equity funds can exacerbate market volatility, leading to potential losses if the market continues to decline.
• Credit risk: CLOs are backed by pools of loans, which carry credit risk. If borrowers default, the value of the CLOs and the fund can decline.
• Liquidity risk: CLO equity funds can be less liquid than their underlying CLOs, making it difficult to exit positions quickly.

Opportunities for Value-Oriented Investors

For investors seeking value and income, the following opportunities may be worth exploring:

• PSEC: With a NAV discount of -15.5%, PSEC offers a compelling entry point into the CLO equity space.
• ARCC: ARCC trades at a discount of -14.5%, providing exposure to a diversified portfolio of CLOs.
• BXSL: Managed by Blackstone, BXSL has a track record of strong performance and trades at a discount of -13.5%.

Tips and Tricks

To maximize your returns from CLO equity funds, consider the following tips:

• Invest for the long term: CLO equity funds are designed for long-term investors who are comfortable with market volatility.
• Diversify: Spread your investments across multiple funds to reduce risk.
• Monitor market conditions: Keep an eye on interest rates and economic data, which can impact the value of CLOs.
• Consider closed-end fund fees: CEFs typically have higher fees than open-end funds, so factor these costs into your decision.

Common Mistakes to Avoid

Avoid these common mistakes when investing in CLO equity funds:

• Chasing yield: Don't be tempted by high yields, as they may be unsustainable.
• Not understanding the risks: Ensure you fully understand the risks involved before investing in CLO equity funds.
• Overinvesting: Don't allocate too much of your portfolio to CLO equity funds, as they can be volatile.

Unveiling the Underlying Value

The current discounts to NAV on CLO equity funds present opportunities for value-oriented investors seeking income and potential upside. By understanding the factors driving the discounts and implementing smart investment strategies, investors can capitalize on these opportunities and enhance their portfolios.