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Closed-Ended Funds Improving Yields on Increased Risk

Robert Karr

High Expectations for Closed-Ended Funds, but What's Driving Them?

(Continued from Prior Part)

Improved yields

Closed-ended funds (PEX) are boosting their yields by deploying capital in marginally risky asset classes or companies. Prospect Capital’s (PSEC) portfolio generated an annualized yield of 13.3% in fiscal 2Q16 (ended December 31, 2015) across its interest-bearing investments. This represents a 1.0% increase over fiscal 1Q15 and a 0.3% increase over fiscal 1Q16. The company has also elected to invest in higher-interest-yielding asset classes such as structured credit and online lending.

The Market has seen some revival in yields on the interest rate hike by the Fed in the fourth quarter of 2015. Prospect Capital is thus deploying capital in higher-interest-yielding asset classes such as structured credit and online lending. Prospect’s non-bank structure gives it the flexibility to invest in multiple levels of corporate capital, with a preference for secured and structured lending.

Companies with exposure to automobiles and real estate, such as American Capital (ACAS) and United Rentals (URI), have experienced lower yields. Those with higher exposure in the energy sector saw some compression. CIT Group (CIT) saw its yields improve to 6.4%, with average earning assets of $3.9 million.

Ares and BlackRock expect improvement

Ares Capital’s (ARCC) weighted average yield stood at 9.4% in 3Q15, compared to 9.9% in 3Q14. Its yield has declined over the past few quarters, mainly due to a decline in the yield on subordinated certificates in the SSLP (senior secured loan program) and an increase in lower yielding investments. The company intends to sell these investments to the SDLP (senior direct lending program) on the establishment of a diversified portfolio for the program. However, it is expected to see some recovery in yields in the fourth quarter of 2015 on improved originations.

By comparison, BlackRock Capital Investment’s (BKCC) weighted average yield stood at 11.5% in 3Q15, compared to 11.5% as of June 30, 2015, and 11.8% as of September 30, 2014. The decline of 30 basis points on a year-over-year basis was expected, as the company shifted a composition of its portfolio into slightly lower-yielding senior loans as it monetized equities. The company is expected to see improvement in its yield on investments in higher yielding loans with marginally higher risk.

Continue to the next part for a closer and up-to-date look at originations.

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