XFLT Review: Could this be a key to long term income?

Summary

In this video, Brad provides an in-depth overview of XFLT, a CLO-focused fund. He discusses its portfolio, performance, and risks, highlighting the importance of understanding CLO managers. Brad shares his personal backtesting insights, revealing how the fund has delivered strong returns in specific time frames. He also addresses its 14% distributions and the mechanics behind its pricing and liquidity. While not offering financial advice, Brad emphasizes the fund's potential for income investors looking for a non-correlated investment option, stressing the need for due diligence and professional consultation.

Takeaways

• 😀 XFLT is a large investment fund with $33.8 billion in assets under management and 29 years of experience.
• 😀 CLO managers are critical to the success of CLO-based funds—if you don’t believe in the manager, avoid the investment.
• 😀 XFLT focuses on income and capital preservation, with a diversified portfolio of CLO debt and equity, as well as senior secured loans.
• 😀 The fund has 43% of its assets in senior secured loans, 34% in CLO equity, and 15% in CLO debt, providing a mix of risk and reward.
• 😀 XFLT's performance is impacted by interest rate changes, which affect the profitability of its loans. Higher rates can depress fund price, while lower rates can improve returns.
• 😀 Over a four-year period from June 2020, XFLT's performance saw a doubling of investment value with an 8% annual withdrawal rate.
• 😀 In some periods, especially when interest rates are high, XFLT’s performance may flatten or show minimal growth, but distributions remain steady.
• 😀 XFLT does not offer DRIP at NAV; however, platforms like Fidelity provide a discount of 2-3% when purchasing above NAV.
• 😀 Distributions from XFLT are relatively stable, with a steady payout observed for the last 18 months, signaling ongoing profitability.
• 😀 XFLT may be a suitable option for income-focused investors, particularly those seeking a fund not directly correlated to stocks or bonds.

Q & A

What is the main focus of the XFLT fund?

The XFLT fund is primarily focused on income generation and capital preservation. It invests in CLOs (Collateralized Loan Obligations) and senior secured loans to provide steady income for investors.

How large is the XFLT fund in terms of assets under management?

XFLT manages approximately $33.8 billion in assets, indicating it is a significant player in the market.

What types of loans and investments are included in the XFLT portfolio?

XFLT's portfolio includes 43% in senior secured loans, 34% in CLO equity, 15% in CLO debt, and some high-yield second loans, along with minor investments in common stock.

What is a CLO, and why is it important for this fund?

A CLO (Collateralized Loan Obligation) is a type of structured financial product backed by a pool of loans. CLOs are crucial to XFLT's investment strategy because they offer a mix of debt and equity positions, allowing the fund to balance risk and return.

How does XFLT's distribution strategy work for investors?

XFLT offers an 8% annual distribution, and investors can opt for a DRIP (Dividend Reinvestment Plan). If the fund is trading above its NAV, the DRIP is available at a discount, typically around 3%. However, it does not drip at NAV directly.

What is the significance of the senior secured loans in XFLT's portfolio?

Senior secured loans make up 43% of the XFLT portfolio and are considered safer investments because they are backed by collateral. This provides a higher level of security for the fund compared to riskier equity positions.

How does interest rate fluctuation affect XFLT's performance?

XFLT's performance is influenced by interest rate changes because its loans are tied to floating rates. When rates rise, the fund's value can decrease, and when rates fall, the fund may see improved performance as payments stretch out and returns increase.

How did XFLT perform during the pandemic, and what is its track record since then?

During the pandemic, XFLT showed some fluctuations, but over a four-year period starting June 2020, investors who took an 8% annual distribution could have doubled their money. The fund has generally performed steadily since then, with minor ups and downs based on market conditions.

What tax forms are associated with XFLT, and how should investors approach tax considerations?

XFLT uses 10.99 tax forms, but specific tax details aren't easily available. Investors are advised to consult with financial professionals, such as accountants or tax lawyers, for detailed tax guidance.

What are the risks associated with investing in XFLT?

The primary risks of investing in XFLT include liquidity risk (difficulty selling investments quickly), potential loss in CLO equity tranches, and exposure to interest rate fluctuations which can affect loan performance and distributions.