The Invesco VK Dynamic Credit Opportunities Fund VTA) seeks a high level of current income by investing primarily in senior bank loans. VTA management aims to use leverage to enhance returns by borrowing at a floating short-term rate and reinvesting the proceeds at a higher rate.
Compared to most other fixed income asset classes, using leverage on senior loan investments involves less risk from rising short-term interest rates, since the income from senior loans generally adjusts to rising rates, as do the rates which determine the borrowing costs. The fund also invests in some foreign currency transactions to minimize fluctuations in NAV resulting from non-dollar denominated loans.
VTA is currently selling at a discount to NAV of -8.77% compared to the 6 month average discount of -4.00%. The 1-Year Z-Statistic is -1.95. This means the current discount to net asset value is nearly two standard deviations below the mean.
In April, the fund lowered its monthly distribution from $0.0857 per month to $0.0725. The average monthly earnings per share was reported as $0.0695 in June, so the fund is slightly under-earning its payout. But there is $0.448 in UNII per share (undistributed investment income), so there is little or no risk of a dividend cut in the near term.
Portfolio Management Team
VTA is team managed.
He earned a B.S. in business administration, with majors in finance and management information systems, from the University at Albany, State University of New York.
He earned a B.S. in applied mathematics and economics from Ursinus College and an M.B.A. in finance from St. Joseph’s University.
Chartered Financial Analyst, portfolio manager, has managed the Fund since 2007. He earned a B.S. in mathematics and economics from the University of Nottingham and an M.B.A. in finance from Northwestern University.
Sub-managers from Avenue Europe International Management, L.P.
He earned a B.S. in economics from the Wharton School of the University of Pennsylvania and an M.B.A. from the Kellogg School of Management of Northwestern University.
He earned a B.S. in mechanical engineering with a concentration in industrial engineering from Instituto Tecnólogico y de Estudios Superiores de Monterrey and an M.B.A. from the Wharton School of the University of Pennsylvania.
Asset Class Breakdown (as of 05/31/2011)
Variable Rate Senior Loan
Credit Quality (as of 6/30/2011)
CCC and below
Ticker: VTA Invesco VK Dynamic Credit Opportunities Fund
- Total Net Assets= 1175 MM Total Common Assets= 894 MM
- Annual Distribution Rate= 7.89%
- Income Only Yield= 7.57%
- Dividend Frequency= Monthly
- Current Monthly Distribution= $0.0725 per share ($0.87 per year)
- Baseline Expense ratio= 1.00% (before interest expense)
- Discount to NAV= -8.64% 6 Month Avg. Discount= -3.77%
- Portfolio Turnover rate= 88%
- Effective Leverage= 23.9%
- Average 3 Mos. Daily Trading Volume= 213,000 shares (about $2.625 MM)
The Federal Reserve recently announced a policy of keeping short-term interest rates at zero for two more years. I believe this partially explains why the discount to NAV has widened recently on VTA and several other floating rate bond closed-end funds. It is true that the zero interest rate policy should keep the floating rate cash flows low for the next few years. But the fund also benefits from low borrowing costs during that time period. The average cost of fund leverage was reported as 2.71% in June, which is well below the NAV yield of 6.69%. The default rate in June was only 0.93%, and even when there is a default, the recovery rate on senior loans is much higher than for bonds.
VTA is attractive now as a very low duration, high income play, but there is some credit risk as a tradeoff. It is a good holding for a tax deferred retirement account. I believe there is a good chance that the discount to NAV will narrow over the next few months which would add to the total return. VTA is fairly liquid and usually trades over 200,000 shares a day.
Disclosure: I am long VTA.