CIK: HY Fund From Credit Suisse, 8.68% Yield

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Binary Tree Analytics
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Summary

  • CIK is a closed end fund focused on fixed income.
  • With a moderate leverage of 26.2%, the fund "primarily invests in high yield fixed income securities that are in the lower ratings categories of Moody’s Investors Service".
  • On a 5-year basis CIK has outperformed significantly both DHY and JNK.

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Thesis

Credit Suisse Asset Management Income Fund (NYSE:CIK) is a closed end fund focused on fixed income. With a moderate leverage of 26.2%, the fund "primarily invests in high yield fixed income securities that are in the lower ratings categories of Moody’s Investors Service Inc., Standard & Poor’s, a division of the McGraw-Hill Companies, Inc. or another nationally recognized ratings service". Currently, the fund has an ~70% allocation to fixed high yield bonds and a ~25% allocation to leveraged loans. With a 0.54 Sharpe ratio and a 10.72 5-year standard deviation, the fund compares favorably with the Morningstar US HY Bond Total Return Index which exhibits a 0.51 Sharpe and a 7.6 standard deviation on the same measurement period. The fund runs a fairly low duration (sub 3-years) but has a risky credit profile with a high single-B and CCC credit concentration. The portfolio is well diversified and granular but the fund is subject to a sudden spike in default rates and more importantly in credit spreads. CIK is down more than 8% on a year-to-date basis, and there is a bit more weakness to come from a market risk perspective. Three year treasury rates have moved up from roughly 95 bps at the end of 2021 to 160 bps now, and we might see a significant push higher to the 200-250bps area as the Fed undertakes its rate hikes. For a retail buy-and-hold investor we would cut a third of the exposure and rate the fund a Hold, while new money looking to enter the space would do well to revisit the fund in June/July when we are going to have a much clearer picture of the yield curve and its stabilization.

Holdings

The fund currently holds approximately 70% of its portfolio in fixed rate high yield bonds:

Portfolio parsing

Portfolio Parsing (Fund Fact Sheet)

Unlike other CEFs which tend to be overweight leveraged loans in a rising interest rate environment, CIK is overweight fixed rate bonds. The fund has a very granular composition, with only 5 issuers breaching the 1% portfolio weighting:

CIK top 10 issuers

Top 10 Issuers (Fact Sheet)

Granularity ensures there are no systemic portfolio events which can drive a significant negative performance. If Flex Acquisition Co. defaults with zero recovery tomorrow the fund incurs just a 0.95% loss which is going to be absorbed by its dividend yield. The fund currently has 251 issuers in its portfolio.

The fund has a well contained industry concentration, with only one bucket exceeding a 15% threshold:

CIK top ten industries

Top Ten Industries (Fund Fact Sheet)

The main risks for the fund lie with its credit profile and market risk profile.

Credit Risk

As described in the prospectus, the fund tends to invest in the riskiest part of the rating spectrum with single-B and CCC names prevailing in the portfolio:

rating

Ratings (Fact Sheet)

Ultimately this means that the portfolio has a higher probability of default and that in a risk-off environment where credit spreads widen the fund is set to suffer a larger impact to its NAV.

High yield spreads have pushed higher lately, but are still very well contained from a historical perspective:

ICE BofA US high yield index option-adjusted spread

High Yield Spreads (The Fed)

We can see from the above graph that the BofA US High Yield Index Option-Adjusted Spread is still under its historic 4% level, not signaling a significant current market stress. If these levels were to push significantly higher, the fund is set to lose a high amount of NAV through a lower re-pricing of the underlying credits.

Market Risk

The fund runs a fairly low duration for a high concentration of fixed rate bonds:

CIK duration profile

Duration Profile (Fund Fact Sheet)

Given its duration profile, the fund falls in the short-term bond fund profile:

How interest rarte changes affect the value of a 1000$ bond

Duration Impact (Vanguard)

The above table indicates that for its duration the fund is set to lose ~3% of NAV for every 1% increase in rates (100bps) for its target tenor. 3-year rates have moved up from roughly 95 bps to 160 bps on a year to date basis and we might see a significant push higher to the 200-250bps area. There is a bit more weakness to come from a market risk perspective.

Performance

CIK is down more than 8% on a year-to-date basis, very similarly to its sister fund DHY:

CIK total return

YTD Performance (Seeking Alpha)

We can observe the effect of leverage in the case of the two CEFs versus the unleveraged JNK ETF which focuses on high yield debt. JNK is down only 4.57% on a total return basis year to date.

On a 5-year basis CIK has outperformed significantly both DHY and JNK:

performance

5-Year Performance (Seeking Alpha)

Lower leverage than DHY has ensured the 2020 Covid drawdown was not NAV destructive and the fund has managed to outperform both its peers since then. On a long-term basis (10 years) the fund displays the characteristics of a buy-and-hold investment with a total return in excess of 84%:

CIK 10-year performance

10-Year Performance (Seeking Alpha)

We can observe that the fund treads water or has a slight negative total return in periods of rising interest rates such as 2014-2016 and again in 2018. Similarly to its historic pattern this year's rising in the front end of the curve has resulted in a negative total return performance.

Premium/Discount to NAV

The fund tends to trade at a significant discount to NAV during periods of rising rates:

premium/discout to NAV

Premium / Discount to NAV (Morningstar)

We can see from the above matrix that the fund usually trades at an approximate -10% discount to NAV during rising interest rate environments. In the unprecedented 0% rates period in 2021, we saw for the second time in the past decade a premium to NAV for the fund. However, we are going to experience a reversion to historic norms, so we are expecting more weakness in pricing from the discount to NAV alignment to historic levels. The fund currently trades at a 5.18% discount to NAV and a very negative z-stat of -2.19. Today's z-stat is not that telling for this fund because we are coming from a historic measurement period that includes the 2021 figures which were very much driven by the Fed liquidity and investor clamoring for yield.

The fund also exposes a bit of a yearly NAV give-up, meaning that the asset manager pays a dividend yield that is not entirely supported by the cashflows from the underlying portfolio:

nav performance past decade

NAV Performance Past Decade (CefConnect)

In the above graph we can see that the fund has an approximate -1.183% annual NAV give up over the past decade.

Conclusion

Coming from Credit Suisse Asset Management, CIK is a fixed income fund that is overweight high yield bonds. With a classic blend of bonds and leveraged loans, the fund provides an 8.68% yield with moderate leverage (currently at 26.2%). The fund has a slight annual NAV give-up that subsidizes the yield but exhibits a fairly strong Sharpe ratio of 0.54 and a standard deviation of 10.72 (when measured on a 5-year basis). The vehicle has a robust 10-year performance but tends to invest in the lower rungs of the credit quality matrix thus is exposed to a sudden spike in credit spreads. CIK has usually traded at a 10% discount to NAV during Fed tightening cycles and has another 4-5% to go in terms of discount widening to reach historic norms. We feel there is a bit more weakness to come from a market risk perspective as well for this fund. For a retail buy-and-hold investor, we would cut a third of the exposure and rate the fund a Hold, while new money looking to enter the space would do well to revisit the fund in June/July when we are going to have a much clearer picture of the yield curve and its stabilization.

This article was written by

Binary Tree Analytics profile picture
2.43K Followers
With a financial services cash and derivatives trading background, Binary Tree Analytics aims to provide transparency and analytics in respect to capital markets instruments and trades._____________________________http://www.BinaryTreeAnalytics.com

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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