OXLC: A Bad Setup For Income Investors

Jun. 08, 2022 11:46 AM ETOxford Lane Capital (OXLC), OXLCM, OXLCPJNK, O, SPY, XFLT317 Comments

Summary

  • Oxford Lane Capital has done ok by conventional measures.
  • Most investors use it for income though, and there the fund has done exceptionally poorly.
  • The current NAV premium puts it at very high risk in this aggressive Federal Reserve environment.
  • We do like one offering from the fund though.
  • I do much more than just articles at Conservative Income Portfolio: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

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Investors have different objectives. Some focus on preservation of capital while others have their eyes popping out of their heads whenever they see a double digit yield. Unfortunately websites tend to measure all returns without taking into account the investor involved. Oxford Lane Capital (NASDAQ:OXLC) is a prime example of this. Let's look at this today and see how the two kinds of investors that we talked about, perform in this fund.

The Fund

OXLC is a popular CLO fund and we have covered XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT) which invests in generally the same area. OXLC is however riskier than XFLT on account of it focusing on riskier tranches of CLOs versus XFLT. The two funds generally tracked each other through the COVID-19 crisis and currently, based on price at least, XFLT is out ahead.

Chart
Data by YCharts

What's The Bull Case?

OXLC as one of the best known CLO funds, and gets well deserved attention because of this. While we cannot speak to all opinions, the key attraction here is the astoundingly large dividend (or distribution for you purists) yield that the fund throws your way.

Chart
Data by YCharts

What We Say

CLOs are solid return investments, in relation to their risk. There is a plethora of evidence out there that they can be a good source of alpha in most environments. Depending on how they are priced, they can really do better than junk bonds. Here, do take note, that we are again sensitive to value of the asset, in this case a closed end fund, versus what we can get elsewhere. In other words, none of that "buy cause the yield is high". In the case of OXLC, there is an additional wrinkle that we want to go over.

Returns Of The DRIP Investor

If you bought OXLC for distribution reinvestment, your returns will align with what we see on most websites. Total return according to Y-Charts (and there are always subtle differences) was 125% since inception.

Chart
Data by YCharts

Now you might say that the S&P 500 (SPY) did much better, but that is not a fair comparison. OXLC is not designed to beat the SPY. It is designed for income investors. It did handily beat SPDR Bloomberg High Yield Bond ETF (JNK), and that is what counts. Now, while most would agree with that logic, there is another flaw there.

The returns you see above assume you are NOT an income investor. They assume reinvestment of those large distributions.

Those are different things. If your dietary guide told you the weight you would gain by looking at a cake, you would not assume it would be the same if you actually consumed the cake. But here investors do. That total return looks like an awesome security blanket, whereas for income investors, it looks like a wet blanket.

Income Investor Returns

Assuming you took all your cash out and paid bills with it, how did you do? Exceptionally poorly. $1,000 invested on Feb 10, 2011 turns into $2,280 with reinvestment and $1,419 without.

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OXLC (Buy Upside)

This bonus with reinvestment is not at all uncommon with dividends. Here is Realty Income (O).

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Realty Income (Buy Upside)

But there are some key differences here.

1) If you consumed the dividends, the yield on your original purchase of Realty Income is now 14.7%. It increased from 5.2% in 2011 to 14.7% today.

2) If you consumed the dividends, the yield on your original purchase of OXLC went from 9% in 2011 to 4.5% today. That is mainly because the NAV is down about 70% since inception.

If you are looking at where the pie stands at the end of the period, with dividends consumed, even iShares 20+ Year Treasury Bond ETF (TLT) beats OXLC.

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TLT (Buy Upside)

Dividend Reinvestment Added Value is the critical number here. You can see it is 32.78% for TLT and 72.55% for Realty Income. We purposefully left it out for OXLC in the first table.

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OXLC (Buy Upside)

Verdict

Fixed income faces a lot of headwinds and we don't think the junk and beyond tiers have fully priced the Federal Reserve aggressiveness. After the latest disclosure, OXLC trades at about a 10% premium to NAV. Not the combination we are looking for in an investment. Morningstar gives it a one Star rating, which we think is slightly harsh (we would give it a 2).

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Morningstar

OXLC does have some interesting investing options for investors who actually care about total returns while consuming the payout. Oxford Lane Capital Corp. 6.75% PF TRM 24 (NASDAQ:OXLCM) is a term preferred due in 2 years and offers a capital protected yield. The shares are callable (since 2020) and it will be interesting to see if they are indeed called in light of OXLC's new preferred shares announced this morning. Oxford Lane Capital 6.25% Preferred Shares Series 2027 (NASDAQ:OXLCP) is the other outstanding (and we mean outstanding as in being traded, not a reference to the quality) preferred share offering from OXLC and that is an interesting option as well. We will take a pass of the primary listing and keep our eyes on the preferred shares for opportunities.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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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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