Aberdeen Income Credit Strategies Fund: High Yield, High Risk, Diversified Bond CEF


  • ACP is a monthly dividend payer with a double-digit yield and invests primarily in lower rated and unrated bonds or debt-related instruments.
  • ACP’s investments are diversified among various industries and geographic regions, which helps the fund generate a steady yield.
  • ACP’s portfolio has some risk of falling yields, as well as of defaults, which may result in erosion of NAV.
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Aberdeen Income Credit Strategies Fund (NYSE:ACP) is a monthly dividend payer with a double-digit yield. This closed-ended fund (CEF) invests primarily in high-yield but lowest-rated loan-related or debt-related instruments, including repurchase and reverse repurchase agreements and derivative instruments. ACP's investments are diversified among various industries and geographic regions.

Launched and managed by Aberdeen Asset Managers Limited almost 12 years back, the fund has failed to deliver positive price growth. However, a yield in the range of 11 to 14 percent has enabled this fund to generate a respectable positive total return for its shareholders. If the fund manages to generate such high yield, it will be a very good fund to have.

A Highly Diversified Fund with A Very Low Average Credit Rating

Aberdeen Income Credit Strategies Fund has assets under management (AUM) of $207 million, and has a price to book (P/B) close to 1. The fund has a very high expense ratio of more than 3 percent. It invests in low rated or unrated bonds. Almost 95 percent of its investments are in corporate bonds, and within that only 6 percent are in bonds rated higher than B. The average credit rating of its bond portfolio is CCC+. However the weighted average coupon is quite high at 7.4 percent. Almost 63 percent of its investments are in short term bonds with maturity less than 5 years.

Aberdeen Income Credit Strategies Fund is trading at a premium of 13 percent over its net asset value (NAV). This poses a high risk for would-be buyers of ACP. Although the price performance has been negative, an excessively high yield has enabled this fund to generate a respectable positive total return for its shareholders. The fund has a current yield close to 14 percent. The fund is well diversified geographically with only 28.7 percent investments in the US financial market. Almost a similar percentage of funds is invested in European markets, and 21 percent of its investments are made in the financial markets of the United Kingdom. The fund, however, is located in the US.

The fund is also well diversified in terms of its investments in various sectors, including aerospace, defense, energy, chemicals, containers, packaging, telecommunication services, healthcare equipment and supplies, information technology services, life sciences tools and services, marine, media, and electric utilities. Almost 28 percent is invested in companies belonging to the consumer discretionary sector, bonds of which generally generate very high yield. An equal proportion of funds is invested in companies from telecommunications, information technology, and financial sectors.

How the Bond Market and Junk Bonds Are Expected to Perform?

During May, 2022, Jason Zweig wrote in the Wall Street Journal:

So far in 2022, with inflation raging, bonds have lost 10%-among the worst returns in U.S. history. On Wednesday, the Federal Reserve raised interest rates by 0.5 percentage point, the sharpest increase in 22 years……Inflation is like kryptonite for bonds, whose interest payments are fixed and thus can't grow to keep pace with rises in the cost of living. Until recently, inflation seemed like a problem of the distant past, when it often plagued bond investors…….Over some long periods, such as the 20 years ending in March 2020, bonds earned even higher returns than stocks, without any of their bloodcurdling losses. Those glory years are gone.

Thus, investments in bonds, though they deliver a fixed return, become risky during high inflation. This problem further magnifies for lower rated or unrated corporate bonds, as there is a much higher chance of default. The companies issuing such bonds are already under suspicion of failure in generating stable income. Defaulting bonds not only lead to lower yields, but also may eat out the net asset value (NAV) of funds like Aberdeen Income Credit Strategies Fund. In addition, the rise in inflation has already made investors invest more in junk bonds, which resulted in an increase in bond price and thus lowering the yield of such bonds.

A junk bond is a kind of debt instrument that has been given a low credit rating by a ratings agency, below investment grade. In the words of The Wall Street Journal reporter Sebastian Pellejero, "Investors' rush into the lowest-rated junk debt has driven yields to record lows, reflecting Wall Street's thirst for fixed-income returns and increasing confidence that even struggling businesses can survive the pandemic. The yield on an index of triple-C rated corporate bonds settled Thursday at an all-time low of 6.42%, according to Bloomberg Barclays data. That was down from 7.4% entering the year. Yields fall when bond prices rise."

Investment Thesis

Aberdeen Income Credit Strategies Fund is a closed-end fund focusing on lower rated and unrated corporate bonds. The fund pays a monthly dividend with a very high yield, and thus results in a positive total return despite negative price growth. Going by the yield, it's a good option for income seeking investors. However, with an average credit rating of CCC+, the fund carries substantial credit risk. In addition, the rise in inflation has already made investors invest more in such bonds, which resulted in an increase in bond price and thus lowering the yield.

Moreover, this fund has an extremely high expense ratio. In a scenario of negative price growth and risk over sustaining of such high yield, this expense ratio surely is a demotivating factor for investors. As the inflation is expected to continue for a much longer period of time, these lower rated bonds fail to generate enough optimism, despite their high yield, as the cost level increases too. On top of all these, despite the fund having a negative price growth, it still is trading at a 13 percent premium over its NAV. All these makes Aberdeen Income Credit Strategies Fund a high-risk investment option.

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