Entering text into the input field will update the search result below

Switches Continue To Generate Alpha In Income Portfolios

Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Value, CEFs

Seeking Alpha Analyst Since 2014

At Systematic Income our aim is to build robust Income Portfolios with mid-to-high single digit yields and provide investors with unique Interactive Tools to cut through the wealth of different investment options across BDCs, CEFs, ETFs, mutual funds, preferred stocks and more. Join us on our Marketplace service Systematic Income.

Our background is in research and trading at several bulge-bracket global investment banks along with technical savvy which helps to round out our service. 


  • Welcome to another weekday blog post from Systematic Income.
  • We highlight our recent portfolio switch from OCCI to AAIC-C that has clocked in a 10% gain in less than three weeks.
  • In a market environment of low yields, switches provide one way of generating decent returns.
  • Take a 2-week no-obligation trial of Systematic Income and check out our Income Portfolios and Interactive Investor Tools.

Welcome to another weekday blog post from Systematic Income where we give an update on the recent rotation out of OCCI.

In a recent blog post we discussed a switch out of the OFS Credit Company (OCCI). As it happens, we rotated into the Arlington Asset Investment Corp 8.25% Series C (AAIC.PC) which was our highest conviction mREIT preferred, trading at that point at a yield north of 9%. So far the switch has gained 10% - 2/3 of it from the gain in AAIC.PC and the other third from avoiding the recent drop in OCCI due to the share offering

Obviously, we didn't expect the share offering but with OCCI trading at a double-digit premium, holding it was not a very attractive risk/reward particularly given the very attractive valuation of AAIC.PC. In retrospect, we got out of OCCI a bit early as it continued to move higher but the reality is that no one is going to nail the timing exactly right on rotations.

Within the broader mREIT preferred sector AAIC looks very attractive with a combination of high agency exposure, low leverage and high equity/preferred coverage.  The chart below captures three valuation metrics we view as most important - the allocation to agency securities, economic leverage and equity / preferred coverage. The stock has very low leverage (3.0x) for its level of agency percentage holding of 90% with equity / preferred coverage that is on the higher side across the sector. Our view remains that the stock is undervalued due to its failure to reinstate its common dividend which is actually a positive for the preferred though it likely puts some investors off as they interpret it as a sign of distress. 

Apart from rotating into a more attractive valued security, the move from a CEF into a preferred highlights a key trend we have been discussing for some time which is that in the current market environment it makes sense to lighten up on CEF exposure in favor of individual preferreds. 

We discussed this theme in a recent article on the service which hasn't been republished publicly yet but, in short, the discount volatility dynamic, low underlying yields and yield optics make CEFs marginally less attractive in the current environment. By yield optics we refer to the fact that CEFs look like they are delivering income levels significantly above those of senior securities, however, this isn't actually the case in many instances. More to come on this topic so watch this space!

Thanks for reading. Take a free trial of Systematic Income!

Check out Systematic Income and take a look at our suite of Income Portfolios designed from the perspective of yield and risk control in mind.

Explore the best of the CEF/ETF, preferred and baby bond markets with our powerful Interactive Investor Tools.

Check us out on a no-risk basis - sign up for a 2-week free trial!

Analyst's Disclosure: I am/we are long AAIC.PC.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.