Closed-end managers

Closed-end asset managers (PSP) are expected to see subdued earnings in 4Q16 as originations rise more slowly. Expectations of an interest rate hike could increase the cost of keeping higher leverage in upcoming quarters.

Portfolio yields are expected to remain in line with the previous quarters as companies target second lien and retail loans to command higher rates. Investors tend to give premiums to those stocks that have low-cost debt or lower leverages on their books.

Closed-End Funds Are Affected by Originations, Rates

Closed-end managers deploy money in middle market companies engaged in businesses across sectors by raising capital through share issuances. Major players in the industry include Prospect Capital (PSEC), Apollo Investment (AINV), Ares Capital (ARCC), CIT Group (CIT), BlackRock Capital Investment (BKCC), and United Rentals (URI).

Major drivers for evaluating the performances of closed-end funds include originations, costs of funds, yields on loan books, leverages, and operating expenses.

September 2016 performance

In 3Q16, Prospect Capital missed Wall Street analysts’ consensus net income estimate of $0.24 per share with net income of $0.22 per share. Ares Capital posted EPS (earnings per share) of $0.43, beating Wall Street analysts’ consensus estimate of $0.39. Apollo Investment posted EPS of $0.18, beating Wall Street analysts’ consensus estimate of $0.17.

Closed-end companies reward investors primarily through dividends carrying yields of 10%–16% and dividend payout ratios of 60%–100%.

Stable yields

In the past few quarters, there’s been a revival in yields due to an expectation of a rate hike, deployments toward second lien investments, structured lending, and retail loans.

In this series, we’ll study how these closed-end funds have been performing and what to expect of their performances in upcoming quarters. We’ll also study the impact of a potential rate hike in 4Q16 on yields, originations, and performance.

Let’s start with a look at how closed-end funds have been improving yields.

Latest articles

Apple (AAPL) investors have had a roller coaster week. Apple stock has lost just under 2% in a week, ending on August 23, 2019.

Competition taking a toll on Netflix as its share of US subscription video streaming market keep falling as rivals gain ground.

Crude oil production continues to rise, and oil prices remain at $50. Despite that, US energy stocks aren’t getting investors’ interest.

Apple stock fell 4.6% as the US-China trade war intensified today. China warned of tariffs on more US goods, followed by Trump's tweeted response.

In response to new tariffs from China and President Trump's tweets, the market tanked to session lows on Friday. The DJIA nosedived more than 600 points.

Coverage on Cresco Labs has increased from seven analysts in July to nine in August. Six analysts favor a “strong buy,” and three recommend a “buy.”