ARDC CEF: move from sell to conservation
In February, we wrote an article in which we analyzed Ares Dynamic Credit Allocation Fund, Inc. (NYSE: ARDC) and assigned it a To sell rating based on our analysis and view of the market. the fund is down more than -9% since our rating, or on an annualized basis, down more than -36%. If an investor had held the name rather than selling it, an entire year of dividends would have been wiped out in just three months. Unlike other writers on the platform, we constantly articulate our reasons for taking certain market views and actively monitor our performance against our ratings. We believe that a well-informed investor can make a more profitable decision by validating the authors’ historical performance in their respective fields.
We believe that the massive market sell-off driven by the Fed rate hike and the fear of a “hard landing” is slightly overdone and that all momentum must die down soon. We believe the Fed will hike another 50 basis points three times and reach a neutral rate level of 2.5%, followed by an valuation period. We think the market has already priced this in and is currently almost done with the risk aversion move. We have seen credit spreads widen significantly due to recession fears, which, coupled with higher risk-free yields, has resulted in a significant negative performance for CEF ARDC fixed income securities since the start of the year. With most of the negative movement behind us, we are now moving from To sell for Hold on this name.
The fund is down more than -9% in progress since our rating:
Since our February post, the ARDC is down over -9% on a price basis and over -7.86% on a total return basis, negating an entire year of dividends for the fund.
The fund is down more than -18% on a total return basis since the start of the year:
On a 5 year basis, which is more appropriate for a real individual buy and hold, the fund is still up around +5% on an annualized annualized return basis:
We believe that for buy and hold instruments, while an investor is well served to hold only the name in the portfolio, during significant macroeconomic events such as monetary and fiscal policies (tighten/loosen), it is worth trading part of the position. Namely, when identifying further weakness in the name due to higher interest rates in the market, even a true long-and-hold investor would have been well served to lighten their positioning. Taking such action does not mean liquidating the entire position, but simply adjusting to a lower ratio with the intention of buying the name later in the year at a lower price.
The fund currently holds leveraged loans, high yield bonds and CLOs:
The vehicle is heavily invested in CLOs which represent more than 30% of the portfolio and have a mixed sector allocation due to their own collateral pools: