SPY - AIF And Credit Funds: Make My Day Call It 'Junk'

2024-03-25 17:06:32 ET

Summary

• "Junk" may be a misnomer, but it helps deter many investors, keeping demand lower and cash yields higher for loan and bond asset classes that have solid long-term records.
• Many equity investors who swear they'd never buy "junk," actually own mid-cap and small-cap stocks that are issued by these same "junk" companies, but as equity, are much riskier.
• Apollo Tactical Income Fund, #1 in its class for the past 10 years, is one of many "all-weather" credit funds that generate solid cashflow from "junk" year after year.
• One big advantage of credit investing comes later, when retired investors, who need to extract cash every year, don't want to be stuck selling stock in a down market.

Credit Investing: Make My Day, Call It "Junk"

Some of my favorite holdings are "credit investments." This includes, especially, corporate loans, high-yield bonds, and business development companies ("BDCs"), whose primary business is making corporate loans and bonds. My goal, to the extent possible, is to earn an "equity return" of 9-10%, which is the historical average annual total return of an equity portfolio over the past century. (For example, the S&P 500 ETF " SPY " has earned a total return averaging 10% per annum over the past 31 years since its inception.)

What I like about credit investments is that I can earn most or all of my total return target in the form of cash distributions (i.e. from interest payments), and - unlike equity investing - I do NOT have to depend on capital gains for most or all of my total return. This makes the returns from credit investing more stable and predictable than returns from equity....

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