CCIA - ARDC: This Well-Liked Fund Looks Overpriced Right Now (Rating Downgrade)

2025-01-09 16:55:47 ET

Summary

• The Ares Dynamic Credit Allocation Fund has delivered a 26.40% total return over the past three years, outperforming domestic investment-grade and junk bonds.
• The fund's 9.25% yield is attractive compared to domestic bond indices but lower than many peer closed-end funds due to recent share price performance.
• The fund's high allocation to floating-rate securities could be detrimental if the Federal Reserve continues to reduce interest rates, impacting its income.
• The fund's share price performance has been substantially stronger than its investment portfolio has been able to deliver.
• Currently trading at a 3.04% premium on net asset value, the fund appears overpriced relative to its historical pricing and peers.

The Ares Dynamic Credit Allocation Fund ( ARDC ) is a closed-end fund that income-seeking investors can opt to purchase as a means of generating a high level of current income from the assets in their portfolios. The fund has proven to be a very popular way to do that in recent years, which may be partly due to its strong performance over the past few years. As we can see here, the Ares Dynamic Credit Allocation Fund has provided its investors with a 26.40% total return over the past three years:

This was sufficient to beat both domestic investment-grade and domestic junk bonds over the period. Indeed, this fund managed to deliver a positive return over the period at a time in which most investors in investment-grade bonds (and many investors in other closed-end bond funds) were losing money. As such, it seems that the fund’s popularity may be well-earned.

Another reason for the fund’s popularity is likely its very high distribution yield. As of the time of writing, the Ares Dynamic Credit Allocation Fund boasts a 9.25% yield, which is substantially higher than the yields of any domestic bond index:

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