07-07-2014, 07:20 PM
I currently own 5 BDCs and one BDC related ETN. My positions are ARCC, BDCL (the ETN), GBDC, HTGC, NMFC, and TCPC.
I have 2 sources of information. One is BDC Buzz on SA, mentioned above. The other is research produced by Wells Fargo, my broker.
The Wells Fargo research team has much more resource to spend on analyzing BDCs than BDC Buzz - more manpower, more time, more money. Their research is the best I have seen for both depth and breadth. They divide their research universe into 4 tiers, and they use many criteria to grade BDCs. I want my BDC dividends to be as secure as they can be, and the top tier are their best picks for both dividend security and NAV growth. I invest exclusively in their top tier; the only BDC I own that is not in their top tier (NMFC) was there at one time, and I haven't seen a good reason to drop it.
BDC Buzz cannot hope to match a highly paid research team, but his analyses are excellent and he arrives at conclusions that match closely those of Wells Fargo. He places heavy emphasis on the alignment of management interests with owner interests. I want my companies to be managed by those who demonstrate a clear commitment to my financial well being, and BDC Buzz does an excellent job of revealing the spectrum of management attitudes. What he cannot do is in depth analysis of the various BDCs' portfolios. For that I look to Wells Fargo.
Both WF and BDC Buzz provide the other data point that I am very interested in, namely the effect that rising rates might have on net investment income (NII). There is a spectrum of borrowing strategies used by BDCs. Some borrow at fixed rates, some borrow at variable rates, some use a combination. Part of the income protection I want is to have a good idea what will happen to the dividend if borrowing rates increase. You can get this information from 10-K and 10-Q filings for some BDCs but not all. I learned how to find this information from BDC Buzz. For those BDCs that do not provide this information directly, I rely on both WF and BDC Buzz to run the financials for me. I want to own only those BDCs whose NII will not be negatively impacted by rising rates insofar as the BDCs balance sheets are concerned. Whether or not the companies they lend to will be able to pay increased interest on their variable rate borrowing is another matter that neither WF nor BDC Buzz can be expected to predict with as much accuracy.
The BDC universe was recently roiled by the decision by S and P and Russell to remove BDCs from their index funds. There was a panic selloff, and like most such, it provided some wonderful buying opportunities. One of my favorite BDCs, HTGC, was a case in point, and I owned it at the time this happened. On April 1, HTGC traded in the range of 12.95-14.36, and closed at 13.81, down 0.26 or -3.85%. There were two items of note: 1) volume was much higher than normal, and 2) the close was much higher than the daily low. This told me two things: 1) the selling was done by institutions (i.e. SnP and Russell funds) that were forced to remove HTGC from their books, and 2) there was buying strength into the close. Given the volume, the buyers had to be predominantly institutions, and they were not the funds and ETFs that were forced to sell HTGC. In other words, smart money.
I was not following HTGC on that day, or I would have placed a buy order to increase my position. Since I missed it, I decided to wait for any subsequent forced selling that might occur before June 26 (the last day for the Russell funds to rebalance). I saw an opportunity on May 15 and 16, when HTGC was trading under $14 and appeared to be in the final phase of building a base, and the yield was close to 9%, so instead of being greedy and waiting for exactly 9% I bought on both days. HTGC subsequently ran up as high as $16.50 and is very close to that now.
I have sold several BDCs, and the one sale that might interest most people was PSEC. I owned it for the high dividend, even though WF rated it in tier 4 - a violation of my own rule! Wells Fargo produced a detailed report that showed how their high cost of new capital, compared to the tier 1 BDCs, was forcing PSEC to make risky investments. BDC Buzz emphasized how high their fees are compared to the best BDCs. I finally decided to follow my own rules and sell all of PSEC, which I did on April 8. This was just plain lucky because the announcement about dropping the BDCs from SnP and Russell was made several days later. I missed all the subsequent downside in PSEC.
BDCs now constitute 11.5% of my portfolio. My target is 14%. I want to start a position in MAIN, and I want to increase positions in GBDC and TCPC.
I have 2 sources of information. One is BDC Buzz on SA, mentioned above. The other is research produced by Wells Fargo, my broker.
The Wells Fargo research team has much more resource to spend on analyzing BDCs than BDC Buzz - more manpower, more time, more money. Their research is the best I have seen for both depth and breadth. They divide their research universe into 4 tiers, and they use many criteria to grade BDCs. I want my BDC dividends to be as secure as they can be, and the top tier are their best picks for both dividend security and NAV growth. I invest exclusively in their top tier; the only BDC I own that is not in their top tier (NMFC) was there at one time, and I haven't seen a good reason to drop it.
BDC Buzz cannot hope to match a highly paid research team, but his analyses are excellent and he arrives at conclusions that match closely those of Wells Fargo. He places heavy emphasis on the alignment of management interests with owner interests. I want my companies to be managed by those who demonstrate a clear commitment to my financial well being, and BDC Buzz does an excellent job of revealing the spectrum of management attitudes. What he cannot do is in depth analysis of the various BDCs' portfolios. For that I look to Wells Fargo.
Both WF and BDC Buzz provide the other data point that I am very interested in, namely the effect that rising rates might have on net investment income (NII). There is a spectrum of borrowing strategies used by BDCs. Some borrow at fixed rates, some borrow at variable rates, some use a combination. Part of the income protection I want is to have a good idea what will happen to the dividend if borrowing rates increase. You can get this information from 10-K and 10-Q filings for some BDCs but not all. I learned how to find this information from BDC Buzz. For those BDCs that do not provide this information directly, I rely on both WF and BDC Buzz to run the financials for me. I want to own only those BDCs whose NII will not be negatively impacted by rising rates insofar as the BDCs balance sheets are concerned. Whether or not the companies they lend to will be able to pay increased interest on their variable rate borrowing is another matter that neither WF nor BDC Buzz can be expected to predict with as much accuracy.
The BDC universe was recently roiled by the decision by S and P and Russell to remove BDCs from their index funds. There was a panic selloff, and like most such, it provided some wonderful buying opportunities. One of my favorite BDCs, HTGC, was a case in point, and I owned it at the time this happened. On April 1, HTGC traded in the range of 12.95-14.36, and closed at 13.81, down 0.26 or -3.85%. There were two items of note: 1) volume was much higher than normal, and 2) the close was much higher than the daily low. This told me two things: 1) the selling was done by institutions (i.e. SnP and Russell funds) that were forced to remove HTGC from their books, and 2) there was buying strength into the close. Given the volume, the buyers had to be predominantly institutions, and they were not the funds and ETFs that were forced to sell HTGC. In other words, smart money.
I was not following HTGC on that day, or I would have placed a buy order to increase my position. Since I missed it, I decided to wait for any subsequent forced selling that might occur before June 26 (the last day for the Russell funds to rebalance). I saw an opportunity on May 15 and 16, when HTGC was trading under $14 and appeared to be in the final phase of building a base, and the yield was close to 9%, so instead of being greedy and waiting for exactly 9% I bought on both days. HTGC subsequently ran up as high as $16.50 and is very close to that now.
I have sold several BDCs, and the one sale that might interest most people was PSEC. I owned it for the high dividend, even though WF rated it in tier 4 - a violation of my own rule! Wells Fargo produced a detailed report that showed how their high cost of new capital, compared to the tier 1 BDCs, was forcing PSEC to make risky investments. BDC Buzz emphasized how high their fees are compared to the best BDCs. I finally decided to follow my own rules and sell all of PSEC, which I did on April 8. This was just plain lucky because the announcement about dropping the BDCs from SnP and Russell was made several days later. I missed all the subsequent downside in PSEC.
BDCs now constitute 11.5% of my portfolio. My target is 14%. I want to start a position in MAIN, and I want to increase positions in GBDC and TCPC.