BDC COMMON STOCKS

Week 26

Different

The problem with using guides is that they can get you lost.

In our case, we look at a number of sources to track how the BDC sector has fared from week to week.

We rely on BDCZ – the UBS-sponsored exchange note which owns most public BDC stocks – as well as BIZD – which is the only exchange-traded fund dedicated to the BDC sector. Then there’s the S&P BDC Index which generates both a price and “total” return.

Most of the time our guides point in the same direction. On rare occasions – like this week, at the end of a quarter and at mid-year – they differ.

BDCZ unexpectedly shot up late on Friday and ended the week 2.9% higher.

BIZD – in sharp contrast – was down on Friday and up only 0.6% for the week.

The S&P BDC Index – in price terms – increased only 0.2% over the week, and fell (1.4%) on Friday.

In a “total return” basis, the BDC Index was up 1.0% in the last days of the month, breaking a three week losing streak.

Readers can take their pick of weekly returns.

Unfazed

More reliably we can say that the major indices did not react much to the much-anticipated – if only by the headline writers – latest inflation report, which was published on Friday.

The Personal Consumption Expenditures (PCE) price index was unchanged in May after ticking up 0.3% in April. Core inflation, which excludes food and energy prices, was 0.1% in May, bringing the annual rate down to 2.6%, its lowest reading since March 2021. 

Investopedia – June 28, 2024

The S&P 500 ultimately dropped both on Friday and (0.1%) for the week. The Dow Jones was flat and the NASDAQ – despite slipping on Friday – eked out a small percentage price gain for the week – a “nothing to talk about” 0.2%.

26 Weeks In

Setting aside the week’s specifics, all the major indices – as well as the BDC sector – don’t have much to complain about after six months of 2024.

S&P 500 finish[ed] the first half of 2024 with a 14.5% gain. The Nasdaq has jumped 18.1% so far this year, while the Dow has climbed 3.8% in 2024 through June.

MarketWatch- June 28, 2024

BDCZ has increased 6.4%, BIZD 6.7% and the S&P BDC Indices 4.6% on a price basis and 10.6% when distributions are figured in as well.

Not So Wonderful

With all that said – and despite 3 BDCs reaching new 52-week highs this week – there are signs of weakness across the BDC sector which shouldn’t be ignored.

For example, this week one third of the 42 BDCs we track were in the red despite the reading from BDCZ,.

That included 2 BDCs reaching new 52-week lows.

Not surprisingly, the BDCS involved were OFS Capital (OFS) and TriplePoint Venture Growth (TPVG), both of whom have reached new lows previously.

Falling

More disturbingly in our eyes, 16 BDCs have dropped in price on a YTD basis out of 41. (We’re not including Palmer Square – PSBD- which became public intra-month). That’s 40% of our coverage universe.

The Biggest 2024 YTD Losers are OFS and TPVG – which have forgone nearly a quarter of their market capitalization in 6 months – but also on the list are previously popular – and larger BDCs – like New Mountain Finance (NMFC); Oaktree Specialty Lending (OCSL) and Prospect Capital (PSEC).

We frequently bleat on about the differential in performance between BDCs but in previous rallies most BDCs have benefited from investors animal spirits.

This year, the market has been much more discerning – rightly or wrongly.

Diversity

As a result, BDC investors who hold a variety of names will have very different results at mid-year, depending on who was chosen.

If you owned Hercules Capital (HTGC); Carlyle Secured Lending (CGBD) and Main Street (MAIN), your mini-portfolio would be up more than 20% – easily trouncing the S&P 500 even in this excellent period and 4x the return of the BDC S&P Index on a price basis.

However, if you’d chosen to invest in TPVG, OFS and Saratoga Investment (SAR), you’d be (17.8%) down in price terms.

Further Back

The Seeking Alpha price data we lean on suggests that nearly half all BDCs have not really benefited from the excellent macro conditions of recent years.

Going by the 3 year results, 20 BDCs out of 41 – essentially half our universe – are in the red price-wise over a 36 month time frame. That includes 6 BDCs down (30%) or more.

This in the midst of a BDC rally that began in September 2022 – 21 months ago.

Thank Goodness

However, we don’t want to our Market Recap on a sour note so we’ll also point out that one of the most endearing features of BDC investing is the requirement that most earnings have to be distributed to shareholders.

Sometimes those distributions are made grudgingly by the BDC managers and some portion held back – saddling shareholders with excise tax payments.

However, much more is paid out than retained.

As a result – over 3 years – only 8 BDCs are in the red on a “total return” basis and the average loss is “only” (9.1%), or just over (3%) a year.

Heck, you could have bought Tesla 3 years ago and be down (12%) and received no dividends at all.