Oxford Square Capital is a closed-end fund that invests in collateralized loan obligations (CLOs). It offers investors regular high distributions, but also comes with risks. In determining whether Oxford Square Capital is a good investment, it is important to objectively analyze its pros and cons. This article provides a balanced analysis of Oxford Square Capital’s strengths and weaknesses as an investment.
Oxford Square Capital provides high distributions but has high fees
One of the main attractions of Oxford Square Capital is its high distribution rate. The fund pays out an attractive yield of around 10% to shareholders. This regular high payout can be appealing for income-oriented investors.
However, Oxford Square Capital’s high fees have been a cause of concern. The fund has a total annual expense ratio of 10.46%, which is very high compared to other closed-end funds and ETFs. A significant portion goes towards paying the management fee. So while investors enjoy high yields, a chunk of that is lost in fees.
Investment in CLOs provides diversification but has risks
Oxford Square Capital invests primarily in CLOs, which provides diversification for investors outside of traditional stocks and bonds. CLOs also generate steady cash flows from underlying corporate loans. This provides a stable source of income for Oxford Square Capital to fund its distributions.
However, CLOs are complex instruments and carry credit risk and default risk. CLOs tend to underperform during times of market stress when defaults increase. Oxford Square Capital’s CLO investments declined in value during the 2020 pandemic downturn. Investing in the fund means taking on the risks associated with CLOs.
Regular high distributions but can be overdistributed
Oxford Square Capital has consistently paid out high monthly distributions of around 10% to shareholders. This level of income can be highly attractive for investors focused on cash flow.
However, some analyses have argued that Oxford Square Capital has been overdistributing beyond its earnings. This means it has possibly been funding distributions through destructive return of capital rather than true investment income. Overdistribution gives investors high payouts in the short-term but can undermine long-term sustainability.
Oxford Square Capital offers attractive high yields but also has risks from overdistribution and CLO investments. Investors should assess their risk tolerance and income needs to determine if the pros outweigh the cons.