I recently came across the Allspring Income Opportunities Fund (NYSE:EAD) while looking for high-yielding income funds. The EAD fund offers an attractive 9.1% distribution yield, but it relies on return of capital to cover its earnings gap, leading to long-term NAV erosion and declining income. The fund has historically delivered modest returns with above-average volatility, resulting in poor risk-adjusted returns. For investors seeking exposure to junk bonds, I recommend exploring other options.
The Allspring Income Opportunities Fund aims to generate current income from a diverse portfolio of high-yield debt securities, loans, and preferred stocks. With $434 million in net assets and $623 million in managed assets, the fund charges a relatively high 3.7% gross expense ratio. The portfolio consists of 261 holdings with a low duration of 3.0 years and an average coupon of 6.9%. Sector allocations include Consumer Discretionary (21.2%), Energy (16.7%), and Financials (14.9%). In terms of credit quality, the fund primarily invests in below-investment-grade securities, with 42.3% BB-rated, 37.8% B-rated, and 11.6% CCC-rated or below.
Historically, the EAD fund has delivered average annual returns of 4.3%, 5.1%, and 8.8% over 3, 5, and 10 years, respectively. The fund’s performance ranks it as a 3rd or 2nd quartile fund in the High Yield Bond category on Morningstar. One factor contributing to its mediocre performance is the high expense ratio, mainly driven by leverage expenses. Despite offering an attractive distribution yield of 9.1%, the fund has not fully earned its distributions, relying on return of capital to supplement net investment income.
Investors should be cautious of ‘return of principal’ funds like EAD, as they tend to exhibit declining NAV patterns, leading to potential principal and income losses for long-term investors. The fund’s distribution has declined at a 3.6% CAGR since its inception in 2003, indicating a shrinking income stream. When compared to peer CEFs focusing on high-yield junk bonds, the EAD fund scores poorly in terms of returns, volatility, and distribution sustainability.
In conclusion, while the Allspring Income Opportunities Fund offers an attractive distribution yield, investors should be wary of its reliance on return of capital and potential long-term NAV erosion. For those interested in high-yield bond CEFs, alternative options like the PGIM High Yield Bond Fund (ISD), the BlackRock Limited Duration Income Fund (BLW), or the Credit Suisse High Yield Bond Fund (DHY) may be more suitable. It’s essential for investors to conduct thorough research and consider the risks before investing in high-yield income funds like EAD.
