Shares in the Guggenheim Strategic Opportunities Fund (GOF 3.06%) declined by 13.6% in the week to Thursday at 11 a.m. The move comes as a bond market sell-off caused a drop in the fund's net asset value (NAV) and raised questions over the sustainability of its current monthly distribution.
It is a high-yield fund, but is its payout sustainable?
I covered the fund in more detail in September when its NAV per share was $12.32, and the latest bond market sell-off has helped it decline to $11.66, in line with its current share price. It's essential to keep that figure in mind because the fund's current monthly distribution of $0.1821 annualizes to about $2.19. Putting that figure into context, it represents nearly 19% of its NAV.
NYSE: GOF
Key Data Points
That's not a sustainable distribution unless the closed-end fund's NAV significantly reverses its trend, and that's something hard to see given its holding of high-yield corporate bonds, bank loans, and asset-backed securities. When the bond market sells off (the yield on the 10-year Treasury is now at a multi-year high of 4.8%), high-yield debt is one of the first things sold off.
Moreover, in recent years, the fund has financed its distributions by returning capital (at the expense of NAV), and management has taken on leverage (via reverse-repurchase agreements). At the same time, its net investment income has come under pressure.
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Where next for the Guggenheim Strategic Opportunities Fund
Everything points to one of two options. Either the interest rate environment turns around sharply for the fund, or management will cut its distribution. On a more positive note, the hefty premium to NAV has now disappeared, moving it closer to value range. Still, given that most investors will want to avoid the stock because the market reaction to a cut tends to be highly unfavorable, this stock looks like one for the monitor list for now.
