As we kick off 2025, I’m excited to announce we’re ramping up our income strategy even further. We’ve already achieved an impressive 9% current income in the Yield Report portfolio, with much of it paid monthly. Today, we’re going to boost that yield even higher by adding one of my all-time favorite closed-end funds to our holdings.
Let me introduce you to the Angel Oak Financial Strategies Income Term Trust. This isn’t just another closed-end fund – it’s a unique vehicle that gives us access to an institutional-quality market that’s typically closed to individual investors. The fund primarily invests in debt securities issued by banks, with some REIT exposure mixed in. I’ve had several in-depth conversations with fund manager Cheryl Pate, and I’m consistently impressed with their approach.
What makes this fund special is its focus on community bank debt and preferred securities. This is an extremely high-quality asset class with very low credit risk that’s typically reserved for institutional investors. When these deals come to market, they’re usually snapped up entirely by institutions, with maybe a handful of well-connected high-net-worth individuals getting access. But Angel Oak’s long-standing presence in the community bank debt market gives them – and now us – a seat at the table.
The fund currently trades at about an 8.5% discount to NAV. While this discount isn’t as wide as we typically target, the fund’s track record and unique market access make it compelling at these levels. The current yield sits at a healthy 10.25%, right in line with its historical average of around 9%.
For those following my work, you know I’m a huge fan of community banks, and the backdrop for this sector is particularly strong right now. These institutions are sitting on more capital than most people realize – while banks were leveraged 25-to-1 during the 2007-2008 crisis, today’s industry average equity-to-asset ratio is around 10, with many community banks running even higher capital levels.
Looking ahead into 2025, several catalysts could benefit this position. We’ve already seen 75 basis points of interest rate cuts, with more potentially on the horizon. The regulatory environment is likely to become more favorable, and M&A activity is poised to return. More importantly, the credit markets are beginning to thaw after last year’s freeze, with large and regional banks already returning to regular issuance.
For initial positioning, I recommend starting with a 2-3% allocation, or 4% if you’re feeling particularly aggressive. While I’m comfortable building this into a larger position over time, we want to maintain discipline and use market volatility to our advantage. Remember, while this fund has low correlation to Treasury bonds, it’s not zero – so any broad bond market selloffs could give us opportunities to add at even better prices.
This addition fits perfectly with our broader portfolio strategy heading into 2025. We’ve built significant positions in private credit through partnerships with industry giants like Apollo, KKR, and Aries Management. Our commercial real estate exposure is similarly focused on experienced players like Starwood and Franklin BSP Realty Trust. We maintain strong natural gas exposure through Quatera Energy and Devon Energy, and even our Mosaic position gives us indirect exposure through their natural gas feedstock requirements.
As we navigate 2025, we’re staying focused on our core principles: safety first, credit quality matters, and partner with experienced managers who have deep pockets. Yes, there will be volatility – the bond market is already signaling concerns about inflation, tariffs, and deficit spending. But that’s exactly what we want. When others panic and the talking heads on CNBC start looking worried, we’ll be ready to step in and add to our high-quality, high-yielding positions.
Our strategy remains simple: sit in our corner, collect substantial cash flows, play defense, and let compound interest work its magic. Here’s to what I believe will be a fantastic year of income generation in 2025.