XAI Floating Rate & Alternative Income Trust (XFLT) Earnings Call Transcript & Summary

Good morning. Welcome to the XFLT's Fourth Quarter Update Webinar. Thank you so much for joining us today. We are excited to get to the primary content here, but I do have several housekeeping items that we need to cover. I'll first begin with some brief introductions. I'm Kevin Davis with XA Investments. I head up sales and distribution for the firm. I'm happy to be joined today by Lauren Law from Octagon Credit who is a senior portfolio manager. She joined the firm in 2004 and oversees Octagon's structured credit investment strategies. She'll be covering the leveraged loan and CLO market outlook, the current interest rate environment and holdings -- the top holdings of the fund. We're also joined today by my colleague Kim Flynn, who is the President of XA Investments. Kim will be walking us through the performance highlights from the quarter as well as portfolio composition and a comparison with other CLO focused products in the marketplace. Before we get into the presentation, we do have a few important disclosures that we want to address. We will be talking about performance throughout the presentation. Certainly, past performance does not guarantee future results and current performance may be higher or lower than the performance data quoted. We will also be discussing market outlook and the materials do contain forward-looking statements. Investors should not place undue reliance on forward-looking statements. We encourage you all to review all of the general disclosures of the presentation. And one last housekeeping item. Please note the Q&A box at the bottom of the screen. If you have any questions, please type them into the box, and we'll do our best to get them answered in real time. We'll also open up for questions at the end of the prepared remarks. And if you don't get your question answered, please feel free to contact me directly and we will get those answers for you. Lastly, please check out our website xainvestments.com to find information on our funds, on our firm, general education materials about the asset class and some of the exciting things that we're working on in-house. So let's get started. Most of you are likely already familiar with Octagon Credit. If so, you know their history, their expertise and the successful long-term track record they have in the space. For those newer to the firm, they are an industry leader in CLO issuance as well as CLO fund management. The firm has been around since 1994 and have over $32 billion in assets under management as of the end of last year. XFLT was launched in 2017, and it was Octagon's first strategy to be publicly available in a registered fund format. I'll also provide some brief background on XA investments. I know there's a lot on this slide, but I'll just point out a few highlights. We are a Chicago-based boutique alternative asset manager with nearly $1 billion in managed assets as of 12/31. We were founded by an investment bank in 2016. We have a suite of proprietary registered funds focused on alternative income. For each of these funds, XA acts as the adviser, and we work with best-in-class sub-advisers such as Octagon Credit. We have 2 listed closed-end funds as well as some interval fund, which is also sub-advised by Octagon and it's focused primarily on CLO debt. Lastly, in addition to our proprietary suite of funds, we have a robust consulting and research practice focused on the closed-end fund interval and tender offer fund markets. We help outside firms build products, bring them to market and publish research to support their efforts. We also make research available on a subscription basis for interested parties looking to learn more about the space. Okay. So let's get into it. We have some prepared questions and topics for the speakers, which we will address throughout the presentation. And again, as a quick reminder, if you have questions for the speakers, please type them into the Q&A box at the bottom of the screen. With that, let me turn the call over to Kim Flynn to begin with financial highlights. Kim?

Great. I think everybody has been feeling that Q1 this year has been super busy. So as we report today on the period ended December 31, it may seem like a long time ago in the rearview mirror, given what we've all faced this quarter. But let's get into it. So today's webinar we are going to be talking about the fund's performance for Q4 of '24. Net investment income for that period, the 3 months ended 12/31 was $0.21. The fund continues to grow and scale and the goal is to drive efficiencies for shareholders. In 2024, the fund did issue 14 million shares of common stock for net proceeds of a little under $100 million. And as you know, we pay regular monthly distributions and those distributions are paid on a -- declared and paid on a monthly basis. And we did make a change to distributions due to the Fed decline in rates or decreases in rates that we experienced September through December of last year. You're probably aware of that. But we do try to maintain those regular cash flows to shareholders and we'll be talking about that a little bit later in today's webinar. We ended the year at $805 million in total managed assets. XFLT is unique in the marketplace and that drives a lot of demand for XFLT in the secondary market, and there was a lot of growth in last year. There's a lot of demand right now for CLO debt, CLO equity. Lauren is going to speak about that. XFLT was a beneficiary. We always get questions from investors because the CLO debt and equity markets are a little bit more opaque than high yield, for example. What are the current yields in the marketplace? These are very high-yielding securities. CLO equity, current yields north of 20%. CLO debt, current yields north of 11%. Senior loans, also referred to as leverage loans, current yield, about 828. Bonds, XFLT has a very small exposure to high-yield bonds current yield 6.31%. And then we also have included the current market prices. XFLT has always invested in CLO debt and equity, and there can be a lot of price movement for CLO debt and equity. And so I think that's why we get the question commonly about where are these assets being marked today. We always -- despite that mark-to-market volatility of CLO debt and equity, we always remind people that investing in CLO debt and equity is beneficial because these are high cash flowing investments and are generating high current yields, and you have to be able to tolerate a little bit of that volatility in the mark-to-market price and that's why XFLT is an optimal structure to house these types of assets because it is a closed structure. Let's move on. I want to cover the performance. The fund on every relative period shown on a NAV basis, has beat the funds benchmark, which is the Morningstar LSTA Leveraged Loan 100 Index. And if we go to the far right column, looking at inception-to-date performance, it shows a [ 654 ] NAV total return relative to [ 520 ] for the index outperformance of about [ 134 ]. One of the things that I wanted to comment on is that NAV always is going to reflect the current market price of the investments within. Our fund is unique in that we have a daily NAV. And so to the extent that CLO equity positions are marked down, that is going to be transparent to you. It's going to show up in the NAV of the fund. It also shows up in this NAV calculation. So that's why it's important to understand that while the CLO equity prices may be depressed or lower, there's still cash flowing at a very high level. But we capture that. We're transparent with our investors in terms of our daily NAV. And that obviously is going to show up in NAV net return performance. So that's why we get a lot of questions because there is a disconnect sometimes between the high level of cash flow that the fund is producing and what shows up on a NAV total return basis, because we are reflecting those current marks of the fund securities. Thinking about secondary market performance. On average, since inception, September of 2017, XFLT has benefited from favorable trading in the secondary market. The average inception to date premium has been about 3.25%. And you see from this full picture, the history since the beginning of the fund, there have been moments where the fund has traded at much larger premiums and has traded at discounts from time to time. For example, when we saw pressure in the CLO market in December of '18, the fund because it's transparent reflected that, and that's where you see the dip in the chart. Likewise, in COVID, a lot of concerns about fundamental credit in that moment in time, the fund did trade to a small discount. So I think it's helpful to understand where we're trading today, the XFLT premium discount. Today, it actually is a discount. As of last night, the discount was 1.32%. And I think that's okay. Obviously, we'd like the fun to trade the way it historically has traded. And so we're continuing to talk about XFLT with new shareholders and promote the benefits of the asset class. And we know that this asset class has a strong following among shareholders and investors and because XFLT is uniquely positioned in the market with its mix of senior loans, CLO debt, CLO equity, we'll continue to see demand for XFLT in the secondary market.

Great. Thank you. Thank you, Kim. So I'd like to bring in Lauren Law with Octagon to talk through the market conditions and outlook for both the broadly syndicated loan and CLO markets.

Lauren, given the positive earnings trends and decreased loan payment default rates highlighted in the presentation here, how do you foresee these factors influencing the loan market's performance in the upcoming quarters?

Thanks, Kevin. You're correct. Earnings trends across the levered credit universe have been quite constructive, really through all of 2024. We continue to see both revenue and EBITDA growth across the credit universe. Third quarter earnings were healthy. And while remarkably, it is still early in the fourth quarter earnings season, given the extended timelines, private loan issuers have to file audited financials. The data we have on fourth quarter performance points to really robust earnings to round out 2024. Earnings growth and lower interest rates combined to create a relatively healthy picture for levered credits. Robust performance in the underlying loan market has allowed borrowers healthy access to credit. So borrowers have been accessing the market to lower their cost of debt, extend their maturities as well as finance opportunistic transactions. So when you think of all of these factors combined, earnings growth, lower interest expense, limited maturities that creates a fairly healthy fundamental picture for the loan market. And we are certainly seeing this reflected in the level of default and default like activity, which has been much more muted in recent months. And it's really our expectation in the months coming up that we'll continue to see this trend. In fact, the month of February actually experienced the lightest default activity since December of 2022, which I think was a very welcome reprieve for market participants. And while we remain constructive on levered credit, it is worth highlighting some more recent uncertainty in the associated volatility in markets. Softer economic data points in the last couple of weeks, the uncertainty presented by the implementation of tariffs as well as a more muted outlook for first quarter earnings growth has increased the level of volatility in risk assets. We've seen that in the loan market in recent weeks, and we do think that's constructive. The market had been moving in one direction for an extended period of time. And we actually think for the trust that it's well positioned to capitalize on some of this volatility in risk assets, and we view lower prices as an attractive buying opportunity given our fundamental outlook.

That's great. So as we look at the next slide, Lauren, the percent of performing loans priced at or above par as of year-end was 62%, just over that, as you can see. So what percent of loans are trading above par now? And what are some of the driving forces behind these changes over the past couple of months?

Sure. Maybe before I talk about the percent of loans trading above par, it may be useful just to give a little bit of context on the loan market and its dynamics. So loans very simply are a prepayable asset class. And generally, at any time, this is in contrast to the high-yield market where a bond may benefit from several years of call protection. In the loan market, new issue loans are issued with what is referred to as 6 months of soft call protection. And all that means is that a borrower can't refinance a loan with the express goal of reducing their interest rate for 6 months. So a very short period of time. And in practice, this means that in periods of tightening spreads, loan borrowers refinance very actively and very quickly to lower their cost of financing. And as a lender, you expect this type of activity when a loan trades above par. And at year-end, as you said, 62% of loans traded above par. In the month of January, this percentage exceeded 70%. And what that meant is that we saw a continuation of the trend that we saw for much of 2024, where almost 60% of loans refinanced to lower their interest expense. That activity continued in January and the early part of February with the market losing about another 10 basis points of spread through this type of activity. Now in recent weeks, with the softer data that I mentioned, the broader macro volatility only about 30% of loans trade above par. So this volatility in risk assets, some outflows from loan mutual funds and some true new loan issue supply have all combined to mute the level of repricing activity we've seen in recent weeks and do create some hope that a lot of the very aggressive repricing actions are behind us and that we should see some level of stability in spreads from here.

Great. So let's maybe shift to the CLO market specifically. There is -- as we all know, there's been strong demand all around for CLO debt and CLO equity in the last 12 to 18 months. What is Octagon observing with respect to both institutional and retail demand in the asset class?

Yes, we are observing significant demand for CLO debt and CLO equity really all across the CLO capital stack from our institutional investor and base. And I would describe this really as a continuation of a long-term trend towards growth and acceptance of this asset class in the institutional channel. The strong fundamental performance of CLO debt and equity through multiple cycles has continued to attract investors, particularly when you consider the attractive relative value versus comparable asset classes. So longer-term trend, but 2024 and 2025, certainly saw robust interest and participation from the institutional channel, when you think of the yields available as well as the spread pickup across the CLO universe. What's relatively new, and I think perhaps more interesting is the growth and acceptance of this product in the retail channel. CLO tranche ETFs, specifically those focused on AAA CLO risk have grown and substantially so over the course of the last few years. The AAA ETFs with their robust daily flows have been a significant buyer in the market and a major factor driving AAA spreads tighter in 2024, 2025. As aside, that has been great for the Trust CLO equity book as it has looked to refinance its liabilities and capitalize on those tighter spreads. So a very good thing. But we're also seeing the launch and growth of interval fund strategies focused on CLO mezz such as the product that we manage upticks. These strategies are attracting capital and scaling actively in the retail channel. And I think the prospects for growth of this asset class in the retail channel is still in early stages. And as that evolves over time, I think that should result in a bigger market with better liquidity and tighter spreads. So I think it's a very attractive opportunity for this asset class where we sit today.

Yes. I would agree. So maybe let's shift the conversation to interest rates. And I'll stick with you, Lauren. So the Federal Reserve paused on rate cuts in January maintaining that Fed funds range target to 4.25% to 4.5%. Could you discuss how the market is viewing the rate environment for 2025? And then what that may mean for floating rate funds such as XFLT?

Yes. The Feds and their potential actions, the rate environment, it's really been a huge topic of conversation, particularly for markets, but particularly for floating rate asset classes. Over the course of 2024 and obviously, 2025, as you highlight, the Fed did pause in January and is evaluating incoming data. We expect the Fed to be data-driven. We don't publish a formal interest rate projection, but I can share that the futures market is pointing to an expectation of 2 to 3 cuts over the course of 2025. And if that comes to fruition, this has a couple of implications for the assets held by the trust. One, loans are floating rate assets. And therefore, the yield on the trust loan portfolio will decrease in line with the reduction of base rates. The same would be true for the trust holdings of BB mezzanine paper. Of note, this would be partially offset by a reduction in the interest expense that the trust pays on its credit facility. That is also floating rate in nature, so a bit of a natural offset. And in addition, the CLO equity holdings of the trust also benefit from a bit of a natural hedge. As CLOs earn floating rate income, but also pay out floating rate interest expense on their liabilities. So while -- reduction in interest rates would create pressure on income. There are some natural offsets within the portfolio that would mitigate the impact of further reductions in base rates. And outside of just the yield on floating rate assets and what a reduction in base rates would mean, it is worth noting that from a fundamental perspective, that would be healthy. Lower interest expense would be healthy for floating rate borrowers. So that's something to keep in mind as well as we think of that default and default like activity that we talked about earlier. Lower interest expense does create some cushion for levered borrowers and help them perform longer term.

Okay. So I do want to bring Kim back in the conversation to talk specifically about XFLT in relation to rates. So related to Lauren's question, Kim, the Fed cut rates 3 times in 2024. And as such, XFLT trimmed its distribution and was announced in its December monthly distribution the announcement. So what has been the market reaction to XFLT's distribution change?

Yes. So I think I would say we were relatively pleased. We knew with a distribution cut because distributions are so important to close-end fund shareholders that there would be a reaction. I think it was fair on price. The fund had actually built up a fairly high premium prior to the distribution cut. The fund was trading at about a 7% premium partly because we were not selling shares into the open market. And so that -- while we have seen a price decline as noted on the slide, the blue line is price, we felt okay about the market reaction. We expected this market reaction, and we're doing what we can in a floating rate fund to educate people. I think that the yield, the distribution yield is still very attractive even though it is at a reduced level. As of last night, the distribution rate was 14.55%. But we understand and we appreciate. There's also at year-end, it was the right time to make the change in terms of the distribution given the Fed action in the prior 4 months. But at year-end, for listed closed-end funds, this is a time for tax loss harvesting and there's a lot going on in the listed closed-end fund space. So I will note that there have been some favorable research reports written about XFLT post distribution cut that we felt like were supportive, underscoring the thesis of why you invest with Octagon, why you invest in XFLT in a portfolio that is diversified in loans, at CLO equity. So with that said, we're still doing what we need to do to support the fund in the secondary market. And we wanted to report back to shareholders in terms of what we've observed on our end, Kevin.

Thank you. So we did have one question come in from the audience regarding the interest in CLO-related assets, and I want to address it real quick before we move on to other parts of the presentation. Lauren, I'll start with you and Kim, feel free to jump in as well. But the question is, given increase in interest, both institutional and retail and CLO-related assets, including ETFs and interval funds do you see CLOs relative value vis-a-vis high-yield reducing?

Sure. Would you like me to start?

Yes. Go ahead, Lauren.

I would say that the longer-term opportunity. If this asset class were to grow, have a larger investor base, greater acceptance among investors that should result in better liquidity. It should result in tighter spreads over time. But to me, where I sit today, that is the opportunity, not something I see happening tomorrow.

Great. Thank you for that. So let's move to portfolio composition. And Kim, this is back to you. Can you talk to us about why XFLT invested in senior loans, CLO debt and CLO equity? And then what is the benefit of the asset mix? And maybe discuss that composition relative to other competitor funds that are more either CLO debt or CLO equity focused?

Yes. So you'll see that the composition of the fund over time it looks like it's the same pie chart, right? So for quarter-over-quarter, we're not seeing wide fluctuations. It's not like Octagon is moving in and out of CLO equity entirely. These are changes that are made on the margin. There's relative value opportunities in the marketplace. But XFLT has the flexibility to take advantage of some of the pricing opportunities that Lauren was just referring to, to the extent that there is volatility in the market, and there is a correction in pricing. That's what the XFLT strategy was designed to do from the get-go. So this composition is fairly true in terms of since inception, we've always had a mix of senior loans as well as CLO debt, CLO equity. And XFLT mirrored one of Octagon's institutional strategies and the goal for those institutional clients is the same as for XFLT shareholders, which is producing attractive risk-adjusted returns. It's not just producing the highest yield possible. So the goal here and the asset mix is reflective of this goal of achieving superior risk-adjusted returns. And most of the listed closed-end funds in the marketplace are 80% to 100% CLO equity exposure. That -- you see that represented in our pie chart with the green and the current allocation of CLO equity is about 37.5%. And so a listed closed-end fund that is allocating 100% to CLO equity is going to have a very, very high yield, which can be attractive to some shareholders. And there are several listed closed-end funds in the marketplace that do so. I will note that we like XFLT because you're going to see less volatility because we have the CLO debt and we have the senior loan exposure, which mutes the volatility from 100% CLO equity portfolio. The other 2 advantages that XFLT has because it's portfolio composition, we're charging a flat management fee. There's no incentive fee. The CLO equity funds that are 100% CLO equity are typically charging performance fees. So it does result in a much higher expenses for shareholders. The other benefit of the portfolio composition here is the way we leverage the fund strategy because the fund has -- as of the end of the year, we had a 46% allocation to senior loans. That allows XFLT to borrow through a traditional credit facility. The funds that are 100% CLO focus are not allowed to do that. You can't get a credit on CLO equity. And so it allows us to diversify our sources of leverage, reduce leverage expenses. So it's very favorable for XFLT shareholders. So I think it's just helpful to talk about this composition and highlight, there's not another fund that matches what XFLT is doing in the marketplace. And that's okay. We like kind of where we sit in between the senior loan funds. There are quite a few options in the marketplace in listed closed-end funds and also in mutual funds. But we sit in the middle between these CLO equity dedicated funds and the senior loan funds.

Yes. Thank you. That's great. So I do want to touch real quick on XFLT ownership. It's a question that comes up a lot to us here internally. We do get questions on who's invested in the fund and are we concentrated in a few large shareholders. Kim, can you discuss XFLT's investor base?

Yes. I think this has come up a couple of times. I would say that the answer is not that interesting, but I'll give you the answer, which is that the XFLT shareholder base is widely diversified. And the reason for that is the fund was launched in 2017. So we've had a long period of time for the fund's shares to migrate into the hands of many investors, many of which are small investors. We've become well acquainted with the shareholder base. When we did our shareholder vote last year, we had visibility into all of the shareholders. Obviously, XFLT, given its trading performance, we don't have any activist investors in our fund. We don't have very many large institutions. We have a handful. For example, the #1 holder Herzfeld, they invest in a lot of listed closed-end funds, and they like the CLO asset class. So they own about 1.37%. Eagle Point, another -- in this case, they have their own listed closed-end funds. Some of you may be investors. But they also have a relationship with Octagon and with XFLT. They know the fund very well. They have been an investor in our common and our preferred and they own about 1% of the shares outstanding. Very diverse myself, my retirement account is fully invested in XFLT. My bosses, John Yogi Spence; and Ted Brombach, who run our parent company, XMS Capital, they are big investors and have always been in XFLT. So you see them listed at just under 1% ownership. UBS also shows up on this table because they were the underwriter at the time of the IPO. We still hear from a lot of UBS financial advisers, which bought at the time of the IPO or have bought subsequent. And so we're really pleased to have those advisers be long-term investors in XFLT. So a very nice diversified shareholder base.

Yes. Yes. So let's discuss one other very hot topic, that I think it's important to address. And that is how XFLT compares to other types of product structures in the marketplace. Kim, I'll stick with you on this. So we've discussed some of the XFLT comparisons and how they compare to other closed-end funds. Now we're seeing a rise of CLO debt ETFs and the expansion of that ETF category. So there appears to be a lot of ways for investors to access CLO debt in the market today. Why do you think the listed closed-end fund structure is a superior way to invest in CLO debt?

Yes. And so while CLO debt is a small part of our fund, I want to address it because this is sort of the new kid on the block, there have been a number of very successful capital raises among CLO debt ETFs. And we believe that the closed-end fund structure is superior because CLO debt, CLO equity, these in -- just as I was talking about on the earlier chart, December of 2018 is a really good example. I'm not sure how a CLO debt ETF would have performed in December of '18, because these assets can become episodically illiquid very quickly. The same was true in March -- end of March, beginning of April of 2020. And we believe in transparency, that's why we have a daily NAV. And most of the competitors have monthly or quarterly NAV. So firms will look at XFLT because -- and the reality, we have that transparency, we have a daily NAV. And that volatility that you're going to observe in the marketplace is going to show up right away. And so -- and ETF that invests in the lower tranches, lower rated tranches like a BB debt ETF. I think in that moment in time, you're going to see bid-ask spreads widen out because buyers are going to step away. It's in those periods, the December of '18, the April of 2020, that the closed-end fund structure is best able to navigate the cyclicality of the CLO marketplace. So while on one hand, we like the fact that investors are now more in tune with the CLO market, and they have -- there's more advisers asking about CLO debt and CLO equity, but a very strong recommendation to consider closed-ended structures because an interval fund and a listed closed-end fund, they are not going to be forced sellers in those moments of episodic illiquidity. And so we believe that XFLT is designed to navigate the natural volatility that this asset class experiences from time to time. And so I think there's been a lot of headlines lately, not just about CLO debt ETFs, but about the State Street, Apollo private credit ETF, and you do have to wonder as the ETF market expands some of these asset classes -- we don't know how those ETFs are going to behave and may be tested. But we do know how closed-end funds are going to behave. And shareholders, we don't want force selling, and we don't want to crystallize losses and that's the protection, that's the benefit of these closed-ended fund structures relative to an ETF, Kevin.

So following up on that, and I'm sure related, why don't we see CLO equity inside of ETFs?

Yes. I've had a few questions from folks, it's just the same continuation. The truth is, is that, that's probably a step too far. The SEC would not sign off on CLO equity dedicated ETF. Now that I say that, somebody will probably try. But we talk about debt that depending on the AAA down to the BB the lower grade tranches are going to have more volatility than the higher grade tranches. But with CLO equity as the residual holder, that's where you're going to pick up the most price volatility. So it is really not a good fit for an ETF. I think we've seen some -- mutual funds have a basket for less liquid securities. So I suppose we could see a small allocation of CLO equity in a mutual fund, but I would be -- I think -- I don't think we'll see dedicated CLO equity ETFs come about. And frankly, that's why the listed closed-end fund market now has a number of different options for CLO equity dedicated funds. And I don't -- there are interval funds also in the marketplace for investors that don't like the premium discount trading of a closed-end fund, there are a lot more options now for CLO investors. The one thing I'll say about the listed closed-end fund structure, the marketplace as a whole tends to be income buyers. And so to the extent -- and because CLO equity, debt and equity are naturally high yielding, it attracts a wide base of income-focused buyers. And so because of the asset classes, attractive current yields, it lends itself to a listed closed-end fund structure because many of the funds, as we showed to you with XFLT it's traded at about a 3% premium on average. You'll see on this Slide 23, the CLO equity-focused funds have traded at higher premiums at 6.3%. That may or may not interest to you. You may not want to buy something trading at a premium. But part of it has to do with these fairly high distribution rates. So you have a choice now as an investor among the CLO debt ETFs, which come with a note of caution as we talk about, but you also have a lot of interesting interval fund options, which you're in and out at NAV, right? There's no price, so there's no premium discount. So I think that's what Lauren was speaking about. The retail demand access points has just multiplied in the last 2 or 3 years.

Yes. Certainly, we've seen that. So okay. One other topic to discuss before we get to any other questions from the audience. And as a reminder, if you do have questions, please type them into the Q&A box at the bottom of the screen. I do want to make sure that we cover the top holdings of the fund. So Lauren, I'd like to bring you back in. Can you discuss XFLT's top 10 holdings, which as we've discussed are comprised primarily at CLO equity positions? How does Octagon approach CLO equity manager selection? And then what top-down and bottom-up factors does Octagon access and its active research process for CLO equity?

Sure. I could answer this question for hours, but I will try to be concise. You're right to ask about manager selection because as we think about CLO equity, in particular, but CLO tranches broadly, but equity in particular, the most important factor as we make a decision about purchasing a particular equity investment opportunity surrounds the manager. And this is really a bottoms-up analysis. It is qualitatively and quantitatively driven, and we're looking at a lot of fundamental factors here. So what we tend to gravitate to you are managers of scale with a proven long-term track record of outperformance and a consistent team in place that generated that outperformance. And as we perform our analysis, we are endeavoring to understand a manager's approach to portfolio construction, their trading activity, their history of avoiding credit losses, which is a very big driver of CLO equity returns, their distribution history as well as how adeptly they manage the CLO liability side of the CLO balance sheet in a period of spread tightening. All of these factors are hugely important as well as many others that I will spare the audience from -- for these purposes. And then from -- those I would really describe as kind of bottoms-up factors. But then from a top-down perspective, we're making an assessment about a number of factors as well and really trying to decide what type of the equity profile would result in the most attractive source of risk-adjusted return for the trust at any given time. So when we think about that today and where we've been focused and what we're buying, we're focused on equity profiles with what I would refer to as reset upside, which is a concept that we've talked about in previous calls. And as a reminder, a reset is simply a refinancing of CLO's liabilities and the contractual extension of the funds reinvestment period. I'll remind you of my comments earlier on spread tightening in the loan market. So the weighted average spread that a pool -- that a portfolio of loans generate today has tightened. It has moved in. And so this makes reducing a CLO's liability spreads, a very, very important driver of the equity return. We look to align with managers that are very active there, and we look to buy profiles that have that opportunity. In addition to just that benefit of lowering a trust -- excuse me, a CLO equities liability costs, the extension of the reinvestment period is also very valuable to CLO equity it allows for a longer stream of cash flows, a longer stream of distributions, which is accretive to the equity and it also creates a less volatile, more stable holding for the fund, that longer stream of cash flows will mute any volatility that we see in the loan market and what that means for the holdings of that CLO. So that is what we're looking for today. And that's really kind of a top-down assessment of what we think is attractive. But that can change over time. But today, that's where we see the most value.

Great. Thank you. So we did have one question come in prior to the webinar. I wanted to make sure that we addressed it. And Kim, I'll send this one to you. The question is XFLT's AUM grew significantly in 2024. Can you explain how XFLT has been able to grow assets -- has been able to grow in assets and discuss the impact on shareholders?

Yes. So the fund because of its secondary market trading, we are primarily growing in an accretive way using the at-the-market program that we have in place. If you're not familiar with an at-the-market program, corporations will use this for treasury function. But it's a way to drip out shares on a daily basis and to hopefully, the goal of the ATM agent is to protect price, so not being impactful on price when selling shares in the marketplace. Because of our discussion around demand for the asset class, 2024 proved to be a very productive year for the funds at the market program. XFLT also has opportunities from time to time to do private placements and to issue preferred which can also convert into common. And so that helps grow the fund's asset base. And as you all know, a lot of fund expenses are fixed dollar amounts, which on a larger asset base results in reduced operating expenses for the fund. And having a fund also -- one of the other scale benefits is that the fund's average daily trading volume has increased on a larger base. And so for investors who are trying to buy or sell in the secondary market, having a larger fund is also more beneficial for those moments when you want to get in or out. And so XFLT right now is just focused on managing the assets that we do have. There's a lot of opportunities, as Lauren has talked about, given some of the volatility in the marketplace today. And the goal is to produce consistent distributions for shareholders. And so that is what our focus will remain.

Thank you for that. It does not look like there's any additional questions from the audience. Kim, Lauren, thank you both so much for your input, your commentary today. I will remind everyone that the webinar will be available via replay on our website. And as I mentioned at the outset, there is a wealth of information available on our site in the Knowledge Bank tab. So please reach out if you have any additional questions or needs and we certainly appreciate your time today. Thank you.