Home Discount rate GUG CEF: exposing the same issues as BCAT (NYSE:GUG)

GUG CEF: exposing the same issues as BCAT (NYSE:GUG)


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Guggenheim Active Allocation Fund (NYSE: GUG) is a multi-asset closed-end Guggenheim fund. The fund went public in November 2021 and had a tough first year. Down more than -28% since its inception, the CEF has changed its orientation, being now overweight fixed income. The fund started with a 50/50 equity/fixed income allocation. The vehicle is reminiscent of another multi-asset CEF, namely BlackRock Capital Allocation Trust (BCAT) that we have explored in detail here. Both funds are multi-asset CEFs with broad mandates that have floated relatively recently, and have seen their discounts to net asset value widen to historic lows.

In our first article on GUG, we discussed at length why we thought the first year was going to be a tough one for the fund, given the propensity of newly IPO CEFs to underperform. In addition to its issuance schedule, the fund has also increased its portfolio to the top of the market (end of 2021). The results were not favorable to investors. Interestingly, however, the fund is taking advantage of its broad mandate to optimize its collateral mix, having liquidated most of its equity positions in 2022. The fund now has an 86% allocation to fixed income, compared to 50 % in equities, 50% fixed income at the beginning of the year.

Both vehicles are now trading at very deep discounts to NAV, and at least in the case of GUG, the discount is justified. Having pivoted to fixed income securities, the fund failed to create a history of tangible and measurable risk factors. An investor valuing the vehicle should allocate a higher discount rate given its “black box” characteristics. GUG is now using less ROC than expected (only 38% ROC according to the September distribution) given the cash flows received from the fixed income portfolio. We remain a firm believer that new CEF vehicles should not be purchased by retail investors in their first year on the market, due to historical underperformance and issues associated with establishing a well-established trading model. defined and identifiable.


The fund started out with a balanced 50/50 equity/fixed income mix:


Assets (half-yearly report)

However, CEF pivoted to fixed income in 2022, after shedding most of its equity holdings:

What to do

Portfolio concentration (fund website)

The vehicle can be seen to have shifted to high yield corporate bonds and loans (traditional instruments of a classic fixed income CEF) with other small tranches tilted towards ABS and preferred securities. Equities now represent only 12.1% of the fund.

On the one hand, the beauty of a broad mandate allows for this type of pivot, but at the same time, investors will find it difficult to allocate capital to a “black box” type vehicle. We are curious to see the evolution of the fund here and how the collateral mix will evolve throughout the economic cycle. We believe the fund needs to establish some sort of identifiable trading identity or pattern for investors to properly value it.

The current main holdings of the fund are:

What are the facts

Top Holdings (Fund Fact Sheet)


The fund has fallen significantly since its creation:

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Performance since inception (Seeking Alpha)

We can see that since its creation in November 2021 the fund has fallen by more than -28%. During this period, it has a similar return profile to BCAT. A more established CEF fixed income bond from Credit Suisse, namely CIK, fell only -20% due to better spread performance.

Year-to-date, the fund’s return profile has mirrored the broader market:

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Year-to-date total return (seeking alpha)

Ultimately, in the fixed income/multi-asset CEF space, when adding leverage to a losing position, the result will always be a more negative return.

Premium/Rebate to NAV

During its short tenure, the fund moved to a discount to net asset value and stayed there:

Data by YCharts

We can see that the fund has a bit of a beta to risk-on/risk-off environments, but is generally stuck in the range of -7% to -18% in terms of the discount to NAV. Is it justified? We believe it. The fund has no performance history and it has already significantly modified its risk factors by its virtual exit from equities. A cautious investor does not know what the fund will look like next, so when uncertainty prevails, a discount is warranted.

When the market recovers, and if the fund manages to forge a certain identity, we should see this discount tighten given the robustness of the Guggenheim platform.


So how does GUG fare in the distribution department?

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September Distribution (Section 19.a.)

Having pivoted to fixed income, ROC utilization is only 38%, well below what we expected. If the fund had stayed in equities, which are having a horrible year, the vehicle would have used a higher amount of ROC.

Underperformance early in a vehicle’s life is a bit of a vicious circle. Dividends are taken out of principal through the ROC and the fund essentially has a steeper slope to climb on recovery due to principal depletion.


GUG is a multi-asset CEF from the Guggenheim. The vehicle was IPO at the height of the market in 2021 and suffered from the fall in fixed income and equities in 2022. Down more than -28% since inception, the vehicle is still trying to find its footing. place and its identity. The CEF pivoted to an overweight bond allocation (HY bonds and loans) in 2022, and saw its discount widen to historic lows. The vehicle is reminiscent of BCAT, another multi-asset CEF from a major asset manager. Both funds have broad mandates, were fairly recently floated, and have seen their discounts to net asset value widen to historic lows. The GUG has not yet established an identity and currently uses 38% of the ROC for its distribution given its performance. We expect the discount to NAV to normalize in 2023 as the market recovers and the fund is able to show a track record.