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Ares Capital Corporation (ARCC), Apollo Investment Corp. (AINV): Why BDCs Are Lagging the Market

  1. Fixed rate loans lose their luster – When rates rise, the value of a fixed-rate instrument plummets. Apollo Investment Corp. (NASDAQ:AINV) carries considerably high exposure to rising rates, holding 64% of its whole debt portfolio in fixed-rate loans. Ares Capital Corporation (NASDAQ:ARCC) operates on the opposite end of the spectrum, holding its fixed rate investments at a fourth of its portfolio.

Time to buy?

The best time to buy anything is when its on sale. After lagging the market to date, BDCs may appear like a grand bargain, but it pays to wait.

Investors need to know more about Bernanke’s next move before placing another big bet on the future of the business development company. Their decade of outperformance came during a period in which rates were pushed lower time and time again – periods when BDCs and other bond-like investments should outperform.

Investors should wait for the effects of Bernanke’s next move and assess default rates when aggressive bond buying comes to a halt. The Fed juiced the credit market, but when liquidity subsides, we’ll see if the industry can play defense as well as it can play offense.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jordan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Why BDCs Are Lagging the Market originally appeared on is written by Jordan Wathen.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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