Management characterized the fourth quarter as the most challenging environment for CLO equity since mid-2022, driven by elevated credit dispersion and ongoing coupon spread compression.

Performance was pressured by a 'bifurcated' market where weaker credits underperformed while stronger borrowers refinanced at tighter yield spreads, reducing excess interest for CLO equity.

The fund limited NAV losses to approximately 9%, outperforming the peer median of negative 14% for the full year by maintaining an 'up in credit' bias and active trading strategy.

Management executed a deliberate pivot toward CLO mezzanine debt, which represented approximately 70% of purchases over the nine-month period following the fund's conversion.

Active trading served as a primary risk mitigator, with 47 unique CLO trades executed in Q4 to harvest gains and reposition into higher-quality deleveraging positions.

The fund avoided the new issue CLO equity market, citing unattractive pricing dynamics and structural factors that favored secondary market opportunities.

A portion of the quarterly NAV decline was attributed to credit spread widening rather than fundamental impairment, suggesting potential for future mark-to-market reversals.

Management is exploring the issuance of long-term unsecured debt in the coming weeks to provide 'dry powder' for deployment into what they describe as an increasingly distressed market.

The fund anticipates potential benefits from liability refinancings and resets as more than 40% of the U.S. CLO portfolio is scheduled to exit non-call periods before the end of 2026.

Strategic focus remains on rebuilding net investment income by targeting deleveraging BB tranches and selectively adding equity where call optionality is perceived as mispriced.

Management intends to maintain substantial credit hedges, currently at 90% of NAV, as a safeguard against historically tight corporate credit spreads and potential macro shocks.

The investment framework assumes that while January and February 2026 remained difficult, the resulting market dislocations create fertile ground for active relative-value trading.

The fund completed its transition to a CLO closed-end fund on April 1, 2025, successfully liquidating all legacy mortgage-related assets with minimal NAV impact.

The proportion of debt in the CLO portfolio increased significantly to just under 50% by year-end, up from approximately 1/3 at the time of conversion.

Management flagged specific credit concerns in the software sector due to AI-driven disruption, though they emphasized that high diversification limits idiosyncratic risk.

Realized gains were generated from mezzanine positions purchased at discounts that were subsequently redeemed at par during the quarter.

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Management noted that while the software sector has seen significant sell-offs, the fund relies on high diversification to mitigate single-name idiosyncratic risk.

They observed that no single sector exceeds 11% of the portfolio, and they view the current software weakness as a 'winners and losers' scenario rather than a systemic failure.

Management estimated underlying CCC exposure is tracking near the broader CLO market index of approximately 4.4%.

They clarified that mezzanine tranches provide structural protection even if underlying deals reach typical 7.5% CCC concentration limits.

The current hedge portfolio results in an estimated annual NAV drag of 1% to 2%, which management considers a reasonable cost for protection against tail-risk events.

The strategy utilizes out-of-the-money options and liquid indices (CDX, ETFs) to minimize carry costs while maintaining significant downside protection.

Management noted that flows in and out of large CLO ETFs like JAAA create price discovery and volatility that benefit active traders.

They view these technical flows as opportunities to maneuver the portfolio and capture gains from others' forced repositioning.

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