First Trust High Yield Opportunities 2027 Term Fund (FTHY)FTHY

First Trust High Yield Opportunities 2027 Term Fund (HYT): A Comprehensive Overview

Company Profile

Detailed History and Background:

First Trust High Yield Opportunities 2027 Term Fund (HYT) is a closed-end fund launched in January 2017. It invests primarily in high-yield corporate bonds with a target maturity date of December 31, 2027. The fund is managed by First Trust Advisors L.P., a subsidiary of First Trust Portfolios L.P., with over three decades of experience managing closed-end funds.

Core Business Areas:

HYT focuses on delivering high current income and capital appreciation to its shareholders by actively managing a portfolio of high-yield corporate bonds. The fund utilizes a combination of fundamental analysis, quantitative screening, and active portfolio management to maximize returns while mitigating portfolio risks.

Leadership Team and Corporate Structure:

HYT's portfolio management team comprises experienced investment professionals led by Michael Decker with over 30 years of experience in fixed income investing. The corporate structure is a closed-end fund, offering greater flexibility in portfolio management, including utilizing leverage for enhanced potential returns.

Top Products and Market Share

Top Products and Offerings:

HYT's primary product is its actively managed portfolio of high-yield corporate bonds, primarily in the B and CCC credit rating classifications. The fund invests in a diversified mix of sectors to avoid over-concentration risk but maintains a focus on the energy sector, historically offering attractive yields in the high-yield bond market.

Market Share:

As of November 2023, HYT has roughly $891.5 million in assets under management, representing less than 1% of the total high-yield bond market share estimated at over $2.1 trillion. However, it occupies a prominent position within the closed-end fund space for its target maturity structure, actively managed approach, and focus on income generation.

Product Performance and Market Reception:

HYT's performance has seen a mixed picture. Since its inception, it delivered a total NAV return of over 11%. However, the fund underperformed the S&P High Yield Corporate Bond Index for a period, primarily as the strategy prioritizes income over price appreciation through active trading within its portfolio. This approach appeals to income-oriented investors who favor regular distributions over capital gains.

Total Addressable Market:

The global high-yield bond market represents HYT's total addressable market, exceeding $2.1 trillion as reported in November 2023. This vast marketplace with various risk and credit profiles offers the fund ample options for investment, diversification, and potential alpha generation through active management.

Financial Performance:

Reviewing Recent Financials:

HYT distributed annualized income exceeding 8.12% as of October 31st, 2023. Despite the volatile markets in this year, the current fiscal quarter's net investment income remained in line with previous periods despite a slight decline of 0.8%.

Year-Over-Year Growth:

While its total NAV returned shrunk by over 1.67% over the past year compared to the High Yield Bond Index, there remained some positive developments. HYT reported an increased adjusted net earnings per share of roughly 0.2% over the same duration, indicating continued income-generation capacity despite the challenging market circumstances.

Review of Cash Flow and Balance Sheet:

HYT reports steady and consistent net cash outflows from operating investments. However, this is expected for closed-end funds distributing a large portion of income earned back to shareholders. As of October 2023, the fund boasts a healthy leverage position with minimal financial debt to support its investment activities.

Dividends and Shareholder Returns:

Dividend History:

The fund boasts impressive consistency in annualized dividend distributions since inception, reaching over 8%. Its current distribution rate represents an attractive 6.12% yield as of December 2023.

Shareholder Returns:

Despite positive dividend payments, overall total returns to HYT shareholders were modest. Since January 2017 the fund returned less than 8.17%, trailing the High Yield Corporate Bond Index slightly during this period. This reflects a trade-off between pure capital appreciation in some market situations versus stable and recurring dividend income, aligning better with specific investor portfolios and objectives.

Growth Trajectory:

Historically:

HYT's historical average net investment income per quarter remained fairly flat, fluctuating with market conditions. Its distribution history, however, shows greater stability and resilience, reflecting the focus on consistent income pay-out to its investors even in challenging market cycles.

Future Growth Prospects:

Continued emphasis on active portfolio management and exposure to the higher yielding, longer-maturity segment should position HYT for potential gains as interest rates stabilize or start a possible downward path with a less aggressive tightening environment from central banks.

Strategic Product and Innovation Initiatives:

To further enhance its offerings and potentially boost returns, HYT implemented an investment objective shift in early 2022, allowing more flexible investments beyond a pure focus on 2026-2028 maturities, potentially providing greater portfolio construction agility and alpha-generation opportunities in response to market developments.