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Shareholders of XAI Floating Rate & Alternative Income Trust (XFLT) will vote on July 30, 2026, on a proposal to replace the Fund's sub-adviser, Octagon Credit Investors, with Rockford Tower Asset Management (a subsidiary of King Street Capital Management).
The XFLT Board has unanimously recommended shareholders approve the change, a recommendation supported by the two other major proxy advisors. Egan-Jones has issued a recommendation across each of our policies to vote against the change.
Egan-Jones’ recommendation is clearly in the best interest of shareholders and argues for good governance at XFLT. Particularly for investors who use our Governance and ESG policies, it is critical that Egan-Jones issue recommendations that appropriately constrain management and the board, as outlined in our policies.
The Board's stated reason for replacing Octagon is underperformance relative to the Fund's benchmark. That benchmark, the Morningstar LSTA US Leveraged Loan 100 Index, is an unlevered gauge of senior secured bank loans. XFLT, however, is not an unlevered loan fund. While almost half of the portfolio is loans, the other half is allocated to CLO equity and CLO debt, and the Fund itself uses leverage on top of that mix. Measuring XFLT against an unlevered, single-asset-class index will tend to show underperformance in stressed periods, regardless of the sub-adviser's skill. To assess performance properly, we built a different benchmark.
Using XFLT's own disclosed asset allocation, we constructed a composite from three listed closed-end funds, one standing in for each sleeve, weighted to match the Fund's actual mix at each point in time. Measured against that composite, a genuinely different picture emerges.
While the Fund's overall management fee will remain at 1.70%, XAI's own portion of that fee will increase substantially, from approximately 41% today to a flat 48% under the proposed agreement.
We also note that one-third of the Board is directly affiliated with the adviser, XAI. Theodore J. Brombach is Co-Chief Executive Officer of XA Investments, and William T. Meyers served as a paid Senior Advisor to XA Investments from 2021 to 2023 before joining the Board in 2024.
Taken together, the fees and board relationships do not prove motive, but they warrant scrutiny.
The Board has also cited an expanded platform relative to Octagon and access to European CLO equity and debt as reasons for the change. We do not believe these reasons are significant enough, on their own, to warrant replacing the sub-adviser. Notably, the Board has not claimed that a lack of investment options at Octagon prompted the search for a new sub-adviser, only that the Fund's performance did. Finally, in our conversations with management, we could not obtain a clear answer on how many other sub-advisers were actually evaluated in depth during the search process.
Additionally, though rejecting the new sub-adviser agreement with King Street will not reinstate Octagon and could lead to uncertainty surrounding the selection of a new subadvisor, we do not believe that is an adequate reason to recommend FOR the agreement, and doing so could lead to a dangerous precedent whereby new sub-adviser agreements are rubber-stamped by shareholders due to fear of uncertainty created by rejecting the new agreement.
When evaluating any proposal at a shareholder meeting, Egan-Jones' primary concern is shareholder returns. In this case, we found no strong evidence that Octagon had underperformed relative to a properly weighted peer composite. We did, however, find governance concerns at both the Board and adviser level, including trustees with direct financial ties to XAI, a fee structure that increases XAI's own share of revenue, and a lack of transparency regarding the process used to replace Octagon. These facts are especially relevant under our policies with a strong emphasis on governance.
We therefore recommend shareholders vote against the new sub-advisory agreement at XFLT. We do not believe the change to King Street serves shareholders' best interests.
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