Contrarian Opportunities in High-Yield BDCs and CEFs: Leveraging NAV Discounts for Sustainable Income and Capital Appreciation

The current market environment, marked by elevated interest rates and shifting investor sentiment, has created fertile ground for contrarian strategies. Among the most compelling opportunities lie in high-yield business development companies (BDCs) and closed-end funds (CEFs), which trade at significant discounts to their net asset value (NAV). These discounts, often driven by short-term volatility or structural inefficiencies, present a dual potential: generating income through high yields and capital appreciation as the market revalues the underlying assets.

The Widening NAV Discount Trend

According to a report by the Alternative Investment Management Association (AIMA), the average traditional CEF traded at a -5.53% discount to NAV in Q3 2025, widening from its 25-year average of -4.91%. BDCs fared even worse, with an average discount of -13.9%, reflecting broader challenges in the sector, including a -11.3% decline in basic dividends over the past year as reported in the same analysis. These figures suggest that market participants are pricing in heightened risks, such as credit stress in leveraged loans or regulatory pressures, despite the inherent strengths of these vehicles.

The discount to NAV is not merely a technical metric but a signal of mispricing. For income-focused investors, it implies that the market is undervaluing the fund's portfolio-often composed of high-yield bonds, senior loans, or private equity-while the yield on offer remains attractive. For example, the Nuveen Credit Strategies Income Fund (JQC) trades at a -10.43% discount to NAV as of November 2025, with a distribution rate of 13.01%. Similarly, the Tortoise Sustainable and Social Impact Term Fund (TEAF) offers an 8.9% yield at a -9.2% discount. These spreads between yield and discount create a margin of safety, particularly when the fund's underlying assets are resilient.

Case Studies in Contrarian Potential

1. JQC: A High-Yield CEF with a Deep Discount
JQC's -10.43% discount to NAV is among the most pronounced in the CEF universe. While its distribution rate of 13.01% has declined by -15.95% over the past year, the fund's focus on senior loans and high-yield corporate debt provides a buffer against default risk. Historically, JQC has averaged a -7.98% discount over three years and -8.28% over five years, suggesting that the current discount may not be sustainable in the long term. If the fund can stabilize its dividend and demonstrate portfolio resilience, the narrowing of the discount could drive capital gains.

2. TEAF: A Term Fund with a Unique Liquidity Profile
TEAF's -9.2% discount to NAV is particularly intriguing given its term structure, which mandates liquidation by 2031. This creates a natural catalyst for discount compression as the fund approaches its maturity date. With an 8.9% yield and a portfolio focused on sustainable and social impact investments, TEAF offers a blend of ethical and financial returns. However, investors must assess whether the fund's underlying assets can maintain their value amid macroeconomic headwinds.

3. GDV: A Dividend-Consistent CEF with a Persistent Discount
The Gabelli Dividend & Income Trust (GDV) has maintained a 6.42% yield while trading at an average -12.03% discount to NAV over the past year. Despite its -1.52% expense ratio, GDV has delivered a 14.77% total return on NAV in the 12 months ending November 2025. Its consistent monthly dividends and diversified portfolio of high-yield bonds make it a compelling candidate for income seekers willing to tolerate short-term discount volatility.

4. NBXG: A Technology-Focused CEF with a 12% Discount
The Neuberger Berman Next Generation Connectivity Fund (NBXG) trades at a -12% discount to NAV, offering an 8.26% yield. Its focus on next-generation connectivity technologies-such as 5G infrastructure and satellite communications-positions it to benefit from long-term secular trends. However, the fund's performance hinges on the ability of its holdings to scale profitably, a risk that must be weighed against its attractive yield.

Risks and Considerations

While the discounts to NAV are enticing, they are not without risks. Dividend sustainability remains a critical concern, particularly for BDCs and CEFs with declining earnings. For instance, JQC's -15.95% drop in dividends over the past year raises questions about its ability to maintain its 13.01% distribution rate. Similarly, BDCs face the dual challenge of managing credit risk in their loan portfolios and navigating regulatory scrutiny over leverage.

Moreover, the discount itself can be volatile. As noted by AICA, CEF discounts narrowed in Q1 2025 but widened again in Q3 2025, reflecting the cyclical nature of market sentiment. Investors must therefore adopt a long-term perspective, focusing on funds with strong portfolio fundamentals and clear catalysts for discount compression.

Conclusion

The current discounts to NAV in high-yield BDCs and CEFs represent a rare alignment of income potential and capital appreciation. For contrarian investors, the key lies in identifying funds where the market's pessimism is unjustified by the underlying assets. JQC, TEAF, GDV, and NBXG exemplify this opportunity, offering yields that far exceed their discounts while providing exposure to resilient sectors. However, success requires careful due diligence on dividend sustainability and portfolio quality. In a world of low-yielding alternatives, these vehicles may prove to be the most compelling arbitrage in years.