Proxy Showdown: Egan-Jones Challenges XFLT Board's Adviser Swap

NEW YORK, NY – July 28, 2026

In a move that sets the stage for a contentious shareholder vote, independent proxy advisory firm Egan-Jones has issued a strong recommendation for shareholders of the XAI Floating Rate & Alternative Income Trust (NYSE: XFLT) to vote AGAINST a proposal to change its sub-adviser. The recommendation, released just days before the fund's July 30 Special Meeting, concludes that the Board's plan to replace Octagon Credit Investors with Rockford Tower Asset Management, a subsidiary of King Street Capital Management, is not in the best interests of long-term shareholders.

The dissent from Egan-Jones, a firm known for its independent analysis for institutional investors, introduces a significant hurdle for XFLT's Board. It shines a spotlight on the fundamental mechanics of fund management: how performance is measured, how advisers are chosen, and how shareholder value is ultimately protected. The firm’s analysis dissects the Board's rationale, raising critical questions about performance metrics, governance, and the strategic incentives being used to secure shareholder approval.

The Benchmark Battle

At the heart of the dispute is a classic but critical debate over performance measurement. The XFLT Board's primary justification for the proposed change is the alleged underperformance of the current sub-adviser, Octagon Credit Investors. To support this claim, the Board pointed to Octagon's results relative to the Morningstar LSTA US Leveraged Loan 100 Index.

However, Egan-Jones' analysis forcefully refutes the appropriateness of this benchmark. The firm argues that the index is a poor yardstick for XFLT's multifaceted strategy. XFLT is not a simple leveraged loan fund; its portfolio has significant allocations to Collateralized Loan Obligation (CLO) debt, CLO equity, and employs leverage—all components that fall outside the narrow scope of the Morningstar index. Using a mismatched benchmark, Egan-Jones contends, can paint a misleading picture of an adviser's true contribution.

To prove its point, the proxy firm constructed a custom composite benchmark designed to mirror XFLT's actual asset allocation. According to Egan-Jones, when Octagon's performance was measured against this more suitable yardstick, a "materially different performance picture" emerged. This finding suggests that the narrative of underperformance, the very foundation of the Board's proposal, may be built on a flawed premise. For shareholders, it raises a crucial question: is the current manager truly failing, or are they being judged by the wrong standards?

Governance Under the Microscope

Beyond the numbers, Egan-Jones' report delves into significant governance concerns that it believes warrant shareholder scrutiny. One of the most pointed observations relates to the financial structure of the proposed deal. While the overall management fee paid by the fund would remain unchanged, the analysis highlights that the adviser's share of that fee would increase under the new agreement with Rockford Tower.

This detail suggests a potential reallocation of fees that benefits the adviser without an obvious corresponding benefit to the shareholders who ultimately pay those fees. Furthermore, Egan-Jones flagged board relationships with the adviser. While stopping short of alleging improper motives, the firm noted that such connections could compromise the Board's independence and that shareholders should consider these ties when evaluating the proposal.

The selection process for Rockford Tower also came under fire. The Board's rationale, which included references to gaining access to an "expanded platform" and European CLO markets, was deemed insufficient justification for replacing the incumbent. More pointedly, Egan-Jones noted that when questioned, fund management "could not clearly explain how many alternative candidates were meaningfully evaluated during the search process." This lack of transparency casts doubt on the rigor of the Board's due diligence and whether Rockford Tower, a subsidiary of the well-regarded King Street Capital Management, was chosen through a competitive and objective process.

Sweeteners and Standstills: A Complicated Vote

Complicating the decision for shareholders are several strategic maneuvers by the XFLT Board seemingly designed to secure a "FOR" vote. On July 27, the Board announced a tender offer to repurchase a percentage of the fund's shares, providing a liquidity event that is often attractive to investors in closed-end funds, which can trade at a discount to their net asset value. However, this offer is contingent on shareholders approving the new sub-advisory agreement.

Egan-Jones was unmoved by this development, stating that decisions about tender offers are the responsibility of the Board and Adviser, not the sub-adviser, and therefore have no "evidence bearing on the choice of sub-adviser." The firm explicitly highlighted this "linkage," suggesting shareholders should carefully weigh whether they are being offered a genuine value proposition or a powerful incentive to overlook the proposal's potential flaws.

Adding another layer to the corporate maneuvering is an agreement the Board struck with Bulldog Investors, LLP, a well-known activist investor that often pushes for measures to narrow fund discounts. In exchange for Bulldog's agreement to vote FOR the proposal, the firm entered into a two-year standstill agreement, effectively neutralizing a potential source of organized opposition. These actions paint a picture of a Board working diligently to clear the path for its preferred outcome.

As the July 30 special meeting approaches, XFLT shareholders are left to navigate a complex landscape. They must weigh the Board's strategic vision and the allure of a contingent tender offer against the detailed, methodical critique from an independent proxy firm. Egan-Jones has concluded that shareholders have not been given enough evidence that this change will enhance long-term value. The final decision now rests with the shareholders themselves, who must decide whether the proposed change represents genuine progress or a costly and unnecessary disruption.